Maximilian R. P. Gebhardt: The Emperor Has No Clothes

Maximilian R. P. Gebhardt is a former US diplomat and Economic Officer for the Department of State, now working as a consultant to private clients. From 2013 to 2015 he served as the economic officer at US Embassy Budapest responsible for covering trade and investment as well as tracking corruption.

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I served in Hungary from 2013 to 2015 doing counter-corruption, although a fair amount of my job was watching trade and investment, along with tracking sectoral changes. I’m proud to have contributed quite a bit to our 2014 and 2015 Investment Climate Statements. It is worth saying that I am more an analyst than an economist, and the data set that I generated is currently being looked at by folks far more experienced than I. My background is ultimately in international relations with a nice six-year stint at the State Department as a Foreign Service Officer where I was trained, though mostly I picked everything up on the job – the Foreign Service way.

Late last week, I was in discussions with a few old contacts from back when I was in Hungary. The discussion seemed pretty routine: the government was seeking to land the Olympics which would mean massive construction contracts, Hungary still showed positive growth signs and Moody’s had upgraded them out of junk status, and the national debt continued to shrink. The usual story of Hungary’s reliable but ultimately unimpressive 2-3% GDP growth. The on-the-ground picture was pretty much as I had left it as well. The rising cost of living was a constant gripe, wages were flat. Generally the complete opposite of the official inflation data that included utility price cuts.

And then Momentum succeeded in forcing a referendum, and the immediate reaction on the heels of that was for the head of the Central Bank to make a not-so-veiled claim that the United States attempted to remove FIDESZ and was behind Quaestor and all the failures of Q1 2015. I admit, it was a pretty funny story. I built the case for those visa bans, and I can say with certainty that there was no plan for a coup. They were at best a shot across the bow.

But it raised an interesting question: “What are you hiding that has you so worried?”

Back in late 2014, when I was tracking agricultural VAT fraud, we got a tip from Ferenc Biró at Ernst and Young that he had tracked some limited food oil VAT fraud for a client of theirs by looking at discrepancies in the trade data. Hungary might cook the books a bit, but it does not live in a vacuum, and Hungary is certainly trade dependent, with exports and imports combining to well over 150% of GDP. Fortunately, trade is classic double-entry bookkeeping. An export logged by one country has a corresponding import recorded on the other side. As the Hungarian Tax and Customs Authority both logs the official trade data and collects taxes like VAT, it stands to reason that anyone cheating on VAT wouldn’t want NAV to know, so there would be no record of the transaction.

I  slogged through bulk Global Trade Atlas data for a dozen countries so that I could prove a point. In the end, I did find anomalies in food oil, oilseed, and some other agricultural commodities in trade with Slovakia, Ukraine, Serbia, and Croatia. It was fun, it told us we were right to worry, but ultimately it was an internal exercise in confirming what we had already confirmed with multiple sources regarding agricultural VAT fraud.

Fast forward, and I asked myself that same question – what about now? The food oil market, after all was said and done, was supposedly cleaned up. Mission accomplished, America won. I pulled out a few million data points from UNCOMTRADE data and asked the question again: “Are there gaps in the data?”

I should first say for American readers that VAT is a type of tax that is not unlike sales tax, except it is assessed on the “value added” at each transaction along the value chain. In Hungary, VAT is 27%, the highest in the world, so there is quite an incentive to cheat. When you export from one country to another, the tax authority in the exporting country refunds the VAT to the exporter, allowing trade to happen at the actual price of the good, rather than the inflated price with VAT. In trade, there are two kinds of VAT fraud you typically catch: import-based and export-based. Import-based VAT fraud rests on a simple principle. When a good is imported into country A, you are liable to country A’s tax authority for VAT on that import. Export-based is a bit more complex. You claim you exported a good to the tax authority, pocket the VAT refund, and then sell the good domestically at or below market price, pocketing the VAT. Food oil and agricultural VAT fraud was typically of the export variety, drawing lots of criminal participants since they realized you could keep claiming exports in a loop, pocketing refund after refund. For a time, that kind of VAT fraud really tied up the oilseed market – why sell off your oilseed when you can use it to keep pulling off VAT fraud ad infinitum?

I did a few initial case studies – automotive, aviation, agriculture, electronics, and petroleum products. In the case of aviation, automotive, and electronics, I found some anomalous reported exports to Hungary that were not reported as imports. In the case of agriculture and petroleum, I found export-based issues with Hungarian exports that had no corresponding imports recorded.

The total impact of this was huge, about $3.37 billion in errors in 2015 alone, which was large enough to impact GDP.

I’m still looking at the data, and several other economists are as well, so these findings are certainly not conclusive, but as my favorite nerdy webcomic XKCD once said, “Correlation doesn’t imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing ‘look over there.’”

February 28, 2017
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Roderick Beck
Guest

What puzzles me is that tax revenues have been strong. And the second though is “when does the shit hit the fan”. If the official figures are exaggerated and the economy is much weaker than reported, there should be a crisis at some point

MaxGebhardt
Guest

Yuuup.

Ballpark 15-30% GDP correction is needed.

Lipizaner
Guest
Which means government debt did not decrease either. Debt actually increased very much in the last 6 years in absolute terms (just counting the years of the Orban government) but went down on paper as a percentage of the GDP because Hungary reported a higher GDP. But GDP is probably significantly smaller and mind you it was already artificially inflated a few years back by including prostitution and other semi-illegal activities. Truth be told it is in everybody’s interest to have high enough GDP numbers. The EU can claim growth and success, the US/UK investment banks can continue to trade Hungarian bonds etc. The dictum: pretend, pretend, pretend. It’s like the EU always knew that subsidies will be stolen (by the mafia or a local autocrat) yet they send the monies anyway. I’m sure the bureaucrats in Brussels suspect that Hungary is cooking its numbers (all of its numbers basically) and propose made up numbers (e.g. Paks 2), but it’s none of their business, they have their lattes to sip. One more thing: Hungary lost about 700,000 people who emigrated and who spend their year (apart from a brief visit to Hungary in the summer and at Christmas) abroad. I… Read more »
Observer
Guest

Lipizaner

The GGDebt is reduced by the year end tricks, this is why the only figure used by the gov is as of Dec. 30th.

The remittances amount to a staggering 2.5-3% GDP. They boost consumption, which is surprisingly (without remittances) good. https://www.google.hu/search?q=k%C3%BClf%C3%B6ldon+dolgoz%C3%B3+p%C3%A9nzutal%C3%A1sai+GDP&ie=utf-8&oe=utf-8&client=firefox-b-ab&gfe_rd=cr&ei=SpW2WMfbM8jR8gfMi5WgDg

Observer
Guest

MaxG

Wow! 15-30% GDP sounds impossible. Even the EEC estimated re the Italian black economy in the 80 were no more than 25% if I remember well.

MaxGebhardt
Guest

Thanks Eva for posting this! I’m happy to field questions.

For the wonky ones, Here’s the data set: https://goo.gl/6e4YJQ

Warning: it is an 80+ MB excel file. Its a sloooow one. I suggest that you pull from the sheet and then transform data in a separate sheet.

Member

Dear Max,

Which program did you use to open it ?
I admit I have not been able to view the content of the file.

MaxGebhardt
Guest

Just excel, the 2010 version. You need to download it to play with it. You can’t just open the online version, it’s too big.

Member

The found GDP error, $3.37 billion , inflated the 2015 Hungarian GDP by 2.88%.

33999012/290.638 = 116980.6 [= 2015 Hungarian GDP in 10^6 $]

http://www.ksh.hu/docs/hun/xstadat/xstadat_evkozi/e_qpt002b.html
https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates

The 2.88% inflation of the GDP numbers translates into a 100/0.9712 = 102.97 factor for the debt/GDP ratio.

Therefore the reported 74.715% “Maastricht” debt/GDP should be modified to 76.93% for 2015-12-31.

http://akk.hu/hu/statisztika/allamadossag-finanszirozas/az-allamhaztartas-maastrichti-adossaga

benno
Guest

The scramble to call down EU funds is on.

MaxGebhardt
Guest

If only OLAF was as cuddly soft at Olaf from Frozen.

e-1956
Guest

Why was the Obama regime so passive in Hungary, Syria, Libya, Poland, Moscow, Tehran, Damascus, Beirut, Somalia, Milwaukee, Chicago…..etc?

Why did the diplomats keep so quiet?

MaxGebhardt
Guest

Honestly, because its not in a diplomat’s nature to get loud and rowdy. The Vienna Conventions are pretty clear that domestic affairs are off limits, and pretty much everything can be played as a domestic affair. You do a lot behind the scenes, like the guys in black in Kabuki.

e-1956
Guest

Will you make up for the lost time?

MaxGebhardt
Guest

Honestly, I’m not a political guy, but I do care an abnormal amount about economics. The fundamental truth is that the Hungarian economy has not been benefitting the Hungarian people as a whole, while well connected folk do better and better. I abhor a rigged system.

Ferenc
Guest

The question may be: one rigged system OR two different systems?
I mean a system for the “average Hungarians”(1) and another for the “connected folks”(2). Official data will show the (official) total of the two together and that gives a not so bad impression. But if data could be splitted up big differences would appear:
-for (1) almost all negative (except probably the utility costs)
-for (2) everything positive (including even higher utility costs)
It basically means that wealth of (2) is increasing by taken that away from (1), but again overall it seems not so bad.
Furthermore there is the possibility that system (2) helped through it’s ‘good’ connections to hide certain things from official data (aka.black money), and that that is in an upward spiral. So in reality (2) achieves an even higher rise than the downfall of (1).
And then the state and mouthpiece media are trying to convince all that everything is going well in Hungary (using and/or needing rigged data).

Ferenc
Guest

correction, I meant:
“-for (2) everything positive (including even lower utility costs)”

wrfree
Guest

You know I find it absolutely galling that stats can be manipulated to the extent that it is done with impunity. Strange that CE has a government in operation running around like that. With the screwing around with stats I’m surprised that apparently there hasn’t been a fine tooth and comb going through the ‘smoothed’ data. And to think economists plan on the data unless I’m mistaken where it’s the rule in those parts.

wrfree
Guest

Thanks for the data of ‘kabuki’ stats.

“By a small sample, we may judge of the whole piece.” Miguel de Cervantes from Don Quixote

Hungary: the land of the ‘fudge’.. always looking for that eco ‘edge’.

webber
Guest
Lipizaner
Guest

also OT – everebody’s favorite “liberal Fidesznik” Tibor Navracsics (commissioner of the EU) was defending Sebi Gorka the other day.

Ferenc
Guest

Like to read/watch that! Where?

wrfree
Guest

Uh oh. That Magyar Ponce de Leon
sure must’ve lost his ‘pahnts’. Florida should have asked for better but really there’s arguably not much with the ‘upper echelons’ in Magyar representation.

Multiproblematic
Guest

WTF. Is America playing world policeman so much that they send officers to other countries to track down corruption and tax fraud? These should be entirely internal matters in an independent nation. The whole article gives me a strong “none of your own business” vibe.

Guest

You’re really funny, and multiproblematic!

Just like in the good old Communist times:
No “meddling in internal affairs” is allowed!

Btw this topic has appeared before:
The US company (forgot the name …) which produces VENUSZ, the best sunflower oil in Hungary (according to my wife – she won’t use any other!) some time ago complained about the competition’s tax manipulations. Wasn’t that the reason for declining US visas to several Hungarian businessmen – and the boss of the tax office?

Ron
Guest

Easy to find out. It was Bunge. Eva’s articles:
http://hungarianspectrum.org/2015/12/19/hungarian-prosecutors-found-the-lone-culprit-in-the-corruption-scandal/
Below in this article you find the four previous articles by Eva. Just click on the number (the number is the link).

FreeWheeling
Guest

Don’t be so naive. If your country has several companies with large investments based in another country, their diplomatic missions would be doing the very same thing. One would assume that the Germans and Japanese, at the very least, have analysts in Budapest who are coming up with the simliar numbers. It’s just what their superiors do with them is the what is key. (for example, many knew about Greece’s finances fudging well in advance of their crisis but no one had the backbone to do anything about it) Believe me, compared to some of the several other diplomatic missions and their proclivity to test the limits of diplomatic immunity, this kind of straightforward data mining to determine the validity of a country’s finances is perfectly acceptable.

Guest

“…this kind of straightforward data mining to determine the validity of a country’s finances is perfectly acceptable.”

Undoubtedly, but is it also acceptable for a former diplomat to tell about it in detail exposing persons as sources?

MaxGebhardt
Guest

I wouldn’t go so far as to say I’m exposing “sources and methods.” I’m exploring public data with a pretty straightforward methodology, which I wanted to acknowledge was grown from an idea that someone else had. It would be stealing, in my book, to not give credit where credit is due on the methodology front. It’s not like I’m some super-expert at fraud and complience accounting, I’m just spinning some data through excel.

Guest

I only talked about exposing sources, not “sources and methods.”

“… we got a tip from ___ at Ernst and Young …”

“I would like to thank our plucky Hungarian intern at the time, ___ …”

Istvan
Guest

That according to the likely security clearances that Gebhart operated under did not expose deeper intelligence methods used let us say in the issues around former president of NAV, Anikó Vida. This very excellent essay by Mr Gebhart was a model of providing public information with out violating security responsibilities.

If Spectrum readers want to connect the dots go back and read Eva’s good summary of the 2014 kickback case at http://hungarianspectrum.org/2014/10/20/american-hungarian-relations-are-crumbling/ Thanks to Eva for posting this essay and thanks to Mr Gebhart for drawing the broader systemic implications of likely VAT fraud for the Hungarian economy.

As for multiproblematic discussing my country being the world economic policeman it is the inherent job of the US Dept of State to protect the economic interests of the USA. If you don’t like this just wait, Trump’s State Department could be far more aggressive since his vision is America first, not implementing WTO rules.

qaz
Guest
It is shocking to see that you disclosed names of what is most probably confidential sources. It is also surprising that it so long for somebody to pick up on this. It is totally irresponsible on your part to give names, at least without clearance from the interested persons. And you surely did not get any clearance otherwise you would have mentioned it instead of trying to unconvincingly wiggle out of it after Jean P. raised the issue. Moreover, if you got across names of people who may have contributed to a report or a study for their client (probably Bunge here) you were surely not at liberty to disclose any such names, and you most probably violated a confidentiality undertaking or at least a confidentiality understanding. This is very disturbing coming from a former US diplomat. If the client of the mentioned consulting firm shared a report with a US diplomat, as you were at the time, it was surely not with the understanding that you were at liberty to use it and disclose names for your self-enlarging promotion. And let’s face it, mentioning names added nothing to your otherwise interesting story. And no amount of semantics you can… Read more »
MaxGebhardt
Guest

“Sources and methods” implies using something they told me in secret, we’re simply professional contacts who happen to talk with one another.
Again, I’m exploring public data with a pretty straightforward methodology and there is nothing secret about UN data. It is there for everyone to see, dissect, and discuss.

Istvan
Guest

How is acknowledging the work of a US embassy intern who is Hungarian and did statistical analysis revealing? I think Orban’s people know who the embassy interns are. I don’t think acknowledging the accounting firm of Ernst and Young falls under the GSA: Classified Information Nondisclosure Agreement State Department staff agree too.

But qaz you can file a complaint on the issue with the inspector general at the Dept of State. Here is the link to the form https://oig.state.gov/hotline-form

By the way no forms are accepted from SVR.

Observer
Guest

Multiproblematic

Love the moniker, spot on. So

The Hungarian corruption and tax fraud should be left to blossom.
Hungary for the Orban’s purely Hungarian mafia, to rob and rape, no police or legal protection is needed.

None of the civilized world’s business. Right?

Guest

“The total impact of this was huge, about $3.37 billion in errors in 2015 alone, which was large enough to impact GDP.”

Practically, what does this mean?

MaxGebhardt
Guest

So practically VAT fraud creates reports of exports that don’t exist (fraudulent refunds) and causes undereporting of imports. Since exports-imports is a component of GDP, it skewed GDP. $3.37b in errors for 2015 means that the reported GDP of Hungary for 2015 would be off by about $3.37b from the true figure, overstating growth.

Guest

And that also means that Hungary’s huge surplus in exports of which Fidesz is so proud is partly/totally a lie, isn’t it?
I’ve always wondered if this could be true …

Ferenc
Guest

Wolfi, very good point!!
Anybody here capable of correcting official export data using the data available given in this post (and comments)?

Observer
Guest

MaxG

Again, the $3.37 b is 2.6% GDP Hungary !!!
Isn’t eventual import cheating offsetting some of the above?

MaxGebhardt
Guest

The problem is the impact over time. Honestly, EKAER and other efforts to clean up the market worked, but it still doesn’t correct the historical GDP data.

GDP correction happens… Just never at this scale.

Observer
Guest

Tnx for the response.
No need to consider the impact over time, the figure for 2015 is shocking enough and it is reasonable to expect that there will be some, if not that high, fraud in the following years aa well.

Ferenc
Guest

Recently started wondering about the correctness of official inflation data:
-complains from Hungarian people about prices going up and up (probably except utility costs)
-official data from the statistic center (KSH) since 2012 ca.0% inflation
-shopping at visits to Hungary giving me the idea that prices are steady going up
So when in the post hitting the following
“rising cost of living was a constant gripe……….the complete opposite of the official inflation data that included utility price cuts”,
started really wondering what’s going on, what is correct and what is bogus?
And the question: With which method can be investigated items in clarifying their real status (correct or bogus).

Ferenc
Guest

The aircraft graphic caught my attention. I understand this to be about planed imported in Hungary, so that means by Malev (till 2012) and Wizzair (since 2003), and from Germany and France only. Well Malev used mainly Boeing (and through some sort of lease construction from Ireland) and Wizzair is using Airbus.
So if my understanding of the info is correct, it means the graphic shows import-based fraud between Wizzair and Airbus. That should for good investing journalists be a piece of cake to bring into the open, I think……

Ferenc
Guest

corrections: planed => planes
investing journalists => investigative reporters

FreeWheeling
Guest

Remember that this doesn’t even strike upon the selective and preferential tax enforcement by this OV gov’t. That is much far difficult to prove as one needs more courageous whistleblowers from within the tax authority to divulge.

OT: OV’s favourite stróman and mayor of his village, Mészarós, believes that he is smarter that Facebook founder Mark Zuckerberg because he has grown his wealth much greater rate:
(in Hungarian)
http://hvg.hu/itthon/20170228_Meszaros_Lorinc_Okosabb_vagyok_mint_Zuckerberg

MaxGebhardt
Guest

Yup!

My data suggests there is selective enforcement, but the way they achieve that is by undermining auditing because they were catching their friends! We told them this would be a problem years ago. You can’t undermine auditing units, like NAV whistleblowers reported publically and not expect *every criminal in the region* to rip you off.

Ferenc
Guest

OT – doping in Russia
Putin acknowledged today that there are (many) doping cases in Russia, but denies that any doping system was organized by the state and/or his government.
Like hearing Orban acknowledge that there is corruption in Hungary, but deny that any of it is organized by his government and/or party.

Ferenc
Guest

OT – Doom or possible scenario? YOU DECIDE!!
After Orban, Fidesz&Co have won the 2018 elections, just after they modified the Electoral Law, so they could secure again a 2/3 majority in parliament (this time with 33,2% of the votes).
The dissatisfaction in Hungary has started growing and growing. more and more people are leaving the country. Then a previously unknown organization comes with the idea of keeping a so called ‘All for Hungary’ march. This time even politicians themselves are personally invited to participate.
Orban takes it upon him to lead the march, and shouts (through a megaphone, taken from a former terrorist): “All for Hungary, Follow Me”, he turns around. Nobody there anymore, all have left their homeland ……….

Member

…and a new ethnological clean turk people enter the empty caparthian bassin and found a new nation that will last for 1000 years.

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[…] Érdekes blogposztot írt Maximilian R. P. Gebhardt, az amerikai nagykövetség volt munkatársa a Hungarian Spectrumra. Gebhardt azt írja magáról, hogy része volt a 2014 őszi kitiltások mögötti érvelés kidolgozásában, és benne volt az amerikaiak áfacsalásokkal kapcsolatos elemző munkájában is. Most pedig felkapta a fejét, amikor Matolcsy György, a Magyar Nemzeti Bank elnök amerikai puccskísérlettel indokolta a parlamentben a Quaestor-ügy kirobbanását. […]

trackback

[…] Érdekes blogposztot írt Maximilian R. P. Gebhardt, az amerikai nagykövetség volt munkatársa a Hungarian Spectrumra. Gebhardt azt írja magáról, hogy része volt a 2014 őszi kitiltások mögötti érvelés kidolgozásában, és benne volt az amerikaiak áfacsalásokkal kapcsolatos elemző munkájában is. Most pedig felkapta a fejét, amikor Matolcsy György, a Magyar Nemzeti Bank elnök amerikai puccskísérlettel indokolta a parlamentben a Quaestor-ügy kirobbanását. […]

Observer
Guest

?? Ès?

pappp
Guest

OT – it didn’t occur to me until now that son of Lőrinc Mészáros (Orban’s alter ego, main front and Strohmann), Lőrinc Mészáros, Jr. is the boyfriend of Orban’s daughter Sára since 2015. The Family.

Observer
Guest

Mèszaros just stated, among others, that he is prepared to support materially Orban, if he lost the elections in 2018, although this was unlikely.
Add Orban’s outrageous parliamentary wealth return showing his total savings as $ 2600guess they.
I suspect they are preparing the ground for some form of wealth transfer to the principal.

Member

Mr. Gebhart

Thanks for your troubles for this little people. We need attention from people like you and many others to make Hungary to a western country. Thanks from my hårt.

trackback

[…] Érdekes blogposztot írt Maximilian R. P. Gebhardt, az amerikai nagykövetség volt munkatársa a Hungarian Spectrumra. Gebhardt azt írja magáról, hogy része volt a 2014 őszi kitiltások mögötti érvelés kidolgozásában, és benne volt az amerikaiak áfacsalásokkal kapcsolatos elemző munkájában is. Most pedig felkapta a fejét, amikor Matolcsy György, a Magyar Nemzeti Bank elnök amerikai puccskísérlettel indokolta a parlamentben a Quaestor-ügy kirobbanását – írja a 444. […]

Istvan
Guest

What scares me, is that important people in the U.S. will actually form an opinion (and consequently make uneducated decisions) about smaller countries like Hungary, based on ‘information’ provided by people like M. R. P. Gebhardt. He clearly has no idea about how the export-import regulations work within the EU and regarding EU-external relations, and completely ignores the nuances, exceptions, conflicting interests and EU-wide problems regarding registration, which in turn, transform his accusations to become complete and utter nonsense 🙂
Malicious and looking for a 1-minute fame, or just simply not the sharpest knife in the drawer…

Ferenc
Guest

“clearly has no idea about how the export-import regulations etc.”
Istvan (from the US?), can you explain your statement to me (who has lived all his live in the EU and for some years in Hungary)?

alread
Guest
MaxGebhardt
Guest
Really great read! I actually was trying to find a way to illustrate that the method by itself is useless for magnitude, but it is great for showing the uniformity of the distortion. There’s no database of corruption, only the tug of gravity in statistical data that happens as a knock on effect. I’m really glad that the author closed by rehashing my comment that I’m no economist. I really can’t stress that enough, but something is sure there. It’s like watching a black hole pull all the data at once. I just couldn’t shut up and ignore it, but I also couldn’t make the conclusions either. That being said, and this is why I said I’m an analyst, my function is to basically read tea leaves and make my best guess. Economists prove something with scientific rigor, analysts just try and feel their way in the dark. >This index piece leaves just as many questions unanswered It’s a debate. And I sure as hell am not the man to settle it. >Okay, so he talks to the guy at MTA who says this that and that about why those numbers aren’t accurate The best I can do is speak… Read more »
Geri
Guest

Every official hungarian economic data is affected by some sort of fraud. For example folowing the year when HUF lost 20% against USD, the hungarian government annouced that it was 0,5% inflation in the previous year. In the last 10 years, fidesz and the EU together caused at least 50% drop in the life standards and in the GDP, every notable corporation and private enterpretour disappeared, they doubled and tripled every form of tax. Another 10 year from this insanity and hungarian GDP reaches the actual economic values of north korea.

MaxGebhardt
Guest

Yup! What made export-based missing trader fraud so interesting to me, was that because the incentive is the refund on VAT, higher taxes actually means that there is *more* of an incentive to commit fraud. The jump to 27% VAT, for example, did not help things.