Hungary in search of lost competitiveness

 Hungary in search of lost competitiveness
Budapest sought to dismiss a recent slide down the WEF competitiveness ranking, but is clearly concerned.
By Blanka Zoldi in Brussels October 18, 2016

The number of employees in Hungary’s bureaucratic apparatus should be halved to reach an “optimal” that contributes to the competitiveness of the country, a deputy minister argued on October 17.

Although the Hungarian government belittled the latest World Economic Forum’s (WEF) competitiveness survey – in which the country scored an all-time low – it seems determined to step up efforts for advancement. While reducing bureaucracy might be a good start, significantly boosting competitiveness will depend on tackling the most problematic issues in Hungary, such as erratic policymaking, corruption and the state of the education system.

Hungary was the sharpest slider in Central and Eastern Europe on the Global Competitiveness Index (GCI) 2016-2017. The country slumped six places this year to 69th on the list of 138 countries, which represents the worst result for Hungary since the index has been compiled.

The economy ministry was quick to note that the primary indicator for competiveness “is not the country’s position in the rankings of a research institute, [but] rather the rate of economic growth, the rise in employment, the balance of public finances and the reduction in public debt”. These achievements are recognised by the market and the credit rating agencies, the ministry stressed to

At the same time, disappointing GDP growth in the first quarter – largely due to a lull in arriving EU funds and a slowdown in the mainly foreign-owned auto sector – demonstrated that Hungary’s economic achievements are fragile, and raised concerns over its growth potential.

Indeed, the defiant rhetoric aside, Budapest appears somewhat rattled by the poor performance in the GCI. It has already announced plans to set up a National Competitiveness Council by the end of October, and begun trotting out its mantra regarding bureaucracy even more often than in recent years.

Taming the beast

While the Fidesz government has stressed the importance of cutting red tape since it returned to power in 2010, the number of employees working in the public sector has actually increased by around 330,000 to 1.1mn in the past six years. At the start of the year, Janos Lazar - the powerful head of the prime minister’s office - repeatedly noted that bloated bureaucracy is dragging Hungary back.

The abolishment of dozens of background institutions was announced, together with a series of legislation aimed at further taming the bureaucratic beast. The GCI ranking will likely further boost these efforts.

“No more than 10-15% of all employees [4.2mn] make up the bureaucratic apparatus in an optimal case,” a Lazar deputy argued in an article published in Vilaggazdasag on October 17. “Ten thousands, or hundreds of thousands, less people will work in the public sector,” the piece argues. “A competitive state is the most important step towards a competitive economy, these two cannot be separated.” After retraining, released bureaucrats could fill vacancies in a private sector facing an increasing labour shortage, the official suggests.

Andras Vertes, chairman of Hungarian economic research institute GKI agrees that the reduction of bureaucracy is essential, but doubts the government will make large cuts to public sector staff ahead of the 2018 general election. At the same time, he points out to bne IntelliNews, that there are several other obstacles to competitiveness that the government fails to mention.

"Hungary’s investment climate is the worst in a regional comparison; there is not enough capital flowing into the country. At the same time, skilled labour is leaving. These problems question the very fundamentals of the state,” Vertes says.

The GCI survey reveals that while the executive respondents for the WEF survey do consider bureaucracy a problem, it is far from their main concern. That is the instability of government policy, followed by corruption, tax regulation and an inadequately educated workforce.

Healthy, wealthy and wise?

According to the GCI, the biggest drag on Hungarian competitiveness is institutional weakness, including a lack of transparency in government policymaking. The subsequent advantage handed to “privileged businesses” and the abuse of property rights are the connected issues. Since the publication of the report, the government has passed two new pieces of legislation that critics worry will increase the risk of corruption.

Vertes also points out that Hungary also fails to perform well in other essential areas. “Everybody says that you have to be very good at two things: healthcare and education. These are the two areas that have deteriorated the most in Hungary,” he says. Demonstrations by Hungarian teachers and nurses rattled the government earlier this year, however, the cabinet has offered only partial reform.

It is yet to seen which issues the newly established National Competitiveness Council will choose to tackle first. Indeed, there is little detail clear about it at all, save for the fact it will be led by Economy Minister Mihaly Varga, and feature representatives from the field of science, business and research, as well as public administration officials.

“Economic shareholders and the government agree that maintaining growth requires improved productivity, a higher share of high-added-value products and services, and innovation must also play a larger role,” reads a statement on the government's website. The cabinet is “expecting the corporate sector to help the government formulate economic policies and promote innovation-based production,” it adds.

Prime Minister Viktor Orban also stated recently in a radio interview that “the aim of the government is to make an agreement with the corporate sector regarding competitiveness”. Again, though, details about the nature of such an agreement, or the actual targets and strategies, are scant.

Vertes can imagine a solution that is not “necessarily the right approach” but could be seen as an acceptable deal. “The government might promise to decrease bureaucracy, and thus reduce the tax to be paid by companies to finance the state. In exchange, companies could support the modernization of state education, for example, from one part of the money that they save on tax,” he suggests.

The “competitiveness council will not simply create competiveness,” he states, “but it is good if it brings about more discussion of the issue."