Júlia Király’s distinguished career began in the 1980s in the Hungarian Statistical Office as a young graduate of the Karl Marx University of Economics (today Corvinus University) and continued all the way to the position of deputy chairman of the Hungarian National Bank. In between she taught at her alma mater, was an adviser to György Surányi, chairman of the National Bank (1990-1991), and even an adviser to Fidesz on economic matters, especially on pension policies (1990-1992). She was on the board on several banks, and in 2002 and 2003 she was CEO of Postabank and as such was in charge of the bank’s privatization.
It was in 2007 that Király was appointed one of the two deputy chairmen of the Hungarian National Bank for a six-year term. Her term would have expired on July 4, 2013, but after the appointment of György Matolcsy as central bank chairman in March, she decided not to wait and quit on April 8. In her opinion, under Matolcsy’s leadership, the Hungarian National Bank was heading in the wrong direction and, as she said, his policies “endanger the central bank’s prestige acquired over many years at home and abroad.” Her decision became international news. The very day of the announcement The Economist published an article on the subject with the title “Julia Király quits with a j’accuse.” Currrently, Király is a professor in the Department of Finance at Corvinus University.
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When the Hungarian economy started to “soar” a year and a half ago, most investors and analysts applauded. Only a few warned of the temporary nature of the upswing, of a one-off recovery after the crisis. “Orbanomics” seemed to be performing well – at least for a short while.
Orbanomics in my view is much more than the so-called and never clearly explained “unorthodox economic policy.” Rather, it is a political economic framework. The main drivers of Orbanomics (most of them discussed earlier on Hungarian Spectrum and in the famous paper of Mr. Kornai about the U-turn in Hungary) are:
- legal uncertainty (legislative bursts of activity and ex post facto legislation);
- a lack of transparency (laws and actions without any supporting explanations, secret government decisions, in Europe the least transparent budgetary system);
- a complete lack of checks and balances (lack of institutions or lack of real independence of institutions, such as the Constitutional Court, the AntiTrust Agency, the State Audit Office, the Central Bank, and the Fiscal Council, which are formally independent but run by government-controlled management);
- the lack of a level playing field (preferring public ownership to private, preferring national ownership to multinationals); and
- state intervention in everyday business affairs, i.e. preferring non-market solutions to market solutions.
The past two years seemed to showcase the great success of Orbanomics: 2013 was the first year when investment started to grow after shrinking for six years, and 2014 saw double-digit growth. But 40% of total investment occurred in the public sector, mainly supported by EU funds, which annually summed to 3.5% of the country’s GDP. The other major sources of investment were the new Mercedes and Audi factories, investments that had been in the pipeline since 2008.
As far as the other segments of the private sector are concerned, according to business surveys the planned investments of the top export-oriented entrepreneurs were significantly below their pre-crisis level. In the energy sector, hard hit by the so-called “rezsicsökkentés” (drastic, state controlled utility fee cut), investment collapsed. The total amount was below the amortization level.
And it is not only the locals who are reluctant to invest. Hungary is the only country in the CEE region where foreign direct investment did not recover and the net capital flow is negative (except for the forced increase in bank capital provided by the mother banks). This year the investment horizon has become really gloomy: the expected growth rate of investment will be below 2 percent, and for 2016 a slight decrease is forecast, so the investment/GDP ratio will fall again. A recent analysis by Portfolio.hu forecast that the construction sector will be frozen and that no significant construction is expected in the new year. Quite a bleak prognosis – not far from the recent forecast of the Central Bank of Hungary. (The excellent staff of the Central Bank has not forgotten professionalism, and if you can read the charts and “between the lines,” like in those good old days, you can get the real picture from the publications of the Central Bank.) The low investment rate means that soon there will no longer be the means to support the country’s long-term sustainable growth.
On the labor front, in the past two years even better news seemed to arrive for Hungary. In 2013 the unemployment rate was still above 10%, and the expectation was for only a modest decline. The reality was astonishing: 7.7% in 2014 and 6.9% in 2015. What a great success! While the periphery of Europe cannot cope with its stubbornly high unemployment, the unorthodox Orbanomics found a solution. When you look closely, however, into the nature of the gained jobs, you realize that some 25-30% of the increase is due to employment abroad (the way Hungarian employment statistics are calculated, as long as you have a permanent local address you are a local employee even if you work abroad) and more than 50% is due to the so-called “forced public work.”
Forced public work is the “magic card” of Orbanomics. Instead of reforming the labor market, providing more flexible structures and feasible educational plans, hundreds of thousands of poor people are pushed into what is effectively a trap. As the empirically convincing study of the Institute of Economics reveals, public work is a counterproductive and very expensive program, the cost of which exceeds by 50% all the other government expenditures aimed at the labor market. It is counterproductive because those who are forced to take part in it have a diminished chance of finding a job in the competitive labor market. Less than 10% of former public employees can find permanent jobs later, and this percentage is declining. Though in the short run it may increase the number of employed Hungarians and boost the short-term growth rate, in the longer run it undermines the potential growth of the country. The system of public work does not promote flexibility in the labor market but absorbs, and ensnares, the under-educated labor force. The re-centralization of the Hungarian educational system, which introduces all the requirements of the nineteenth-century school and where the main virtue is humility to your boss, will never spur a startup mentality. Innovation and creativity, so frequently cited by Hungarian politicians as outstanding Hungarian virtues, will slowly disappear from the Hungarian labor market.
It seemed that the Matolcsy-launched Funding for Growth Scheme would be a great success. In the first two months of the program more than 2 B € in new loans was advanced to small and medium-sized enterprises at a very low interest rate. The demand for these loans, however, slowly died out, though the scheme provided increasingly relaxed terms for borrowers. According to the latest report, in the second phase of the program, since October 2013, only 2.2 B € credit has been advanced, just a bit more than in the first two months. The government scheme could not turn around the declining trend of lending.
In Hungary during and after the crisis deleveraging was widespread. Both households and corporations attempted to decrease their debt burden. So, demand for credit was quite weak. On the supply side, a special feature of Orbanomics is squeezing out foreign banks and recentralizing and nationalizing the financial system. In order to achieve its target, the government imposed heavy burdens on banks—a special banking tax, the redenomination of FX loans, the introduction of so-called fair banking, forcing banks to reimburse their customers for all fees and interest they charged that proved not to be fair according to the new law. All in all, the banking sector lost two-thirds of its capital buffer, and mother banks were forced to increase the capital of their subsidiaries. As a consequence, the availability of credit was weak as well. In all the countries of the region (CEE countries), total private loans are far above their pre- crisis level and are increasing—with the exception of Hungary, where lending activity continues to stagnate. A credit-less economy will be much more sluggish than one with efficient banking intermediation.
Based on the current state of capital (investment), labor, and finance in Hungary, it is quite clear that the long-term, sustainable potential growth rate of the country will not improve significantly. It will be much lower than that of its peer group (the non-EuroZone but EU-member CEE countries: Poland, Czech Republic, Romania, Bulgaria, Croatia). All in all, we are awaiting the future with some anxiety. The latest figures published by the Central Statistical Office justify our fears. The Hungarian economy started to slow down and in the second quarter of 2015 was again among the slowest economies in the region.