Hungarian newspapers regularly report about widespread corruption in the country, amounting to billions of forints. But people complain that it is almost impossible for an ordinary mortal to comprehend just how large these numbers are. Reporters, they say, should “translate” these numbers into a language that the average Joe can grasp.
Péter Magyari of 444.hu did just that in a recent article on subsidies coming from Brussels. According to his calculations, in the last twelve years Hungary has received a total of 12 trillion Hungarian forints (approximately 38.5 billion euros at today’s exchange rate) in subsidies. Indeed, the average Joe is right. That doesn’t tell us much. Perhaps it would help if we broke this incomprehensible number down into smaller units. What if we explain that in the last twelve years Hungary received 2.2 billion forints of financial assistance every day? Or, even better, let’s calculate in euros or dollars. This way, the daily bundle was more than 7 million euros or more than 8 million dollars. Day after day for 12 solid years. It doesn’t matter how you slice it, this is an incredible amount of money. And what is sad is that Hungary has so little to show for it. The subsidies have been wasted. A historic opportunity was missed.
Although breaking down the total into daily packages helps us comprehend the immensity of the economic aid, it is important to note that the distribution of subsidies has not been uniform over time. The bulk of this money has been spent since 2012, which has given a temporary boost to economic growth in recent years. The word “temporary” is key here. When at the end of the 2007-2013 cycle the government rushed to spend the money to which it was entitled so it wouldn’t lose it (it had until the end of 2015 to do so), and when, with the arrival of 2016, there would be no more EU subsidies for a while, economic growth stalled.
Hungary must be doing something very wrong even in comparison to the other countries in the region because, although the subsidies came to a halt at the end of last year in other countries as well, the economies of Poland, Slovakia, and Romania, for example, still showed healthy growth in the first quarter of 2016.
Some of the EU money was, of course, siphoned off as a result of corruption. But corruption is not unique to Hungary, although with the possible exception of Romania, Hungary has the reputation of being the most corrupt East European country within the European Union. And so corruption is most likely not the chief reason for Hungary’s less than sterling use of EU subsidies. The primary culprit is probably the allocation of these resources.
Of the EU money that went to the private sector, the construction industry, which employs a lot of low-skilled or unskilled seasonal workers for funded projects, got the lion’s share. Only 10% of small or medium-size Hungarian businesses received any EU money, and the little money they received was spent on equipment they already needed. Therefore, the subsidies did not spur business growth; they only saved the business owner money, money that he could then, as Magyari says, spend on a sailboat instead. This is one reason the sustainable growth the subsidies were supposed to generate didn’t materialize.
A lot of money was spent on useless frills. Everybody who follows Hungarian politics knows about all those main squares, which towns across the country fixed up on EU money. Also wasteful was money spent to run government institutions. European Union money was used to replace money the government didn’t want to spend on the education of its own citizens. The result is a dysfunctional educational system that has spawned dissatisfied teachers, students, and parents. In brief, a large portion of the money has simply been squandered. According to one estimate, perhaps one-eighth of all the EU investment will have some positive effect on the economy in the long run. It is of little solace that the effectiveness of the EU subsidies is low everywhere.
The best administered financial assistance program was the Marshall Plan, which was very small in size (120 billion in today’s dollars) in comparison to the massive amount of aid going to the lesser developed regions of the European Union. Comparing the Marshall Plan to the EU subsidies, one is struck by a substantial difference in implementation. Today, the government receiving aid makes its own decisions about how to spend the money. It is true that there are certain restrictions and the grants must be approved in Brussels, but oversight is minimal. In the case of the Marshall Plan, in each country there was a representative of the Economic Cooperation Administration, usually an American businessman, whose on-the-spot approval was required. I’m convinced that having a savvy businessman (not an economist) representing Brussels in each capital would have improved matters greatly.
Some people in fact go so far as to say that the East European countries would have been better off if they had received no financial assistance whatsoever. All that money, often coming in spurts, disrupts the normal functioning of the market economy, and it may induce a country to pursue a path that is not the best for its long-run health. There is another problem, which might be even more important. These subsidies keep up the appearance of growth, which in turn leads to indolence on the part of the decision makers. In Hungary’s case, serious economic reforms should have been introduced a long time ago, but the crutches the EU keeps offering have allowed governments to postpone them. And as long as the free money keeps arriving, we can’t expect any major change in economic policy and consequently any genuine economic growth.