Attila Chikán: Illiberal democracy is destroying the economy

December 20, 2014


Hungary’s competitiveness is terrible, and rising levels of state intervention, centralization and the building of an “illiberal state” do not help the situation either. Thus writes Attila Chikán, former minister of economics under the first Orbán government (1998-2002), in a recent report on Hungarian society prepared by research company  Tárki. According to him, if things continue in the same manner we have no reason to be optimistic.

“The Hungarian economy can count on nothing good on the long run,” writes Chikán, who was economics minister in 1998-1999.  According to him, there is virtually no indicator showing any trace of better performance than the average of the past two and a half decades.  In fact, all surveys show that the country’s international market competitiveness is getting worse. Annual Global Competitiveness Report ranked Hungary as 28th in 2001, indicating a better performance than most of the countries in the region. This year’s ranking puts Hungary in 60th place, lagging behind most of the region.

The survey summarizes the data of 124 different indexes that have been filed under 12 levels. Chikán selected three for his analysis: institutional framework, macroeconomic environment and the level of development of business activities.

According to the study Hungary fell critically with regards to the first two categories since 2006. Macroeconomic environment showed some development from 2008 from an extremely low level, but this aspect is also heavily influenced by the political environment and therefore proves to be frequently volatile.

Worsening of business environment is the most dramatic when assessed against expectations. At the time of the regime change, everyone thought that developing a market economy would trigger the development of a gradually better business environment. What happened instead is that Eastern European countries in general are performing much worse than expected in this regard. Hungary is in an especially disadvantaged position, falling from 34th place in 2006 to 92nd in 2014.

Data show that the competitiveness of the country has decreased significantly over the past decade, and the tendency has not changed since the second Orbán government came to power in 2010. This decline can be experienced in the entire region but Hungary is performing especially badly.

Why is this happening?

While pointing out that one specific reason would be difficult, Chikán finds the effect of cultural factors and social values is extremely important. According to the research, regardless of most Hungarians holding Western countries as an example to follow with regards to the quality of life and general operation, Hungary is still far removed from them in terms of values. This can offer an explanation to the much-cited phenomenon that Hungary was quite unprepared for the change of regime in 1989 and was unable to answer the new challenges it created. While this problem is not unique to Hungary, for some reason it has turned out to be much more of a difficult problem in Hungary than other post-Socialist countries.

According to Chikán, the 2010 change in government led to a questioning of Hungary’s Western European, pro-market orientation, even though this went against rational considerations, a phenomenon he attributes to cultural arguments.

Chikán finds that the handicap in competitiveness has another, parallel explanation, and this is the productivity of work, meaning the average amount of GDP generated per working hour. Hungary is especially weak in this regard, ranking 27 out of 33 Organisation for Economic Cooperation and Development members.  He attributes this more to problems in the organizational framework than to underperformance at work.

He thinks that the reasons can be found in the low-level quality of business activities. This is widely considered to be a fundamental basis for competitiveness in which Hungary is performing dramatically bad. Cultural factors are influencing the development of company networks (for example the connecting, supplier networks between multinational firms and smaller enterprises) as well as cooperation within companies. Statistically it seems like productivity and the business milieu are interconnected factors and bad performance regarding them are the primary obstacles for the competitiveness of Hungary.

Should this be left to the State?

According to Chikán, the strengthening of state intervention in the private sector is one of the most charcterist features of the 2nd Orbán government.   According to him this is no way to resolve problems of competitiveness even though efficient state intervention could theoretically contribute to the successful operation of market economy.

This means that intervention could even be good but its quality should be more important than its quantity. In Hungary, however, market and state mechanisms are mixed up, triggering ineffectiveness of market coordination, and thus reducing the performance and competitiveness of the business world. According to the economist such a process causes the country to lag behind, as indicated by the bad rankings for institutional framework and macroeconomic environment.

Chikán thinks that since 2010 state intervention has increased in such a manner and volume that it prevents the normal market processes functioning normally, and is resulting in problems of competitiveness. The government aims to resolve all these issues in an “unorthodox” way, by which they mean centralization, and the building of an illiberal state.

“This does not sound promising to me at all,” he writes, among other things, because this influences social values in a way which further damages competitiveness. Chikán sees a new heyday for state paternalism, which caused serious structural problems for the Hungarian economy in the past, including impoverishment, and the decreasing quality of healthcare services and public education. According to him the present environment is not helping to find a way out of these problems, and if everything stays as it is now,  improvements in competitiveness cannot be predicted.

Referenced in this article:

Chikán Attila: A magyar társadalom fejlődési esélyei a gazdasági versenyképesség tükrében –