Lajos Bokros on “Orbánomics”, crony capitalism and populism

November 28, 2016

“The economic policy behind (the Hungarian model) is so unprofessional and inconsistent that by trying to solve one problem, the government creates several, and that as a consequence it is not conducive to investment and growth.” – Lajos Bokros, chairman, Movement for a Modern Hungary (MoMa)

In a two part interview, Central European University professor of public policy Lajos Bokros equates “Orbánomics” with crony capitalism and says Russian-backed populism poses a direct threat to liberal democracy.

Neither “Illiberal democracy” nor “Liberal non-democracy” is a thing

Viktor Orbán, the controversial prime minister of Hungary, seized upon Donald Trump’s upset victory in the US general election to proclaim the end of the era of “liberal non-democracy.”  Reacting to comments delivered by Orbán at a EBRD meeting in Budapest the following day, former Hungarian finance minister Lajos Bokros accused Viktor Orbán of living in a world of “populist nationalism.”

According to the conservative politician, the new world order heralded by Orbán will be “a time of renewed nationalism where nations will look after their own interests in a more crude and aggressive way the way Orbán does is the case of Hungary” says Bokros. However, the former finance minister is quick to point out that “there is no such thing as an illiberal democracy or liberal non-democracy” and that it is not possible to “separate liberalism from democracy.”  In Bokros’ opinion,“without freedom there is no real democracy” because “the majority can rule in a tyrannical way that does not respect human, individual or minority rights.”

Bokros, who served as a Member of the European Parliament from 2009 to 2014, believes Orbán’s “illiberal values” are not compatible with western values, but rather with those of autocrats like Russian Federation President Vladimir Putin.  “For a while these values may be attractive to people who feel disenfranchised or left behind by globalization and the open markets,” says Bokros, “but in the long run only these values are compatible with economic growth and well-being” he adds.

“Authoritarianism is spreading like wildfire”

warns Bokros, who is genuinely worried by the prospect of the European project falling apart.  The former MEP points out that authoritarian regimes like Russia and Turkey can “much more easily finance populist parties elsewhere” because “they are not constrained by liberal democracy.”

“They have the wherewithal to intervene in the political systems of other countries which are not immune to these threats.,” says Bokros, adding that “if we believe that Russia was intervening in the election of the United States” and that “Russia is financing almost all populist parties in western and eastern Europe, both left and right, then we can see the danger.”  In his opinion, such parties “weaken not only the political establishment but also the social fabric” in a manner “that can destroy cohesion and solidarity within the European Union as well,” which “serves the interests of Russia.”

Russia financing populist parties

The founder and chairman of the Movement for a Modern Hungary calls Russia’s annexation of the Crimea a “milestone in international relations.”

“This is the first time since the Second World War when a border was unilaterally and violently changed by a country at the expense of another one,” he says, adding that “if this is the new normal in international relations, then this is really frightening.”

Bokros says the EU needs to wake up to the fact that the populist parties are financed and supported by Russia and cautions against removing sanctions on Russia as a way of ensuring that the Russian economy does not “benefit from the disintegration of the European Union.”

Bokros says that the west “has to stand up for its values, its ideology, for liberty, for democracy, and for free markets if it wants to survive. ”

“Democracy is not something we can take for granted,” says the CEU professor. “We need to fight for it every single day.”

Viktor Orbán is no democrat

Bokos warns that Orbán is neither a fan of liberal democracy nor of free markets.

“He doesn’t like competition.  He doesn’t like capitalism. He doesn’t like foreign investment.  He doesn’t believe for a second in the globalized, free market world,” says Bokros, who believes Orbán is only interested in “perpetuating his power” and maintaining his “grip on the Hungarian economy and society.”  For Viktor Orbán the measure of success is “whether he can continue his own power or not” and continue stealing the income of the Hungarian people and the western taxpayers” says Bokros, adding that Orbán “knows that power brings money and money can perpetuate power.”

Underlying Orbán’s worldview, however, is “a tremendous amount of ignorance” says Bokros.  “He has no understanding of the normal working of a market economy and the world, and he is afraid of it” says the economist.

Bokros accuses Orbán of having an inferiority complex’ and attributing Hungary’s failures to the whole world being against it.  “Hungarian ‘exceptionalism’ is nationalist propaganda used and abused by the government to perpetuate its own power” at the expense of Hungarian economic competitiveness and the political liberty of the Hungarian nation,” says Bokros, equating “Orbánomics with “neo-communism.

“Orbánomics” or neo-communism?

The former finance minister says “the ideology behind Orbánomics is that it is the government rather than the free market which provides jobs, incentivizes investments, and creates prosperity.”  Calling Orbán’s ideology “neo-communist,” Bokros says Orbán prefers for the government to select the winners and losers.  “He doesn’t like a level playing field,”  says Bokros, adding that “it is no surprise that the level of Hungary’s economic competitiveness is going down very fast, and that Hungary is now behind the other Visegrad 4 countries, as well as the Baltic states.”

Bokros accuses the Orbán government of punishing entrepreneurs who “don’t behave according to the wishes of the government,” which Bokros says “wants to subsidize some others in order to create winners who are loyal to the system.”

“It’s an absolutely authoritarian system even in terms of economic policy which suits the present government very well because it is tantamount to corruption and it allows the government to steal a lot of money” says the former finance minister.

EU not living up to its own values

Bokros believes the European Union is largely responsible for the level of corruption in Hungary.

“The problem with the European Union is not that it has values alien to the Hungarian soul,” says the professor of social policy.  “The problem with the European Union is that it doesn’t live up to its own values.”  He says the EU does not adequately scrutinize how Hungary and other central and eastern European EU member states spend development funds.

As a member of the European budget and finance committee, the former Hungarian MEP saw for himself how “superficial the procedures are and how easy it is to get around them.  “Unfortunately in this environment where populism and nationalism grow anyway, the EU is not interested in unearthing the truth,” laments Bokros

On Hungary’s “economic success”

Reacting to the government’s decision to lower corporate tax to 9 percent from the current two-tier rate, and increase minimum wages, Bokros said this was an attempt to compensate for some of the drawbacks, like the punitive sectoral taxes enacted by the second Orbaán government (2010-2014).

Pointing out that the service sector is the engine of growth,  Bokros says the corporate tax reduction “will only benefit a few businesses making over HUF 500 million a year” and that “the level of taxation is not a major consideration for large corporations when deciding where to locate production.

He points out that Hungary’s investment rate has been very low for the past several years and that “uncertainty of the whole investment climate” has resulted in an investment rate of less than 20 percent of GDP.

Budgetary implications

The former finance minister does not think that it is a good idea to give up so much fiscal revenue and warns that so large an increase in the minimum wage is not consistent with the low increase in productivity in the economy.

“When you have such an exorbitant increase in the minimum wage, this will increase unemployment” especially as the burden is to be borne primarily by employers and not the government.

Bokros says that in Hungary too many people earn minimum wage, and that this is a reflection of tax evasion.  “Close to 40 percent of wage earners get no more than minimum wage which means that employers and employees are colluding agains the government” in order “to minimize payroll taxes.”

On plans to decrease employer contributions by 5 percent, Bokros says it raises the question of how the pension and health care system is to be financed in the future, arguing that “the government destroyed the private pillars for the pension system” in 2011.  He says a 5 percentage point decrease in employer contributions is a “huge reduction on the income side.”

Bokros accuses the government of deliberately trying to destroy the fiscal sector.  “There’s no point in having a social security fund any more because it is going to have a huge deficit” says Bokros, adding that there is no point in having an extra-budgetary account if social security and health care is going to be heavily subsidized by the central budget.

An exceptionally favorable international environment

Seeking to explain Hungary’s above average rate of growth, Bokros points out that “the Orban regime is enjoying an exceptionally favorable international environment,” including low oil prices and extremely low interest rates, very easy refinancing of public debt, and a tremendous amount of net subsidies coming from the European Union which may no be repeated in the next seven year budgetary cycle.”   He says the result is an appearance of economic success.

He further points out that “this is the fist time in Hungarian history that so many Hungarians are working abroad, and a good part of the workforce is employed in artificially, publicly created jobs” and that the number of working age people employed in Hungary continues to be “low by European standards.”

The former finance minister says that, for the time being, the Hungarian model is working but that it is fragile because (1) the international environment can change and (2)  “The economic policy behind (the Hungarian economic model” it is so unprofessional and inconsistent that by trying to solve one problem, the government creates several, and that as a consequence it is not conducive to investment and growth.”