Global Economics

Hungary's Worrisome Anti-Business Turn


With an educated, low-wage workforce, Hungary remains attractive for foreign investment. But recent events—and anti-business attitudes—raise warning flags

Really, this couldn't have come at a worse time.

Just when the country's finances, all over the place for the last few years and badly shaken by the crash of 2008, were finally stabilizing, Hungary has become embroiled in a string of rows with foreign investors and their powerful government backers about whether the country is still open for business.

The first case concerns an Indian company that populist opposition, led by the center-right Fidesz party, stopped from building a tire factory in the town of Gyongyos last year. The party used mostly groundless environmental arguments, torpedoing an investment that would have created 800 jobs in the town.

The second came this year when the local government of Pecs tore up an agreement with Suez (GDSZF), the energy company that was running the local waterworks. The town didn't bother going to the courts, preferring simply to send in heavies to occupy the offices and lock the management out. A legal case is now under way after Suez sued.

The most damaging case happened this autumn when ORTT, the body that oversees Hungary's airwaves, threw out the license-renewal applications of the two national commercial radio stations, both owned by foreign investors. It awarded the licenses instead to two startups, one of which is linked to Fidesz, although ORTT's own chairman had declared the applications inadmissible on technical grounds. Since the members of ORTT's decision-making body are nominated by political parties, most people suspect a stitch-up.

Naturally, the American and French investors concerned complained vociferously, as did their government backers. Members of the U.S. Congress have introduced a resolution slamming Hungary's failure to protect foreign business interests. French President Nicolas Sarkozy has made a scene, as has U.S. Vice President Joe Biden, albeit in a more discreet fashion. Western embassies in Budapest wrote an open letter warning of a deteriorating climate for foreign investors, a highly unusual move against a fellow EU and NATO member.

Of course, the country is still very much open for business. Mercedes-Benz (DAI) has just decided to build a big new car plant here, a move enthusiastically supported by politicians. With labor costs that are still much lower than in Western Europe and with a relatively educated population, overall Hungary is still an attractive place to do business.

But there are rumblings in the deep. In many ways, the country doesn't seem particularly well-suited in the long term to be a vibrant, knowledge-based capitalist economy that can continue to benefit from globalization.

Corruption, although not as severe as in most Eastern European countries, at least according to Transparency International's perception index, is widespread. Both big parties display a rampant and irresponsible social populism that ended up nearly wrecking the economy last year. It's unclear if politicians have learned the lessons of their profligacy. And for all the wealth it has created, the free market is not particularly well-liked by Hungarians – in fact, only the French, the Spanish, and the Portuguese have more negative views about it in the EU, according to one Eurobarometer survey.

GOING BACKWARD FAST

The public perception of the free market is largely of a brutal jungle where only the well-connected can succeed, rather than the innovative and the hard-working. Unfortunately, with some justification. It is no wonder that Fidesz, certain to win next year's election, has risen to unprecedented heights of popularity partly on the back of a strong anti-market and anti-capitalist message.

The education system seems less and less able to cope with the demands of businesses that need increasingly to add cutting-edge technological value to be competitive, rather than just produce goods cheaply. Low but growing labor costs and proximity to Western European markets will not suffice forever. But the only Hungarian university on a "top 200" list of European universities published in the London Sunday Times is Budapest ELTE – in 195th place.

The country has grown inward-looking and full of hazy and conspiracy-driven ideas about what lies beyond its borders. There has been no significant outflow of people to Western economies, unlike from Poland or the Baltics, and therefore little learning from their practices. Proportionately fewer people speak foreign languages than in any other country in the EU including, amazingly, the United Kingdom.

This will not do. The entire Hungarian development model is based on attracting foreign capital and know-how, as the country has little of either. So far this has worked. Hungary has received some 60 billion euros of foreign direct investment, the highest per capita rate in the region. Much of its modernization is due to adopting Western practices, in politics, in the economy, in so many walks of life.

We've come a long way since 1990 thanks mostly to our openness to the world, both by actively reaching out to it and welcoming it. We'd ruin everything by shutting it off and by being unprepared for it.

Provided by Transitions Online—Intelligent Eastern Europe

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