Crony capitalism and state capture in Hungary

September 3, 2016

Illustration by The Budapest Sentinel
Illustration by The Budapest Sentinel

Interview with the director of the Hungarian chapter of Transparency International (TI), József Péter Mártin, appearing in the August 25th, 2016 edition of Magyar Narancs under the title “Captured by crony capitalism” (“A haveri kapitalizmus fogságában”).

Hungary belongs to those few countries where it is not the oligarchs that keep the government in check, but rather the government itself chooses its own loyal oligarchs.  We spoke with the Transparency International CEO about the long term effects of corruption, regional trends, and the size of the theft.

Magyar Narancs:  80 out of 100 youth believe that corruption is a serious problem in Hungary according to a recent TI study.  To what extent can this be considered an improvement over previous years?

József Péter Mártin:  I do not sense any change in trends.  The people of Hungary have always known precisely what was happening in the country.  Eurobaromter surveys also show this, and the EU’s first anti-corruption report in 2014 also wrote that 89 percent of Hungarian society say that corruption is a very serious problem here, so not only the youth.  In the entire EU the percentage is 76 percent.

MN:  66 percent of youth say they would report corruption if they experienced it anywhere.  Does this willingness live in practice?

JPM:  I was surprised by this figure since four years ago only one-fourth of the population said that they would report any corruption they saw, and the following year one-third.  Of course, that is just hypothetical data.  It is not possible to know whether somebody would actually do what they say they would.  But in this sense every opinion poll only deals on the theoretical level. 84 percent of youth also said that they mustn’t accept the fact that politicians are corrupt. So there is light at the end of the tunnel.

MN:  To what do you attribute this increase in zeal?

JPM: What we certainly know is that there has been an increase in awareness and that in the future this might even lead to action.  The press is replete with cases of corruption.  But this is one side of the coin.  From our studies it was also revealed that with the spread of corruption comes a certain blindness as well: there are very few instances that reach the threshold of intolerance. The desire and reality are both reflected in the youth opinion: they are hopeful that the situation will improve, but they also say that without corruption it is not possible to prosper in this country.  For example, 63 percent are of the opinion that there is no point in being honorable at home, and 71 percent say that without corruption it is not possible to achieve one’s goals in Hungary.  These are very depressing figures.

MN:  If this contradiction is not resolved, will the desire to emigrate continue to increase?

JPM: Yes. The surveys indicate there is a strong correlation between corruption and emigration, since corrupt countries project an image of themselves that talent, knowledge and hard work are not enough to achieve prosperity.

MN:  How much money do you estimate flows through corrupt channels every year?

JPM: You can throw numbers around, but nobody knows this for sure.  The reason for this, for example, is that part of corruption is that it remains hidden.  It is only possible to estimate the amount, and in some cases we have even done so.  The study of the qualitative methods of the EU fiscal transfers revealed that on average public tenders are 25-30 percent overpriced, while every year the country receives more than one trillion forints from the European Union.  But corruption can be observed in a number of other areas as well: for example public procurements involving non EU funds, or the public money diverted from the sale of settlement bonds.  And then we have not even discussed the so-called “street” corruption, like bribes paid to doctors or the police.

MN:  Which industry is most vulnerable?

JPM:  It is hard to say. What is corruption?  No generally accepted definition of it exists in the expert literature.  At TI we consider the abuse of power for the sake of advancing private interests to be corruption.  Corruption in this case extends beyond the criminal phenomenon as defined by law.  We consider many instances to be corrupt that are formally lawful: there are numerous examples of this in the recent past, from the tobacco retailing matter to the (nationalization of the) savings and loans, to the casinos and the distribution of state lands, which did not prove to be worrisome in terms of criminal law.  It appears that the prosecutors are not wiling to investigate the National Bank of Hungary’s foundations either.

MN:  The reason these are legal is because they modified the laws to accommodate corruption.

JPM:  That’s right. And that is why we see that the fantastic enrichment of new oligarchs close to the government has not crossed the threshold of intolerance in the Hungarian justice system.  After 2010 Fidesz created the state institutional system in its own image, and operated it to suit its own interests—the laws they passed create corrupt systems.  On the one hand, the entire economy is exposed to corruption.  In Hungary crony capitalism has been combined with state capture, that is, the capture of the state has resulted in a system that advances oligarchs and economic actors that are close to the government.  All of this is dangerous from a purely economic point of view because instead of a merit- and competition-based economy, an economy based on loyalty is created.  On the other hand, it is also possible to observe that corruption primarily affects regulated markets and those dominated by large state orders.  Such are infrastructure development projects or information technology.

MN:  And what is the situation when in the construction industry someone must pay to get a building permit?

JPM: That is another level of corruption, the traditional practice of bribery and cash inducements.  A system of mutual favors exists between the state and economic actors in the history of Hungarian corruption.  It extends far beyond the Fidesz government and dates from well before the system change 26 years ago.  We see that the control of this practice, including cases of street corruption as well, has become stricter in recent years.  The  extreme centralization of the Hungarin political and economic system and the authoritarian governing trends had a positive side effect, if you like, in that the abuses involving smaller bribes—excepting those paid doctors—directed from above, as well as systematic corruption, have been forced to the rear.  But that is not at all to say that they have been eliminated.

MN:  This is precisely the form of corruption that people directly experience for themselves.

JPM: Our studies indicate that small favors and the system of mutual favors are not even considered cases of corruption.  For example, the “gratitude money” paid to doctors is not considered a form of corruption.

MN:  Is it possible to measure how much unnecessary development takes place merely in order to have something to steal?

JPM: We did not examine this, but I am sure that there are a lot of unnecessary projects in the country.  Nonetheless, they contribute to the economic growth, as does the overpricing.  The more we build and the more we spend, the better the GDP figures.  At least in the short run.  The fringe always comes later.

MN: What can be the long term effects?

JPM: There would not be any economic growth or considerable public projects were it not for EU funds.  A devil’s circle (Catch 22 situation-ed,) now exists between corruption and unsustainable economic growth: in part the reason there is a lot of corruption in the country is because the institutional system works in a non-transparent manner.  If the institutional system is not transparent and cannot be held accountable, then the business climate will deteriorate.  If the business climate deteriorates, then the investors will not come to the country as there will be complaints that the rules do not apply to everyone the same way.   For example, the institutional of private property can be damaged.  If the investors are not coming, signs of which can already be seen in regional comparisons of private investments, then that will impact future GDP and economic development. A lot of research shows that those countries can sustainably and consistently prosper where the exposure to corruption is small.  If it is the government’s intention to employ some kind of eastern model to close the gap with more developed western countries through state capitalism, that is an illusion, at best. Among western countries we know of no country that became innovative and capable of sustainable development through such levels of centralization and the destruction of the principle of competition and transparency with an unaccountable and exclusivist institutional system.  The situation is different in Asia: in China and Malaysia and a few other countries it is true that there is—or was—significant economic growth despite not working according to western standards and the lack of transparent institutions.  But it is difficult to imagine that this would work in Europe as well.

MN:  If we compare the Hungarian system before 2010 to the current one, what are the main differences?

JPM: The current system is much more centralized.  The channels of corruption were much more variegated before 2010.

MN:  Did they steal more or less then than now?

JPM:  While weighing this up has become a national sport, in reality it is impossible to compare the two. It is not possible to precisely measure corruption as a part of it remains latent.  During both times the amount of corruption was large.  But the answer depends on what you call corruption: the current government, for example, does not consider much of what we call corruption to be that.  They say the they are building the national capitalist class, and that the redistribution of wealth via distorted conditions is not corruption, but rather “Fidesz’s main policy.”  It should also be noted that in the corruption ratings—and I am thinking primarily of the TI Corruption Perception Index (CPI)—Hungary’s score has deteriorated somewhat but has not changed much since 2010.  More precisely, these indices have been deteriorating for more than a decade, as well as the World Bank corruption control index, but there has been no dramatic change since 2010.  However, our position relative to other countries in the region has become worse.  Ten years ago we were ranked third in the CPI after Slovenia and the Czech Republic.  Now only Romania and Bulgaria score worse than we do.  The Baltic states and Poland have improved much in recent years.  Slovakia, for example, has an electronic public procurement procedure for tenders under the EU value limit.  The machine determines which bidder offers the best conditions without human intervention.  Something like that is inconceivable here for the time being.

MN:  People are of the impression that the corruption situation in Romania is improving.

JPM: The battle against white collar crime is much farther ahead there.  An anti-corruption prosecutorial service was created which, it seems, is indicting politicians and businessmen without favoritism.   By contrast, Hungary is a country without consequences, where nearly the entire Hungarian state institutional system serves the interests of one party and the government.  The system of checks and balances work in Romania.  Its political system is more pluralist, its institutions are more accountable.  Unfortunately, we are experiencing the opposite in Hungary.  When it comes to street corruption whose traditions nestle in the depths of society, the situation is still worse in Romania.

MN:  Wha connection exists between street corruption and white collar corruption?  With the elimination of one, does the other also disappear?

JPM:  I don’t think so. There are instances when the two move in opposite directions.  In other places they grow or decrease together.  Anyway, there is no country that is completely free of corruption.  Bribery, favoritism, and some level of crony capitalism exist everywhere.  It is only a mater of degree.

MN:  What has played the largest role in the spread of corruption in Hungary?

JPM: The fact that after 2010 the system of checks and balances no longer existed.  The prosecutorial services as an institution were subjected to the will of the government.  That indicates to society that they do not persecute every crime, only those committed by their political opponents.  Since 2012 they have been saying that the state has been captured.  The only exception are the courts: here empirically as well it appears that the judges’ decisions are not being distorted to the benefit of Fidesz.  However, a very large number of cases never make it to court because prosecutors do not indict.  The Achilles heel of the justice system and the fight against corruption is the prosecutorial service.  But I would not belittle the role of other institutions as well: the National Bank and the State Auditors for example also primarily serve the interests party and the government.  They serve no control function.   If by some miracle these institutions were to have their autonomy restored, the corruption situation would improve quickly.

MN:  How long does it take to normalize a country?

JPM: In theory it does not take long for institutions to win back their autonomy, that is for the concept to be restored that the state organs are not there to serve the will of the government but exercise control over the executive power.  Of course, in practice such a turn involves wrestling with many political and legal challenges.

MN:  István János Tóth, the director of the Corruption Research Center in Budapest, told Index that between 2009 and 2014 the risk of corruption grew in Hungary, but that in 2015 it stagnated and even decreased slightly.  What do you think?  Are things improving?

JPM:  We don’t see any improvement.  On our corruption sensitivity index Hungary fell three places and lost three points from 2014 to 2015.  It’s currently ranked 50th.  That is an average result in comparison to the rest of the world.  In the EU, however, we belong to the corrupt one-fifth.

MN:  Is there are level beyond which the corruption situation cannot get any worse?

JPM:  Maybe so. The redistribution of ownership might come to an end, and a reduction in EU sources could reduce the amount stolen through public tenders by players close to the government.  The problem is that, while the situation may not get any worse, the system that the current government built up will remain with us, such as the MNB foundations.  It will be different to change a system so fixed in concrete.  It is hardly possible to return the right to sell tobacco products to those from whom it was taken.

MN:  Why don’t EU institutions do anything about this?

JPM: Obviously, the EU feels the lack of rule of law in Hungary and knows about the risk of corruption as well.  This is perfectly clear in the EU’s country report on Hungary and from other materials as well.  I think the reason it does not act more strongly is because the clear legal mechanisms are missing.  It can make use of the breach of obligation and excessive deficit procedures, but these give the government too much room to maneuver legally, at which the government is very good, and the 3 percent budget deficit is sustainable in the long run.  These do not give them a handhold. In addition, there are Articles 2 and 7 of the European charter compelling European values, but these are too abstract and too difficult to apply in practice.  The Copenhagen mechanism in force now for two years punishes the violation of rule of law norms, but the sanctions here culminate with suspension of voting rights provided for by Article 7.   The EU has never applied this because almost total political consensus is needed for it among the member states.

MN:  You have mentioned state capture several times.  How does this work in our case?

JPM: There are two kinds of state capture.  The one is when oligarchs capture the state—like what happened in Russia under Yeltsin.  In the other kind, the state actors create informal relationships with certain oligarchs, and together this circle captures the state, but the state actors have the final say.  To put it simply, in the first system the oligarchs determine who is in government, while in the second the politicians say who the oligarchs are.  State capture exists in other countries in the region as well, for example oligarchs systematically influence the operation of the state in Slovakia and the Czech Republic, and a number of them also come to hold high positions in the government. Hungary is the only one where the party in power controls the oligarchs.  If we are looking for a parallel situation, then Putin’s Russia has a lot in common with the Hungary, especially when it comes to its institutions.  The situation is different with regard to individual freedom rights.  For example, a number of things which appear rhetorically here—like stigmatizing civil society—is written in law in Russia.

MN:  So in our case the oligarchs do not have the final say?

JPM: They can try, but it is not certain they will succeed.  The example for this is Lajos Simicska.  Orbán and Simicska’s break up unequivocally shows which form of state capture took place in Hungary.

MN:  Does the Spéder matter prove it as well?

JPM: It is too early to say.  Maybe so.  There is not a single member state whose central government is as strong as Hungary’s.  No oligarch can feel safe.

Transparency International Hungary has conducted numerous studies and provided expert estimates as to how much money has flowed out through channels of corruption.

EU projects are overpriced by 25 percent on average, which, if we calculate with average yearly fiscal transfers of HUF 1.2 trillion (USD 4.4 billion), amounts to at least HUF 300 billion (USD 1.1 billion)–in reality more because the intensity of support is less than 100 percent in the case of the majority of projects.

The amount of money siphoned off through public procurement in 2015 was around HUF 250 billion (USD 910 million).  TI estimates that 65 percent of public procurements are infected by corruption and calculates with overpricing of 25 percent (naturally there is significant overlap between EU and public procurement overpricing).

In the case of the MNB foundations at leas HUF 500-700 million is the amount spend in a purely corrupt manner, but in principle it could amount to the many billions of forints.  (Of the HUF 266 billion given to the foundations, one-third was spent on grants and two-thirds was used to purchase state bonds.  Although debatable, the latter is not considered corruption).