EU MEMBERSHIP - CAN HUNGARY
COMPETE?
DR MAGDOLNA CSATH
(Doctor of the Hungarian Academy of Sciences)
January 2004
INTRODUCTION
In a previous article on this site Magdolna Csath described the
march of the EU into eastern Europe as a new colonization. In this article
Dr. Csath describes a process which has subjugated those countries into
an "integrated" German Europe, a Union which is as ruthless
in destroying democracy and national sovereignty as was the Soviet Union
from which these countries thought they had escaped. But Hungary, like
other Eastern countries, have gone from Russian Union to European Union,
with barely a democratic sovereign breath in between! They do not have
democracy but a fascist subjugation to Brussels and Berlin, with threatening
words from Paris if they do not behave! They do not have self-government
but have been forced into the alien constitutional straight-jacket prepared
by Germany and France.
They do not have enterprise capitalism which provided wealth for
the Anglo Saxon economies but that corporatist tyranny which was the
hallmark of European fascism of the 1930s and 1940s. Overseas companies
have been given massive subsidies (by tax paying Hungarian companies
of course) tax holidays and other "incentives" to take over
Hungary. As in the poorer parts of the UK as we slid into corporatism
these "screw driver" jobs are low value added, owned by foreigners
are a net drain on the balance of payments and are easily and frequently
lost to the next country offering corporate bribes.
Their public opinion is manipulated by the State and their potentially
free press is controlled by the eurofederalists. German newspaper groups
have been as active in Hungary as in Yugoslavia, Czech Republic and
Poland. As in the rest of Europe Eurosceptics (i.e. sovereigntists and
democrats) are excluded from public "debate". A very small
percentage of the population said Yes to the EU and any notion of the
standard constitutional "two thirds" majority was as absent
in Hungary as it has been elsewhere. This is another worthy and desperate
"Voice from Europe".
Dr. Csath:
There are only five months before 10 more countries become full members
of the EU. How well prepared are these countries for the challenges
of the membership, and how ready is the EU to handle the unexpected
problems and potential shocks of enlargement? There are many warning
signs of unpreparedness by both sides. In this article -using the example
of Hungary - I should like to focus the attention on some of the problem
areas, and their consequences for the future.
Hungary is a country of ten million mostly frustrated and pessimistic
people, who do not believe any longer in the idea that the transformation
which started in 1990 has brought a genuine change in the country. They
are equally skeptical about hoping for any positive developments from
EU membership. These feelings are fostered by their everyday experiences.
There is a general slogan around here which goes like this: the "system
change only means that those who were once devoted followers of Karl
Marx have changed to become supporters of "liberal capitalism",
but have managed to preserve the "capital" for themselves.
These changes have been imposed on the people, and also the price of
change is being paid by them in the form of job losses, high unemployment,
lack of opportunities to live a decent life, poverty and growing gap
between the new rich and the many poor. And they are also very cynical
about the argument that in spite of all the problems at least they have
now democracy and Hungary is a functioning market economy. (Neither
is in fact the case. They have lost their constitution, are ruled by
German Europe and enjoy the imposition of corporatist capitalism - Ed)
The average citizen feels otherwise. We could just remember the well
known notion of what the real merits of democracy can be for the unemployed,
the homeless and the low-paid? And Hungary has enough of these people
thanks to the ways the "transformation" has been managed.
But there are other, everyday problems with democracy, too. It is still
quite typical in Hungary that those who dare to voice opinions different
from those of the "rulers" are silenced, threatened or economically
ruined. (Even we in the UK, a country with an 800 year old parliamentary
tradition, know that this is the great legacy of EU membership!)
The majority of the media speaks with one voice, which is the voice
of the government leaders. No questions may be asked. As a typical example
we could mention the EU election last year. Those who opposed or just
questioned that Hungary should now become a member of the EU were perfectly
excluded from the campaign. They received neither money nor media time
to express their doubts. Only the very positive messages of the politicians
were communicated very aggressively to the population.
It should have been a warning sign for the EU politicians about the
status of democracy in Hungary, but instead they seemed to be quite
satisfied about the situation. Actually they warmly congratulated to
the leaders and the "people of Hungary" on the very successful
and very positive election. Just how successful and positive was it?
Less than 40 percent of the potential voters said "yes".
The others said "no" or simply did not vote. The misled population
will be quite surprised experiencing that there are neither blue skies
nor gold mines waiting for them in the EU. I wonder how the consequences
of the many false and unfair "EU-positive messages" will be
handled later, when the unprepared peasants and small and medium-sized
businesses go bankrupt by the thousands? So democracy and fairness are
still items in great shortage in Hungary. But not so corruption: it
is alive and growing.
Hungary is 33rd on the list of the 2002 Report by Transparency International's
measure of openness and lack of corruption, tied with Trinidad &
Tobago and Malaysia. And as we all know corruption and democracy do
not go hand in hand. Neither is corruption a good vehicle for developing
a functioning market economy. By the way: how is market economy really
functioning in Hungary? Before the changes in 1990 the Hungarian economy
was dominated by a few large "socialist enterprises" subsidize
by the government at the expense of the population. Now the economy
is dominated by a few huge global companies subsidize by the government
at the expense of the population and the Hungarian SMEs. What subsidies
am I talking about? I refer to the tax holidays, the cheap, sometimes
free land offered to foreign businesses, and also to the wages kept
low in order that they can establish a low cost location. I can also
mention a very typical subsidy these companies force out of the government:
the devaluation of the national currency with the argument that it will
help increase the competitiveness of the economy. Of course one need
not to be a Nobel-prize winner economist to find out how incorrect and
hypocritical this argument is. The undervalued national currency has
never made an economy more competitive. As M. Porter wrote in one of
his latest reports ( M.E.Porter: Can Japan Compete: New Findings from
the Global Competitiveness Report 2002/03. Harvard Business School)
: "Devaluation does not make a country more competitive."
It only helps the exporters to make more money without further efforts.
In the case of Hungary, about 80% of exports are produced by a few large
foreign companies. How can we describe Hungary as a functioning market
economy when the big players receive significant amount of subsidies
while the rest gets none? This is rather a distorted market situation
with unfair conditions for competition.
It is also worth mentioning that the foreign companies have established
fully owned and headquarters-dependent subsidiaries in Hungary with
mostly low value-added screwdriver operations. These places require
diligent, disciplined and well-trained implementers rather than creative,
original thinkers. Therefore the majority of those people, who have
been spending a longer time in these circumstances will never be able
to become an entrepreneur, a new idea creator: in other words an independent
person. And more than 50% of the working population works in these screwdriver
operations in Hungary! Beyond high unemployment this is one major reason
why the knowledge base of the society is rapidly deteriorating. The
other determining factor is of course the low level investment into
R&D and education. But let us examine a few typical figures from
the European Innovation Scoreboard 2003 publication!
The average proportion of the S&E (science and engineering) graduates
as a percentage in the 20-29 years age group in the EU is 11.3%. This
number is 21.7% for Ireland, 19.6% for France, 13.1% for Lithuania and
3.7% for Hungary. We have to note that the value for Hungary was higher
in 2002: it was 4.49%. These numbers can be interpreted from two points
of view. Firstly, it looks like the interest of young people in these
disciplines is declining. Why? Probably because there are not enough
attractive jobs available. We can agree on that supervising people working
at assembly lines is not really a very exciting job for these types
of specialists. The second possible reason can be the decreasing level
of support for these educational areas by the government. Research proves
however, that without enough high quality professionals in science and
engineering a country can not be among the "first movers",
the innovators. It can not build a dynamic and prosperous economy and
society. So instead of being a member of the so called "first economy"
countries, it will become a follower, even worse it can slide down to
the periphery of economic development.
This assumption can also be supported by another striking number, which
is the proportion of population in the age range of 25-64 participating
in any type of education or training. This number is 3.3% for Hungary,
while it is 18.9% for Finland and 18.4% for Sweden. The EU average is
8.4%. Among the accession countries Hungary and Lithuania produce this
very low number. The value of this indicator is 6% for the Czech Republic,
9% for Slovakia and 8.4% for Latvia. Hungary also has a very unfavourable
number for the proportion of people having tertiary education between
age 25-64. It is only 14.1% compared to 29.6% in Estonia, 19.6% in Latvia,
44% in Lithuania or 25.4% in Ireland. The EU average for this indicator
is: 21.5%. Considering the very low value of these three important indicators
we can forecast a very poor future for Hungary, unless there will be
drastic changes in the government policies very soon!
One of those changes necessary to be implemented is related to money
spent on R&D. In accordance with the EU Report Hungary spends only
0.95% of the GDP on R&D. Out of this the proportion spent by business
is less than 40%. This is in harmony with the fact mentioned before,
that the majority of foreign operations in Hungary is low value-added
assembly-line operation. The average number for money spent on R&D
in the EU is 1.99% of the GDP, 4.27% in Sweden, 3.49% in Finland with
77.5% and 70% business participation. After analyzing these numbers
it is easy to understand why only 8.5% of the workforce is employed
in medium-high and high-tech manufacturing in Hungary, compared for
example to the 9.28% in Slovenia or to the 11.36% in Germany.
What are than the chances for Hungary not falling back dramatically
after accession? How can it contribute to the Lisbon goal to turn the
EU into the most dynamic and competitive knowledge-based economy by
2010? Or will it rather be a drag along the way to achieving this objective?
At the beginning of the transformation in 1990 Lester Thurow, the Nobel
prize winner MIT professor enthusiastically declared in one of his writings
that Hungary was in the best position to catch up with the developed
world if it would only base its development strategy on the knowledge
and entrepreneurial spirit of its people, and also if it would efficiently
use the strong educational and R&D institutions to develop competitive
products and services. This of course would have needed a strong, deliberate
development strategy and an attractive, positive and energy-releasing
vision for the population.
Instead, as Porter pointed out in his Global Competitiveness Report
2002/03, the Hungarian politicians have chosen a different path: to
compete with cheap resources, especially low-waged people, and to attract
as much Foreign Direct Investment as possible by offering a very favourable
business environment, including many different types of subsidies to
them. This policy has gained new impetus with the incoming government
in 2002. In the meantime however our innovation indicators are becoming
more and more serious obstacles of our economic development.
By now it is also evident how unhealthy the structure of the Hungarian
economy is. First of all it is dominated by large foreign firms, while
the home-based economy - including the SMEs and the small agricultural
businesses - is weak and umcompetitive The country is still a low cost
production site of the foreign firms. In Porter's opinion - what is
shared with other specialists, too - with such an economic structure
and such economic policies a country can not develop into a knowledge-based
society. Instead it will continuously lag behind as a server-follower
of other nations. In Hungary many people believe that the EU leaders
know very well what is happening in Hungary, but they do not seem to
care about it. This strengthens the bad feelings that this ignorance
can only indicate one thing: we are only needed in the EU for our remaining
resources: our market, geographic location, cheap labour, reasonably
clean environment and our land. That was one reason why the turnout
was so low at the EU referendum, and also why there is a growing resentment
against our EU membership in the society.
It is also annoying what one can read in the 2003 EU Country Report
on Hungary. The report states that Hungary is a "functioning market
economy" and therefore it should be able "to cope with competitive
pressures and market forces in the Union." As I tried to prove,
this is only true for the foreign companies operating in Hungary, but
definitely not relevant to the majority of Hungarian businesses. In
other words: the "real Hungarian economy" is definitely not
prepared for the liberalized circumstances of the membership. Therefore,
facing the much stronger, and in the case of the agriculture, the much
more heavily supported competitors will push them into a one way street
of decline. The professionals also cannot expect fair competition, because
of their low salary, which is one fifth to one tenth of that of their
counterparts in the EU. Their chances of getting access to new knowledge,
like participating in professional conferences or buying professional
books will be in proportion to their salaries. It was therefore objectionable
when Romano Prodi during his very short visit to Budapest on the 15th
of January declared in the media that Hungary "was well prepared
for EU membership".
Further analyzing the economic situation from the start of 2004 there
are huge price increases in Hungary. Also many new taxes are being introduced,
while - in accordance with the intentions of the government - wages
will be kept under the inflation rate. In 2003 in many areas wages were
frozen. This means for many people a dramatic decline in their living
standards for two consecutive years. Many feel the reason why the people
are squeezed is our coming membership with all the payments we have
to make into the EU budget. The people also believe that we will be
net contributors, because we are not prepared to draw on the EU sources
which will open up for Hungary.
VAT has also been dramatically increased from the 1st of January 2004.
This will push the inflation rate even higher and further worsen the
chances for the Hungarians to become competitive. The biggest sin the
government committed against the people was to raise the previously
0% VAT of the non-accredited training and education activities to 25%.
This will tremendously increase the costs of further education and training,
including language training where Hungarians have a bad record anyway.
A further decline can be expected in the number of people trying to
upgrade their knowledge not already relevant for the new circumstances.
This is extremely dangerous when Hungary -as pointed out earlier- produces
very bad results in this field already.
This government decision was a typical sign of short term thinking,
lack of vision and strategy. This is the case with the increase of VAT
on solar power from 12%-to 25%. This is an act against those people
who would like to use alternative energy sources. The environmental
record of the present government is very bad according to the ratings
produced by the IMD World Competitiveness Report 2003. Considering sustainable
development as a government priority Hungary occupies the 27th position
out of 29 European countries!
To conclude: there are tremendous uncertainties about what will happen
in Hungary after accession. How can social and political problems can
be handled? Is the EU prepared to cope with a potential crisis in Hungary
or in any other new member state? Why are the EU leaders not more determined
to push the Hungarian government to better prepare the country for EU
membership including the modernisation of the entire governance system?
It is worth remembering that for Germany even 13 years have not been
long enough to close the development gap of the former Eastern Germany,
which was the most economically advanced country from the former Eastern
bloc! It would also be urgent to demand from the Hungarian government
to prepare an active, dynamic, "stretch" strategy, which could
swing the country into the right direction by energizing, revitalizing
business and population simultaneously. It would be also vital to build
trust and repair the social capital badly damaged by the consequences
of "system change" since 1990. Unfortunately, right now there
are no signs of good intentions by the Hungarian government to act upon
these problems and since they are doing the bidding of the new masters
in the European Union there is no hope there either.
Dr. Magdolna Csath
(Doctor of the Hungarian Academy of Sciences)
Professor of Economics and Management
Hungary
