“Orbanomics” or why Hungary Needs Europe
Matteo Tacconi 28 November 2018

When he won the 2010 elections after enduring eight years of purgatory in opposition, Viktor Orban found himself leader of a country devastated by the global crisis and saved only thanks to intervention by the IMF (International Monetary Fund) which followed a well-known format—new money in exchange for strict adherence to externally advised economic restructuring.

 

 

Back to sovereignty

 

 

Orban, however, chose a different path. He adopted a range of unorthodox economic policies, exemplified by the so-called mega-taxes that were applied in key economic sectors—banking, telecommunications, energy, and large-scale distribution—mainly controlled by foreign players. Orban’s tax policy had two objectives. The first was to bolster the public purse and pay down Hungary’s inflated debt burden; the second was to rebalance the ratio between foreign and Hungarian capital.

Orban is obsessed with the idea that the economic transition experienced by his country after 1989 was dominated by the interests of foreign capital, which was granted too many favours and allowed too much influence on Hungary’s economy. The battle undertaken since 2010 by the Hungarian prime minister, re-elected in 2014 and 2018, has consisted in a return to political and economic-financial sovereignty.

The mega-taxes, lowered over time, also served to encourage large investors to leave Hungary, selling their assets to local operators, which has to a certain extent been achieved. Having repaid its debt to the IMF (not kicking it out of the country, as reported in the past by the Orban-supporting press), Hungarian capital—both public and private—has now returned to playing a very important role in these sectors. The government, for example, now controls 20% of the banking sector.

The compulsory transfer of contributions paid in to private pension funds to a national fund is another measure that has taken off since 2010. This helped generate a critical mass of funds that has simultaneously supported Orban’s project of restoring economic sovereignty and sustained the search for an illiberal path to democracy and the refusal to open up to immigration. In other words, the nationalization of pensions.

 

 

Social intervention by the government

 

 

This broad-based economic agenda has been labled Orbanomics. It also has other fundamental pillars, such as lower interest rates—now at an all-time low—to encourage consumption. Then there is the vast workfare programme, through which large numbers of unemployed Hungarians have been hired for public works, ranging from construction to street cleaning, and agriculture to building the “wall”—a wire fence that seals the border with Serbia, thereby greatly reducing the flow of refugees along the Balkan route.

Those employed in the public works programme earn about €200 a month. This is a miserly amount but one that in the vast Hungarian countryside—practically speaking, the entire country except for Budapest and a few other urban centres such as Gyor, Debrecen, Miskolc, and Szeged—goes quite a way in covering bills, rent, and groceries.

Social intervention by the government also includes a plan for supporting families. Those who have children and intend to buy a home receive significant financial aid. The objective of the one-party Fidesz government, the political party founded by Orban after the fall of Communism, is to fight demographic decline and avoid having to resort to immigration. Economics and demographics thus merge and sustain one another.

Investors and rating agencies were initially extremely perplexed as far as Orbanomics was concerned, considering it unsustainable. As time went by, however, their negative opinions softened thanks to the progressive improvements seen at the macroeconomic level. Growth has returned, and this year may rise above the 4% reached in 2017. Since 2010, unemployment has fallen from 11.4% to 3.8%.

In sovereignist circles, Orbanomics is nowadays seen as a model of success and one to be copied. The Polish government, for example, has adopted various similar measures. Matteo Salvini, the real leader of the Italian government, has also more than once indicated the Hungarian economic model as a path to be followed.

 

 

What the programme hides

 

 

And yet, Orbanomics hides several cracks under the surface. Quite a few in fact. One is the national debt, which has been steadily rising towards 100% of GDP (in 2010 it was 80%). Another—as explained in an article published by Political Critique, an online review created in Poland—is that hundreds of thousands of people employed in public works are still unable to access the primary labour market.

This is because the programme has not provided any training or specialization for those employed within it. In addition, the government has reduced funding for vocational schools as well as carefully selecting those funds allocated to Hungary’s universities, relying on political loyalty-based criteria.

Once again Political Critique has shed much-needed light on matters the local press ignore, reporting that since 2013, net migration has turned negative in Hungary—another omen for Orbanomics. In other words, more people are leaving the country either temporarily or permanently than are settling in Hungary. Worse still those who emigrate are those with the skills the country needs.

Others simply prefer to accept a better paid, albeit humble, job abroad rather than take a similar position at home. People also emigrate because of workplace safety, which is very precarious in Hungary, especially on construction sites.

Generally speaking, Hungary’s revival has only partly reflected the impact of government programmes. Structural and private investment funds from Western Europe and low manufacturing costs remain the driving force for growth and it is this that leads to the problem affecting Hungary so greatly as well as all the other members of the “new Europe”.

 

 

Foreign capitals

 

 

These are all countries that are needed as the hinterland for the large western manufacturers (Hungary is one of the hubs for the German automotive sector, for example) and that attract capital thanks to low taxation and other incentives. In Hungary there is, for example, a flat tax applied both on personal income (15%) and company profits (9%).

This economic model was useful and necessary in the course of the “first” transition. Now, however, Budapest and other capital cities in the region will have to formulate a “second” one, trying to attract investment through higher technology to face to great challenges posed by the digital economy, as suggested, for example, in the 2018 Central and Eastern Europe Prosperity Report, a study published every year by Erste, the prominent Austrian bank.

While waiting for this laborious and difficult adaptation process to take shape, Hungary will continue to depend on direct foreign investment and European funds, which amount to 80% of all Hungarian state investments. These are the same funds that Brussels have hinted they will cut off due to Orban’s illiberal shift and the same used by the class of oligarchs formed in the shadow of the prime minister to become wealthy.

Indeed, 60% of state invitations to tender won by magnates close to Orban were financed with EU funds, as reported by the Financial Times in an investigation published last December and entitled Viktor Orban’s oligarchs: a new elite emerges in Hungary.

 

 

Translated by Francesca Simmons

Photo: ATTILA KISBENEDEK / AFP


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