Mária Zita Petschnig on Hungary’s economic growth prospects

May 27, 2015

Zita

The following discussion between Hungarian economist Maria Zita Petschnig and ATV’s Olga Kálmán took place Monday, May 25th, 2015, on the evening talk show “Straight Talk” (“Egyenes Beszéd“).

(Narrator):  According to Viktor Orbán Hungary leads the European Union in terms of economic growth and unemployment, as well as in the realm of decreasing national debt.  The head of the government believes Hungary’s successes are precedent setting.  But the majority of society does not feel these results.  Experts say the number of poor is continually increasing.  We discussed the reasons for this with Maria Zita Petsching.

Olga Kálmán:  I think we are going to talk about the debate in Strasbourg for some time, both the criticism expressed there and also what the Hungarian prime minister said.   He said he regretted that the EP wasn’t discussing Hungary’s many successes.  According to the prime minister the Hungarian economy has experienced large growth since 2015.  Out of 28 member states, Hungary ranked 21st in terms of rate of growth. National debt increasing in other countries, whereas in Hungary it is decreasing.  Unemployment has decreased from 11percent to 7 percent.  Out guest is Maria Zita Petsching.  Are you also this optimistic?

(Maria Zita Petschnig): I could continue this list of nice numbers.  These figures only look at the moment.   They also announced that real wages increased 4-5 percent the first quarter of 2015.  Industrial production increased 8 percent.  Construction increased 10 percent.  Retailing increased 8 percent.  These are all first-quarter data.  The number of those employed or actively searching for work now exceeds 4.1 million, which is the highest it has ever been.  We cannot question these statistics as they come from the Central Statistical Agency and the National Bank of Hungary.  However, it is important to know how to understand and interpret the data.

I have two problems with the government’s interpretation.  The first problem is that they attribute the successes of 2014-2015 to the unorthodox policies of the Orbán government, claiming that this is somehow the result of the government’s efforts.  My second problem is with the notion that these results are permanent, and that it will be like this from now on.  Hungary’s convergence program essentially contains this.  Deeper analyses are missing.  Were they to exist, it would be apparent that this cannot continue.  One can already see a slowing down of the economy in the first-quarter figures.  Also, last year’s results contained a number of one-time factors.  While true that growth did not take place at the expense of higher national debt, serious amounts of EU money was involved.   2014 figures reflect more than 2200 billion forints (USD 8 billion) worth of EU grants.  If these funds decrease in the future, as the 2016 budget reflects, then there will be a very serious fall-off in projects.   The government acknowledges this.

(OK):  We are fighting a war of independence against a community of which we are a part.  So we are fighting against ourselves.  It’s like fighting against a family of which one is also a part.  It’s one thing to achieve successes with HUF 2200 billion.  But how is it that the values of the community are not good, and we want to leave, but the money is good?  How long will the various institutions of the EU tolerate this?

(MZP): The EU’s institutions were designed for countries that function normally, both politically and economically, and not for radical deviants.  If Hungary fails to meet the various requirements with regard to the national debt or its decrease, then they might say they are going to limit the resources we can draw from the Cohesion Fund.  This is the one rule that Hungary takes seriously.  Only the money is required.  And don’t concern yourselves with how we spend it or what we spend it on.  Don’t interfere in anything, just give us the money.  The economic policy for the next years is exclusively organized around this principle, this political interest that the money be available.  In exchange for which we will produce the kind of decrease in national debt that is acceptable to Brussels.  However, the fact that we can keep the deficit to under 3 percent of GDP, which is the requirement, can largely be attributed to the fact that they did away with the private pension fund system.   In this way government revenues increase HUF 360-400 billion (USD 1.3-1.4 billion) annually.  If the system of private pension funds had remained, than the deficit would not be under 3 percent.  And it would not have been possible to decrease the national debt if they hadn’t destroyed the private pension funds.  Anyway, we see that it is very difficult to decrease, and we cannot decrease it in the amount that was originally projected for 2016 by the stabilization law and it had to be modified.

(OK): The money will be missing one day.  As those retire whose private pensions funds were taken away, this money will be missing.

(MZP): That’s exactly right.  The government recently made a short-term decision which is advantageous for the government but carries serious consequences for the long run.  Keynes once said that in the long run we’re all dead.  But that also applies to the policies with regard to the environment, as (former undersecretary for environmental and water protection) Zoltán Illés has pointed out.  The government is absolutely not interested in what kind of environment we are going to live in in the future, the 2016 budget radically decreases funding for environmental protection.  This frees up 70-100 billion to be spent elsewhere.  But debts are accumulating in the field of environmental protection that have to be repaid one day that falls outside the government’s policies.

As I said before employment can be strengthened from two directions: On the one hand, it is possible to strengthen the potential productivity through education.  On the other hand, one can ensure that the workforce is healthy.  But if they are systematically defunding education and healthcare, then it ruins in the long run the human resources side to potential growth.  And this happens in such a way that accelerates unbelievably disparities within society, and this is what we’re seeing in terms of wealth and income, with the top level that is rising continuing to do very well, which the next tax system will continue to strengthen, while those who do not vote, those who do not count, are being put down through diminishing social political expenditures.  If I create a large tension within society with these income policies to the point where social cohesion weakens, then this is a long-term political risk for investors.

(OK): Social tensions are also a large political risk.   Not only for investors but for the government.  The larger social tensions grow, the greater the number of people who feel dissatisfied, who feel bad, who are hungry, who have no work, or only public work, and cannot live as happily as the decision makers imagine.  The latest OECD measurement attests to the fact that only the Greeks feel worse than us.  There is a huge price politically.

(MZP): It seems Fidesz believes that it can handle this in the future.  Furthermore, they calculate with the fact that these segments don’t vote.  Earlier governments tried to win over every voter.  The current government has written off 3-4 million people, for whom public works program offers an opportunity to make HUF 50,000 (USD 180) through work instead of merely receiving HUF 28,000 (USD 110) in aid.  The solution to the social problem is being pushed in this direction, which may be good on a certain level but is not good socially.  Socially this is a dead end.  Because the value of the GDP produced by public work is not competitive.  Furthermore, these segments get stuck.  I think the measurement made by the economic institute was too optimistic when it showed that around 14% could transition to the primary labor market.  In all likelihood I think it was less than this.  And the more they put into this, the fewer appear in the primary work market as a competitive workforce.

There are signs that the private sector is suffering for a lack of trained workers.  If we destroy the system of technical training, then we cannot expect to build a system of expert workers with regard to increasing capital, etc.

Allow me to mention two more points of view concerning these wonderful results:

1.  The international credit ratings organizations do not value these accomplishments.  At the end of 2011, beginning of 2012 they reclassified Hungarian paper as junk.  And since then we have not been able to get out of there, no matter what we do.

2.  Neither capital nor labor has any prospects in Hungary.   In 2014, which was a strong year economically in comparison to the years preceding it, there was a negative flow of capital out of the country.  Hungarian capital also went abroad, as did that of foreigners living here.  Emigration is continuing to strengthen. Hungarians are taking more and more jobs abroad, and completing their studies abroad.   If this continues, then in the long run we have to calculate with a contracting economy.