Economists on the “sick Hungary”

Once a week there is a program on ATV called "Civil a pályán." A group of experts weighs in on the designated topic but there is also a guest who is just an ordinary lay person. Yesterday two economists, Tamás Bauer and István Hamecz, discussed the ills of Hungary's economy and György Cserhalmi, an actor, was the "outsider." What prompted the topic was a high-level conference of economists who gathered in Budapest recently. The television's staff put together a little introduction in which they painted a pretty grim picture. Discussion followed.

I was somewhat surprised when the "civilian" was the first to speak. He announced that it is ridiculous to call a whole country sick. Hungary is not sick. The high unemployment rate is a "fiction" because anyone who wants to work can find work, admittedly on the black market. When János Dési, the host of the program, remarked that surely this must be a meager living, Cserhalmi said that he can provide some figures. He lives in a village where people can find work in agriculture; the hourly wage there is 3,000 Ft (11 euros). In addition, that "unemployed" person picks up something from the government: either unemployment insurance or disability.

After discussing the black and grey markets that make up about 25-30% of the Hungarian GDP the economists addressed the possibility of doing something about this underground economy and, even more importantly, what difference reining it in would make as far as state revenues are concerned. For instance, take the entrepreneur who is doing relatively well because on paper he pays only the minimum wage to his employees. We don't know whether if he played by the rules he could remain afloat. The truth is, said Tamás Bauer while István Hamecz nodded in agreement, that economists can't even guess the outcome. They also don't have any firm conviction about the long-term effects of tax reduction. In the short run the amount of state revenues would surely be smaller, but what would happen in the long run is anybody's guess. Therefore it is hard to come up with fool-proof solutions.

The other big problem is underemployment. Let's start with the problem of pensioners. There are more than three million of them and their number is growing. People are now officially eligible to draw a pension at the age of sixty-two but earlier that figure was much lower. If I recall, women could retire at the age of fifty-five. Also after the change of regime when a lot of people found themselves unemployed, the government allowed people who had not quite reached retirement age to join the ranks of pensioners to save them from hardship. Others were allowed to draw "disability pensions." Again, because of the collapse of Hungarian industry. As István Hamecz pointed out, more people are on disability pension today than after World War II! Their number is close to a million. The government acted out of concern for the welfare of its citizens. It was a compassionate act, but it had unintended consequences. A huge able bodied citizenry whose members are not even looking for legal jobs. They live quite well on their pensions plus whatever they pick up on the side.

Tamás Bauer mentioned something in this connection that was thought provoking. For years I have tried to figure out why so few Hungarians were ready to go abroad and try their luck in western Europe when Poles and Romanians left by the millions. I have a friend in Hungary with whom I've sparred over this question. I stressed provincialism, a stuck in the mud attitude, lack of language skills, while she pointed to how much better off Hungarians were. They have no reason to find work abroad. Well, the truth seems to be on her side but not exactly the way she wanted to portray the Hungarian situation. As Tamás Bauer, I think rightly, claimed, Hungarians don't want to work abroad because they are quite satisfied with their lot at home: generous social welfare and illegal work. Not much work, definitely less than they would have to do somewhere in the west. And no taxes. None, except sales tax if they pay even that. There is no incentive to look for work either in Hungary or abroad. Yes, said the two economists, it might sound harsh but there must be a way of leading Hungarians back to work. Unfortunately they ran out of time and were unable to finish what was already implied: the generous government compensation programs must be cut back.

Another fairly hefty government expense is subsidizing motherhood, ostensibly with the goal of producing more little Hungarians. This social welfare provision goes back to the first decade of the Kádár regime. It was in 1968 that the bill was introduced allowing mothers to stay home with their newborn for three years during which they would receive a certain percentage of their former salaries. And once the first child was two or three years old and if another was on its way, three more years, and after the third child three more years. So a mother easily could stay at home at the government's expense for a good nine years or longer depending on the size of the family. There is absolutely no proof that the Hungarian birth rate moved up one scintilla as a result of this legislation. It remains frighteningly low. And monthly government payments to every Hungarian family based on the number of children (independent of need) are equally ineffective in raising the birth rate. According to most people a much better solution would be to spend money on daycare centers.

Then comes the cost of running the government. Apparently Hungary spends twice as much on its government than the European average. In Budapest there are twenty-three district mayoral offices complete with huge bureaucratic staffs. Just the other day I learned that each Budapest district has a "chief architect." That means 23 chief architects in addition to the really chief-chief architect of Budapest as a whole. And one could ask: if there are 23 (plus 1) chief architects how many ordinary architects are on the government payroll? Moving outside the capital, there are about 3,500 local governments, a staggering number for the size of the country. According to György Cserhalmi, our "civilian" on the show, he lives in a village of 64 and there are two secretaries at the mayor's office. I just hope he was joking.

In any case, after listening to this show, I could only despair. How can these problems be solved? How can you redirect people to self-reliance, to work, to responsibility? How can you explain to people there is no free lunch? Honestly, I don't know.

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“How can you redirect people to self-reliance, to work, to responsibility?” In the case of Hungary where an attitude of State paternalism is now so deeply embedded in the collective psyche, I believe only through a form of shock therapy. A continual reduction of State paternalism-higher retirement age, lower unemployment benefits, fewer social transfers, and at the same time a far reaching reduction in the costs of working legally (lower employment and personal taxes). Such a transition would leave a lot of losers-people who cannot adjust. There is no way around this. An effort should be made to invest in education so at least there are fewer such losers in the future. Forms of such adjustment have occurred with success in other parts of the CEE. Hungarians are to committed to relying on the State, and the political class, for obvious reasons, enjoys having so much power remain in the State. Something needs to destroy this consensus. I thought one would need a deep economic crisis plus a committed political leader willing to sacrifice his/her electoral position for the long term interest of the Country. For a time, I thought Gyurcsany might be that person. He, however, is too committed… Read more »