Hungarian economic breakthrough?

In case some of you are missing the proper diacritics in today's blog, please complain to TypePad whose expert programmers, while changing something or other in the program, managed to screw up all accented characters. Since I didn't want to bother you with  instead of real letters, I decided to forgo all diacritics. Let's hope that TypePad will get its act together soon.

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The New Szechenyi Plan seems to be the answer to all of Hungary's economic ills. At least this is what the Orban government thinks or tries to "sell" to the world and to the Hungarian people. According to the authors of the plan (whoever they are) the "great goal" is "the dynamic widening of the rate of employment." The plan repeats the often heard promise of Viktor Orban that in ten years they will create one million new jobs. Considering that currently there are fewer than four million people employed in Hungary such a goal is rather ambitious. According to some people, under the present conditions it is outright impossible. Others point out that it is rather impertinent of Fidesz to create plans that last for ten years. After all, there are elections every four years and for Fidesz to prove that its promise wasn't empty Viktor Orban (because surely he will be the chairman of the party even then) would have to win three elections in a row.

The other quite elusive promise of the Szechenyi Plan is that with its help the Hungarian GDP will reach the average of the European Union in twenty years. I certainly wish them well, but looking through the plan I'm quite skeptical. I'm siding here with Peter Rona, the American-Hungarian economist and bank manager, who said that while the description of the current ills of the Hungarian economy is quite accurate, "when it comes to the chapters outlining how the Plan's goals can be achieved, the whole document falls apart."

The document is very wordy. One could have said everything in less than twenty pages. The only breaks from the tedium are the fancy charts that are, if possible, even less informative than the text that precedes them.

The upshot of the program is that the money used for the New Szechenyi Plan will be divided among seven areas that the Hungarian government considers "vital breaking-out points." They are (1) the health care industry, (2) green economic development, (3) the housing industry, (4) changes in small- and medium-size business environment, (5) science and innovation, (6) employment, and (7) transportation and transit.

There are no specifics in this 200-page book. For example, it is not enough to say that Hungary will be a transit paradise when the Hungarian railway system is a mess. I venture to say that bringing the Hungarian railways up to snuff would eat up all the subsidies received from Brussels. Or it is very nice to dream about Hungary as a transit hub when the government just announced that although they will finish current road construction they will stop any planned highway construction. Small problems like that nag the reader throughout the book.

Out of the seven areas I will pick one to highlight problems with the plan. The very first breaking-out point according to Matolcsy and crew is the health care industry. One of the first things they mention in this context is Hungary's thermal potential. Indeed, it seems that almost everywhere they dig hot water comes up. But there are innumerable spas already, and around them are wellness hotels catering to tourists. This is old hat because an incredible amount of money was spent on building spas in the first Szechenyi Plan. There is a saturation point after which giving money to build yet another spa in some God-forsaken place where there is nothing else but a spa and a hotel is a waste. Moreover it seems that a lot of the spas that were built ten years ago are now languishing or have already died. But it seems that Fidesz politicians are in love with spas.

Let's see what kinds of benefits Hungary will have if it develops health-related industries. The Plan says that it will create jobs, it will improve the population's health, since it requires well trained experts it will stimulate education and training, it will ensure lasting economic growth, and it will strengthen cohesion and decrease geographic and class differences.

This plan is not designed to address problems in the health care delivery system. And although it makes a passing reference to biotechnology, the package is simply too small to provide venture capital for promising biotech startups. So we're back to the spas. That new spas will create jobs is obvious; how long these jobs will last is not so obvious. Whether new spas will improve the population's health is more questionable. First, I'm not sure that sitting in "the waters" makes that much difference to one's health, but even if it does only a select few can take advantage of a fairly expensive "cure" at the waters. Moreover, if the growth of the health industry requires education and training (presumably in real medical science) it will mean that the state will have to provide more educational facilities, which would be an added burden on the budget. As for strengthening cohesion and decreasing geographic and class differences, I have to admit I don't understand. Unless they imagine people from different regions and different social groups sitting in the warm water chatting with each other. I hope this is just a joke on my part.

In case you think I've intentionally dumbed down the plan's characterization of the health care industry, it encompasses greenhouse gardening, the beauty industry and cosmetics, balneology (the science of the therapeutic use of baths), and the so-called specialized building industry. This last I guess is building spas or greenhouses. That's all we learn about this great economic breakthrough program that will bring lasting and steady economic growth. The details of other fields are not better worked out than this one. I'm afraid this just won't do.

 

 

 

 

Comments

[Mark]

My fundamental problem with this kind of "economic planning" is that it does not really make very much economic sense. We would all agree the a government can aid economic development by getting the macro-economic framework, and that there are things the state can do at the micro-economic level to aid development. But it is fundamental economic mistake to believe that a government can somehow conjure profitable sectors out of thin air.

Let's take the spas, in which everyone seems to believe there is much potential. I am sure the government can provide resources to modernize infrastructure, maybe provide education and training, marketing support, perhaps fund research and development. If, however, that sector is going to be self-sustaining and is going to create jobs, then there is going to have to be a steady stream of effective demand for the services provided. Because of the dynamics of the economy, if it is to drive growth most of that effective demand is going to have to come from abroad. Without that effective demand all state spending will achieve is a spa in the middle of nowhere, with nonone using it.

Wellness tourism is a growth industry right across Central Europe, in Austria, in the Czech Republic, in Slovenia. The market is pretty saturated. Some spas like Bük have had some limited success in attracting visitors from abroad, as a result of the railways' offering cheap "Euro-Regio" concessionary tickets. But beyond this one really has to ask - given that facilities already exist close to the potential market, why should anyone come to Hungary? And does one believe that the current government apparatus is capable of properly posing and realistically answering this question?

Likewise the notion of a "transit hub" is likely to founder on elementary geography. Fundamentally population and population density is at its highest in western Europe, and falls as ones travels further east. GDP per capita is highest in western Europe and falls when one travels east. This is why Europe's transport hubs are in London, Paris, Amsterdam, and Frankfurt. Unless these fundamental geographical patterns change, it is not really very realistic to believe the numbers of people travelling through Hungary are going to change. Because when some of the motorways were built, the state failed to ask these kinds of questions and answer them realistically the country already has too many motorways to nowhere. Now, it seems the country will be offered more of them.

At the end of the day governments are not best placed to answer the hard questions as to whether there is a geniune market opportunity in developing a particular sector. And this is especially true when a government is as provincial, and is as captured by the self-interested as the current one. Clearly they would be better in ensuring a competitive exchange rate, and better operating environment for SMEs, as this climate would enable the real areas of comparative advantage to emerge. Then it might be worth using state resources in the context of a decentralized, flexible and, above all, market-led industrial policy.

[whoever]

I think the plans are notable for a lack of genuine ambition or imagination, more than anything. There are so many aspects of infrastructure in Hungary which could be modernised or improved, beyond motorways and thermal spas - not least the social infrastructure - the scope for expanding the social economy, as well as attempting to re-establish indigenous manufacturing and design with the wider availability of incubators.

The problem with a market-led industrial policy would appear to be that credit is so restricted in Hungary and the bureaucratic tendencies so pronounced, that multiple cases of market failure have created very misshapen outcomes.