Organisation for Economic Cooperation and Development: Report on Hungary

First a few words about the Organisation for Economic Cooperation and Development or OECD. It has been in existence for over forty years and has thirty member countries, including Hungary. According to the OECD's webpage it brings together governments of countries committed to democracy and market economy from around the world. Its aims are to support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries' economic development, and contribute to growth in world trade.

OECD is one of the world's largest and most reliable sources of comparative statistics, economic and social data. It also analyzes and forecasts economic developments. As of yesterday a new report was released on Hungary. The first chapter details the sad economic situation of the country in the second half of 2006 and after. According to the report Hungary was facing one of the most severe recessions among OECD countries. After outlining the measures taken, including tight macroeconomic policy despite a deep recession, the report states that "the crisis was also a catalyst to implement decisive structural reforms, such as a far-reaching tax reform, a pension reform and the introduction of a fiscal council and fiscal rules." These "ambitious macro and structural policies served to rebuild confidence." Of course, the confidence the OECD is talking about is confidence of investors and the international community. The population doesn't seem to care about all this. Most likely they don't even realize the importance of the changes the Gyurcsány and Bajnai governments introduced.

OECD has a few words of warning for Hungary's next government: it should "avoid major fiscal slippage, especially during the 2010 election year, [and] should help firmly restore confidence and stabilise the economy." Moreover, they recommend more structural reforms "encompassing the labour market, education, entrepreneurship and innovation." The report says that the shift in tax burden from labor to consumption in 2009 was a positive step. It also hails the pension reform that raised the retirement age and the shortening of maternity leave and warns the new government that these reforms "should be sustained." Or in other words, Orbán who vaguely talked about returning to three years of paid maternity leave instead of two should think twice before he returns to the status quo ante.

The second chapter deals with "sustaining the momentum of fiscal reform." In other words, don't even try to loosen the fiscal restraints introduced hitherto. "Efforts during recent years have produced substantial results. The fiscal deficit has been brought down significantly and, despite the recession, fiscal consolidation has continued to help restore foreign investor confidence."  However, all that "should not lead to complacency." OECD analysts recommend containment of public expenditure and suggest improvement of the efficiency of public administration. Further, they suggest the reduction of the public "footprint" on the economy. Well, if I were Viktor Orbán with his ideas of nationalization of already privatized companies I might reconsider my plans. After all, Hungary's fate largely depends on the opinion of the world.

The third chapter deals with the need for stricter regulations. According to the OECD there was excessive risk taking by banks and households that was masked by relatively stable exchange rates and unusually lax credit conditions in the international financial markets. But then came "the steep depreciation of the forint that boosted households' debt burden, while banks were hit by the drying up of liquidity, including in swap markets for Swiss francs." They recommend stronger protection for borrowers and tighter regulation of the lenders.

And finally, Hungarian education gets a beating. Hungary spends relative to GDP about as much as the OECD average on education. But while younger children perform above average in internationally comparable assessments "this relatively good performance fades with age. Fifteen-year-olds register only average performance in the PISA assessments, and the proportion of adults with terciary qualifications, though rising, is still low." Even more worrisome, according to the report, is the fact that the school system doesn't adequately prepare young people for the labor market. Raising the standards of vocational training should be an important goal. The quality of teachers is also low. And finally, let me quote verbatim the last sentence: "The co-existence of very high gross wage premia for adults with tertiary qualifications, and the comparatively low numbers graduating, suggest that tertiary education should expand further, and that students in higher education should contribute more to the cost of their studies."

Let's translate that into ordinary English. According to the OECD the number of college graduates is still low in Hungary. Their numbers should be increased. Well, that is a blow to those who blame the current problems of Hungarian education on the large number of students enrolled in colleges and universities. The problem, in my opinion, doesn't have so much to do with numbers as with the low quality of both high school and college education.

Second, the OECD points out that there is a huge difference between the salaries of those with a secondary education and those who finished college. The suggestion is that university students should contribute to their education in the form of tuition. Well, Fidesz will have a difficult time with this suggestion. A substantial majority of college students are Fidesz sympathizers. The love affair with Fidesz goes back to 1998 when one of Fidesz's election promises included the restoration of free higher education which Lajos Bokros had put an end to in 1995. This was one promise Fidesz kept. I find it difficult to see how Fidesz could take this, in my opinion, very important step. Especially since as far as I can see Jobbik also has a strong foothold in colleges and universities.

In any case, OECD's recommendations involve the continuation of the present policies. We have no idea what Fidesz's plans are. They are kept secret and it is unlikely that we will find out more about them before the elections. However, in the last few days Viktor Orbán made some rather irresponsible election promises. Some are costly, others are ridiculous. And we are still only at the beginning of the campaign. I hope that the OECD report is being busily studied by Fidesz economists.

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John T
Guest

I suspect that the report will sadly be ignored. After all, it’s foreigners giving advice – what do they know!

Eva S. Balogh
Guest

John T: “I suspect that the report will sadly be ignored. After all, it’s foreigners giving advice – what do they know!”
Unfortunately, you’re perfectly right.

Borys Zielinski
Guest

If I got it right Mr Authors actually proving how great was/is Gyurcsany/Bajnai policy, especially in economics. I can’t believe my eyes – it’s like praising somebody for skillful fixing his car after having it crashed while driving drunken. And the author is so aware of Orban’s dangerous (?) policies even before any formal presentation of his program. Poor Hungarian leftists, you really must have your pants full…

Eva S. Balogh
Guest

Borys: “Mr Authors actually proving how great was/is Gyurcsany/Bajnai policy, especially in economics. I can’t believe my eyes – it’s like praising somebody for skillful fixing his car after having it crashed while driving drunken.”
Actually, the authors of the OECD report are correct. The economic problems were partly created by Viktor Orbán in 2000 and 2001 and by Péter Medgyessy between 2002 and 2004. Gyurcsány became prime minister in the fall of 2004 and cautiously kept cutting back on government expenditures. Because he had only a year and a half before elections he didn’t dare to do more than that. After winning the elections in 2006 he began in earnest to trim expenditures and start reforms. Reforms were stopped by a Fidesz-inspired referendum but he still managed to raise the retirement age and the too long paid maternity leave. Bajnai accelerated the process.
Thus, the report’s analysis by and large is correct.
As for Orbán’s plans. He is talking about doubling the budget deficit and therefore there is every reason to be worried.

Hank
Guest
” As for Orbán’s plans. He is talking about doubling the budget deficit and therefore there is every reason to be worried.” Well, that is true and not true. True, because if you add up all the things he promises to people (turning back some of the savings of the Bajnai government, tax cuts, extra money for sports – very important – , education, health care, etc etc etc) that would probably double the budget deficit. Not true, because he also says time and again that there are skeletons in the closet, the Bajnai government is leaving a much higher deficit than it says and so on. Most analysts interpret this as him preparing the ground for saying after the elections: I’m sorry folks, I promised all this and that, but the mess they left is much bigger than was officially known, so you”l have to wait a bit. In short: he keeps all options open (and does exactely what he accused Gyurcsanyi of doing). Still according to many analysts, he will try to negotiate a new agreement with the IMF in which the deficit will be somewhat higher in 2010 than 3.8% (close to 5% maybe), and the IMF… Read more »
John T
Guest
“If I got it right Mr Authors actually proving how great was/is Gyurcsany/Bajnai policy, especially in economics. I can’t believe my eyes – it’s like praising somebody for skillful fixing his car after having it crashed while driving drunken. And the author is so aware of Orban’s dangerous (?) policies even before any formal presentation of his program. Poor Hungarian leftists, you really must have your pants full…” While there is some credit due for the policy of the last 12 months and Bajnai prevented Hungary from failing into the abyss, the policies of both MSZP and Fidesz in the years prior to that are certainly at fault. And the problem with Orban is that he does not seem willing to publish his actual programme in detail, yet most of the vague promises he has made are going to swell, not cut the deficit. You don’t need to be a leftist to see that the guy is a lightweight, as are almost all of the players in Hungarian politics today – Bajnai is probably the most competent of a bad bunch. What would really change the political scene for the better is a party who could see that both the… Read more »
Eva S. Balogh
Guest

Hank: “” As for Orbán’s plans. He is talking about doubling the budget deficit and therefore there is every reason to be worried.” Well, that is true and not true. True, because if you add up all the things he promises to people (turning back some of the savings of the Bajnai government, tax cuts, extra money for sports – very important – , education, health care, etc etc etc) that would probably double the budget deficit. Not true, because he also says time and again that there are skeletons in the closet, the Bajnai government is leaving a much higher deficit than it says and so on.”
I don’t think that it is necessary to complicate things. Orbán says that the budget figures are false and his economists figured out that instead of 3.8% there is an actual 7.5% deficit. According to IMF and EU that is not so. This is just for covering up his own plans to increase the deficit. The final result is the same with most likely disastrous results.

Odin's lost eye
Guest
John T you say *** “I suspect that the report will sadly be ignored. After all, it’s foreigners giving advice – what do they know!” ***. I know that you are absolutely correct! I have had experience of this at first hand. As Julia Pardoe an 18th centenary English traveller noted about the people “The besetting sin of the Magyar is vanity. He is proud of his nation, of his liberty, of his antiquity, and above all of his privileges. In short he admits no superior and scarcely an equal”. I won’t go on as the lady concerned was a Hungarophil and the rest is a little unpleasent. As was said, by Hungarians in the time of Maria Theresa. “Hungariam non est vita. Si est vita non est ita” (There is no life outside Hungary. And if there is it is not really life.). These quotes are taken from a book by Paul Lendvai called ‘The Hungarians -1000 years of victory in defeat’. Any prudent housewife knows if you only have 1000 forints in her purse she cannot spend more. If she does spend more, she has to borrow it from someone and that which is borrowed MUST be repaid.… Read more »
Hank
Guest

“I don’t think that it is necessary to complicate things. … The final result is the same with most likely disastrous results.”
I’m sorry Eva, but pointing out that it is not at all clear cut what Fidesz will and will not do when in power, is not “complicating things” but stating facts. I don’t like this typical leftish scare mongering (“Fidesz policies will be disastrous” etc). It is also possible – and predicted by many non-right wing analysts – that their financial and economic policies will in the end turn out to be fairly reasonable, if only because they have little choice.
And another fact: however good a job I think Bajnai (and in part Gyurcsány) did, it was basically no more then fixing the mess they had made in the first place. That’s not bad, but not particularly outstanding either.
Finally, as far as the budget figures are concerned: if the new government would have to consolidate the losses and debts of MÁV, BKV etc in one go, then indeed there would be a huge budget problem (and this is also acknowledged by the IMF and the EU). The question is of course whether a new government should do so.

Mark
Guest
” These “ambitious macro and structural policies served to rebuild confidence.” ” Indeed, and as a result of the improved confidence among international investor we can see the money rolling in, and the jobs being created, so that the economy has, errr, contracted by c.6.5-7% in 2009, and employment has fallen. This is transparent nonsense and more reflects the fact that the OECD as an inter-governmental organization cannot be too openly critical of one of its member governments (though it itself signs up institutionally to a consensus that is deeply flawed). Where is Hungary? Well, thanks to IMF support it has stabilized its position with an economy no larger than it was than in 2003. It is dependent on exports to a region of the world economy (the EU) which is effectively stagnant (as we saw from the fourth quarter GDP figures for the major states in the Eurozone), and which faces a financial crisis which it seems politically incapable of dealing with – which will clearly have a downside impact on the growth outlook for the zone. It has a competitiveness position that is underpinned by an overvalued exchange rate (some defenders of the current government would regard this… Read more »
Mark
Guest

Hank: “Finally, as far as the budget figures are concerned: if the new government would have to consolidate the losses and debts of MÁV, BKV etc in one go, then indeed there would be a huge budget problem (and this is also acknowledged by the IMF and the EU).”
Hank is of course absolutely right about this, and this is the issue of the divergence beween the 7% and the 3.9% And the IMF’s representative in Budapest has acknowledged this publicly. You will find this acknowledgement here: http://produkte.erstegroup.com/CorporateClients/de/MarketsAndTrends/NewsAndEvents/Market_news/News_detail/index.phtml?ID_NEWS=132350704

Eva S. Balogh
Guest

Hank: “”I don’t think that it is necessary to complicate things. … The final result is the same with most likely disastrous results.” I’m sorry Eva, but pointing out that it is not at all clear cut what Fidesz will and will not do when in power, is not “complicating things” but stating facts. I don’t like this typical leftish scare mongering (“Fidesz policies will be disastrous” etc).”
Well, I still maintain that in the final analysis it doesn’t matter whether Fidesz will claim that the larger deficit was the former government’s fault or not, the final result will be the same.
As far as disaster is concerned, yes, it will be a disaster if they insist on increasing the deficit. Unfortunately, there were signs even earlier that that is what they are planning to do and now comes this series of offering goodies to the people. It doesn’t sound too promising to me. But, of course, one can always believe that what Orbán says means nothing.

John T
Guest
“It is also possible – and predicted by many non-right wing analysts – that their financial and economic policies will in the end turn out to be fairly reasonable” This indeed could well be the case. But if it is, I would have thought it sensible to spell out the policies properly upfront (with a proviso that they are based on the existing budget / revenue figures). That would reassure the general public, stock / bond market and investors and I would have thought attracted or retained voters. But Orban hasn’t, and what he has said so far in rather foolish and vague promises appears to rely on increased spending using income that does not exist. I think you also need to bear in mind that the global economic conditions are still fragile, and the problems on the Eurozone are a stark reminder of this. I suspect that just as Fidesz try to renegotiate termswith the IMF and others, they will have little room for manoeuvre because the problems with the southern economies (Greece, Spain & Italy) will still be ongoing and the financial organisations will be taking a tough line with them to reduce their spending and deficits. They… Read more »
Hank
Guest
John T.: ” I would have thought it sensible to spell out the policies properly upfront (with a proviso that they are based on the existing budget / revenue figures). That would reassure the general public, stock / bond market and investors and I would have thought attracted or retained voters.” I agree fully, but that is not the way Fidesz thinks. – Remember how Angela Merkel, back in 2006, was about to win a landslide victory – untill she spelled out her economic program (some nice things but also painfull reforms, budget cuts, the works). She won, but by a very small margin and had to go for a coalition with SPD. This experience was followed closely by Fidesz and hit home the message: never ever spell out such plans if you can avoid it. – And what happened when Varga recently suggested Fidesz was still in favor of the Swedish pension system? The left didn’t start a serious discussion about improving the pension system, but jumped on it and immediately started suggesting that Fidesz wanted to cut pensions severely, raise the pension age for some people to 70 etc. etc. And yes, opinion polls for Fidesz went down.… Read more »
John T
Guest

Hank – I agree. But what amazes me is that if a party (Fidesz or anyone else for that matter) decides that they will campaign with a strategy of giving minimal detail, there are always plenty of people who cannot follow what is a very simple rule and keep quiet e.g. Varga. Any politician with an ounce of common sense knows how emotive the issue of pensions is, particularly as many countries are now worrying about how they can be sustained in the future. This was a massive own goal, which opponents will capitalise on.
Additionally, Orban has now effectively backed away from any reform, which is a totally dishonest position, as what Varga said is essentially right. With people living longer, there is, whether we like it or not, going to be a need for the individual to contribute significantly more of their earnings to a pension and the retirement age will be higher.

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