Tag Archives: economic growth

Labor shortage, emigration, and the economy

A couple of weeks ago Hungary’s National Association of Employers and Manufacturers (Munkaadók és Gyáriparosok Országos Szövetsége/MGYOSZ) sounded the alarm about the acute labor shortage in the country. If the government, which is currently busy turning the population against “economic migrants,” does nothing, the country’s economy will be in big trouble. Even now, it is almost impossible to find skilled blue-collar workers and qualified white-collar employees.

The Orbán government’s response was indicative of the total confusion that must reign within Fidesz and the administration in general. It seems that politicians like János Lázár, head of the prime minister’s office, are restrained by the ideological straitjacket imposed by the all-powerful prime minister. The official line is that Hungary doesn’t need immigrants, that the devastating demographic figures can be improved by a higher birthrate. But, as is becoming patently obvious, Hungarian men and women are not in the mood to have larger families. And even if they were, it would not make any difference for another two decades. This attitude of “we are going to deal with the problem ourselves” is now coupled with a vicious anti-refugee campaign. It was inevitable that Lázár would have to toe the party line even though he undoubtedly understands that without immigration the situation will only worsen. Mihály Varga, minister of economics, who is less of a party politician, reacted to MGYOSZ’s cry for help with some sympathy. The result was the confused message typical of this government.

The labor shortage, caused by the low birthrate, is aggravated by the massive exodus of Hungarians, which has been going on for years. According to the latest figures, only last year close to 50,000 people left to find a better life elsewhere.

A recent study by the staff of the International Monetary Fund addresses the economic impact of this emigration. Although the IMF study is titled “Emigration and its Economic Impact on Eastern Europe,” the paper covers Central, Eastern, and Southeastern Europe (CESEE ). The numbers are staggering. In the last 25 years approximately 20 million people left this region and moved to better-off areas of the European Union. Many of the emigrants are well educated and young, and their exodus accelerates the adverse demographic trends. East Europeans moving westward “benefited the receiving countries in the European Union and, therefore, the EU as a whole.” The study views this “migration … as an indicator of success of the EU project, which sees freedom of movement as necessary for achieving greater economic integration, and ultimately, higher incomes.” But migration had a negative impact on the “sending countries” where it “slowed per capita convergence, reduced competitiveness and increased the size of government.” Apparently, the situation is worst in the Baltic countries and in Southeastern Europe, i.e. the Balkans.

So, Hungary is not in the worst shape, but in comparison to earlier years the current situation is different in two important ways. First of all, the number of people who get on a plane to seek their fortune elsewhere has been growing rapidly. Here are a few numbers. Just in one year, during 2015, the number of Hungarians living in other EU countries grew by 15%. Since 2010 the number of Hungarians living in Norway has tripled, in Germany it has doubled. Unfortunately, the United Kingdom, where the number of Hungarians is very high, didn’t report its statistics to Eurostat. According to Eurostat, in 2015 563,00 Hungarian citizens lived outside of Hungary as opposed to 108,000 in 2010. Add to that the estimated 200-300,000 Hungarians in the U.K. and those in Austria, a country that still hasn’t reported, and the picture is even grimmer.

Another difference between those who are now looking for jobs abroad and those who left a few years ago is that the earlier emigrants, at least initially, were not planning to live outside of Hungary permanently. They were thinking of a temporary stay, just long enough to save some money to start a business, buy an apartment in Hungary, or pay off their Swiss-franc loan or perhaps long enough to perfect their German or English. All that has changed. People today who are seeking jobs abroad plan to become permanent residents.

Several employment agencies in Hungary cater to those looking for jobs abroad. One of them, Euwork, specializes in healthcare but has job opportunities for unskilled workers as well. The agency told HVG back in April that a member of Euwork’s staff will ask applicants at their interview why they want to leave. Nowadays, the most frequent answer is that the Hungarian situation is “hopeless.” It is hopeless not just because their own career seems to be going nowhere but also because they think the country itself is going to the dogs. They don’t believe there will be any change for the better in the near future. These applicants increasingly complain about the general state of affairs and politics. They don’t necessarily limit their complaints to the government or Fidesz but talk about the political situation in general. These people, even if they don’t speak the language well and know relatively little about the country where they are heading, plan to stay there permanently. Apparently western companies welcome these determined immigrants because they are more eager to fit in and will more readily integrate.

Randstad, an American employment agency with an office in Hungary, conducted a survey recently on Hungarian young men’s willingness to go abroad for a good job. The findings were astounding. Eight out of ten men under the age of 34 would pack up and leave for employment opportunities abroad. Instrum Justitia, an organization studying the state of the consumer industry, reported that most young parents (between the ages of 20 and 25) are in serious financial trouble. Only 25% of these families can pay their bills on time. So it is not surprising that 44% of them have already contemplated emigration, which is much higher than the average of 35%.

The trend will continue and the gaping differences in living standards between East and West will not be narrowed any time soon. Unfortunately, in the last 25 years Hungary’s economy has stagnated. Or, to be more precise, after a few years of economic growth, bad government policies caused a relapse, followed by some improvement, which was soon enough killed by the next administration. The latest such setback occurred after 2010 when the new Fidesz government’s policies tossed the country into recession, wiping out the heroic efforts of the Gyurcsány and Bajnai governments, which had succeeded in putting the country’s economic house in order, surviving a worldwide recession, reducing the deficit, and achieving modest economic growth by 2010.

Propaganda is not enough

Current government propaganda may laud its great achievements, but the numbers don’t lie. Under the present circumstances more and more people will pack up and leave for places with greater opportunities. The country where they settle will benefit from their presence and so will the immigrants themselves, who make double or triple what they could in Hungary.

As for Hungary’s labor shortage, for the time being the Hungarian government isn’t worrying about it. But let’s assume the Orbán government changes its mind and recruits workers from, let’s say, the Balkan countries. Will these people stay in Hungary? I’m afraid the future is bleak in this respect.

 July 21, 2016

No, Viktor, illiberalism is not the key to economic growth

Today’s post was inspired by an article that appeared yesterday in 444.hu with the intriguing title “We only wanted to open the doors to Eastern dictatorships, but they were blown away by the Curse of Turan.”

What is the Curse of Turan? It is legend according to which Hungarians of the eleventh century were cursed by their pagan shamans when they abandoned their old faith for Christianity. And what about Turan? According to Persian mythical tradition, it was the name of an area which today is known as Turkistan.

We have spent countless hours discussing Viktor Orbán’s firm belief that western civilization and its market-based economy are on the decline while the eastern illiberal, autocratic, dictatorial regimes are thriving economically. They will eventually overtake the West. Orbán projected the recent spectacular growth in some of the Asian countries into a linear trend that might last–well, forever. He kept repeating that we live in a new world which only he was astute enough to discover. And he began making pilgrimages to these thriving eastern countries, courting them, praising their dictators so shamelessly that some Hungarians were outright embarrassed. He went so far as to return an Azeri murderer to Azerbaijan, although he must have known that he would be greeted as a national hero at home for killing an innocent Armenian army officer in Budapest.

This is what happens when someone with limited knowledge of the economic and political complexities of the world acquires unlimited power and begins to implement his idées fixes. Orbán’s theory was based on wrong assumptions and a flawed model. These countries’ economic growth was not due to the illiberal nature of their regimes, as Orbán believed, but to other economic factors–in most cases, to the commodity boom. Most of the countries Orbán so admired were flush with natural resources: oil, natural gas, and important minerals. As long as gas and oil prices were high, the political leadership of these countries was satisfied and did next to nothing to diversify. This is what happens when, as a result of the preponderance of state enterprises, no truly free market economy can develop that would ensure a healthier economic mix.

Viktor Orbán put enormous effort into his “Eastern Opening” project, with few results to show for it. 444.hu examined Hungarian exports to six countries east of Hungary between 2009 and 2014: Azerbaijan, Kazakhstan, Saudi Arabia, Turkey, China, and Russia. Hungarian exports to Turkey grew slightly, the others either stayed the same or actually decreased. 444.hu describes trade with Azerbaijan, Kazakhstan, and Saudi Arabia as microscopic. Investments from these same countries are so insignificant that the Hungarian National Bank doesn’t even record their size. But even Russian, Chinese, and Turkish investments are minuscule, only a few billion, which is very small indeed as a share of total foreign investments in 2014, which was 2.5 trillion forints.

The percentage of the six Eastern countries in Hungarian export between 2009 and 2014. Source: KSH

Hungarian exports to the six eastern countries between 2009 and 2014 as a percentage of total exports. Source: KSH

In the past Viktor Orbán’s admiration of Azerbaijan’s economic accomplishments knew no bounds. In April 2014 he compared Hungary’s  modest 3% growth to the fabulous Azeri growth of 17% between 2003 and 2010 and, after that, 5-6% percent every year. But a little more than a year and a half later Azerbaijan is in grave economic trouble. On January 28 Bloomberg reported the start of negotiations between Azeri officials and the IMF and the World Bank for a four billion dollar loan. The discussion centered around the liberalization of the economy and the improvement of the business climate in exchange for the money. Although the Azeri finance minister insisted that they are in no immediate need of the four billion dollars, the facts don’t support his claim. “The Azeri central bank moved to a free float on December 21 after burning through more than 60% of its reserves last year to defend the national currency … the manat which nosedived by about half last year and slumped further to record lows this month.”

Orbán also sang the praises of Kazakhstan in June 2014. He found the achievements of the country in the last fifteen to twenty years absolutely spectacular. According to him, “the importance of Kazakhstan in the world economy will grow year after year.” Well, that forecast hasn’t panned out either. Because of falling oil prices Kazakhstan’s export income dropped by two-thirds after 2013. This year analysts predict a recession. The Kazakh currency, the tenge, crashed in a spectacular fashion in the middle of 2015. Bloomberg remarked that “Kazakhstan is a textbook case on why economies must diversify” and added that “powered by natural resources ranging from oil to uranium to copper, including the world’s largest proven zinc deposits, the economy has remained hamstrung by corruption and political controls.” Political control, which Orbán believed to be a necessity for economic growth, is in fact an impediment according to economic analysts.

Orbán was also very enthusiastic about the prospects of the Turkish economy. Western analysts, however, are less sanguine. Al-monitor, in an article written in August 2015, said: “Any one of the following problems would ring alarm bells for an emerging market: a slowing economy, rising inflation, distrustful citizens exchanging local currency deposits for dollars whenever possible, a rising tide of violence scaring away foreign tourists and hurting hard currency reserves, and concerned foreign investors eyeing the exit because of a bearish stock exchange and a possible hike in interest rates by the US Federal Reserve. Not content with just one, Turkey is facing all of those headaches and more.” The Turkish economy is still growing by about 3% per annum, but given the growth of the Turkish population this is considered to be a weak performance.

It was at the beginning of 2014 that Orbán visited Saudi Arabia and, as usual, lauded the greatness of the country and its leadership. Saudi Arabia has nothing but oil to export, and if the price of oil falls precipitously for a longer period of time the country is in trouble. At the moment the yearly deficit is 20% of the GDP. Foreign currency reserves are dwindling, and the Saudi princes are becoming visibly nervous. They are entertaining all sorts of measures that may or may not work. There are analysts who predict that the government of the House of Saud may collapse in the not too distant future.

Russia, which also relies heavily on its natural resources, is in trouble as well. As The Economist said a few days ago: “Russia’s economic problems move from the acute to the chronic.” Between mid-2014 and today Russia’s exports and government revenues collapsed. Its GDP shrank by nearly 4%; inflation was close to 13%. The ruble lost half its value against the dollar in 2014 and, after rebounding somewhat at the beginning of 2015, now stands at 80 rubles to the dollar. In March 2014 the exchange rate was 36 to 1. The latest is that Russia is exploring an international bond issuance, which signals that there is a shortage of funds as the economy heads for a second year of recession.

Finally, 444.hu reminds its readers of Orbán’s words at the Chinese-Central-Eastern European Summit in November 2015: “In the past there were many who had doubts about China’s long-term economic future. It was then widely held that the strengthening of the Chinese economy was only a temporary phenomenon and that the financial crisis would undermine its economic growth. But today we see exactly the opposite of this prediction. China is marching along with a permanent and sustained development, and we all know that it will soon be the strongest economy in the world.” But China’s economy is slowing, and worse may come in the wake of the greatest construction boom and credit bubble in recorded history. As an analyst described that bubble: “An entire nation of 1.3 billion has gone mad building, borrowing, speculating, scheming, cheating, lying, and stealing.” He called it a “monumental Ponzi” scheme. In any case, China’s economic growth in 2015 was the slowest in 25 years, and its economic decline is probably even more serious than its questionable figures indicate.

So much for Viktor Orbán’s belief that illiberal leaders are the only ones who know the secret of sustained economic growth.

Is the Hungarian economy in trouble?

Being no expert on economic matters, I have been hesitant to comment on the state of the Hungarian economy, but for a long time I have had the sneaking suspicion that, despite the self-congratulatory reports of the government and the fairly good numbers, something is awry. Something doesn’t add up. Every day we hear about 45 billion for this project, 35 billion for that project, 50 billion for something else. Most of these projects are frivolous, the classic being a train taking non-existent fans to the Felcsút Football Academy’s fancy stadium. Almost all of the projects are being paid for, at least in part, by money Hungary receives from the much-hated European Union, money that János Lázár, who is in charge of the convergence funds, is trying to spend as fast as possible. These are the investments that were behind the surprisingly good economic growth in 2015. Lázár, who is often quite blunt in his public statements, admitted that Hungary’s economic growth depends on how much money he can “squeeze out” of the convergence funds. Since in the next few years less money will be coming from Brussels, unless the Hungarian economy picks up steam, future economic growth will slow. Under the present circumstances, if the flow of money from Brussels were to stop the economy would simply collapse.

At least this is the assessment of the Institute of Budgetary Responsibility (Költségvetési Felelősségi Intézet). This institute serves as a watchdog over the government’s economic policies. It is a non-governmental organization that was formed in 2011 when Viktor Orbán abolished an official government office, the Budgetary Council, that served the same purpose. The Budgetary Council came into being at the insistence of Fidesz, which, when it was in opposition, was very keen on holding the government accountable. After winning the election in 2010, Viktor Orbán found the Council burdensome, especially since its head, George Kopits, an American-Hungarian who formerly worked for the IMF, severely criticized the government’s budget proposal for 2011. I suggest you read my piece “Goodbye, Mr. Kopits” from November 2011. Here you will meet a rare specimen: a man of integrity. Kopits is a conservative, but by 2013 he was quoted in The Wall Street Journal calling Viktor Orbán’s regime “a constitutional mob rule.” Supporting the work of the Council was a research team of economists. Some of them went on to found KFI.

The Haza és Haladás Alapítvány (Homeland and Progress Foundation, established by Gordon Bajnai) commissioned KFI to prepare a study on the “technical outlook” for the years between 2015 and 2019, which is available online. Without going into the details, let me just say that Balázs Romhányi, the director of KFI, described the Hungarian economy “as a car without an engine that is being pushed and only its windshield wipers work.” Those who push it obviously reside in Brussels.

How heavily is Hungary dependent on the European Union subsidies? As Hungarians nowadays like to say, “brutally.” Here is just one example. The government is hoping for an economic growth of 2.7% in 2016 based on receiving 1,988 billion forints this year and 1,105 billion forints next year in subsidies from Brussels. According to Romhányi’s calculations, however, Hungary would need an extra 600 billion to achieve this goal.

Since Hungary’s GDP depends so heavily on these subsidies, it is of paramount importance for the Orbán government to spend the money as quickly as possible, even if not wisely. Index uses the phrase “throwing the money” when it describes Lázár’s efforts to get projects underway. Although, according to KFI’s calculations, the larger Hungary’s economic growth is in 2016 the smaller it will be in 2017, the study talks about 3-4 “good years.” So if Brussels continues to push the engine-less car, it will help Viktor Orbán’s far-right regime win the 2018 election. Perfect timing, I must say.

economic growth2

Even though the government is under budgetary constraints from Brussels, its spending continues unchecked. “Whatever money comes in [from domestic sources] is immediately being spent.” As an example, when the government received 450 billion forints more in tax revenue than anticipated, “they happily spent the windfall.” Nothing was put aside for a rainy day. In fact, it seems that they spent not only the unexpected revenue but even more.

The government is standing by its call for a 2.4% budgetary deficit. But it seems that without additional revenue it will be hard to meet this target. At the end of October the Magyar Nemzeti Vagyonkezelő Zrt. (Hungarian National Asset Management) sold 14 million OTP shares  for 75 billion forints. As a blog writer described it, the government was selling the family silver.

In assessing the economic health of Hungary, economists pay particular attention to employment figures. But there are serious questions about the accuracy of the data being released by the Central Statistical Office (KSH). The concerns are explained quite well in portfolio.hu, so here I will merely summarize the results. Hungary, like the United States, has two measures of employment: the institutional or establishment survey and the labor force or household survey. According to KSH’s own labor force survey, “the entire growth of employed people in the business sector (without employees in public works and those working abroad) totaled 294,000 between 2011 and 2014 [while] the institutional surveys came up with merely 3,000 people.” Surely, KSH is doing something very wrong.

All in all, we have no idea about what’s really going on in the Hungarian economy. I suspect nothing good. I am almost sure that if the Orbán government were to fall tomorrow, the new government would be in a terrible financial predicament. And the majority of Hungarians, in their total ignorance of what’s going on, dream of hosting the Olympic Games in 2024. In fact, 70% of them would be mighty proud.