A critique of the New Széchenyi Plan

There are days that I am in a quandary. There are too many topics that should be covered. Every time I find something interesting I jot it down and at the moment I already have five items on my plate. There are, for example, the proceedings of a dreadfully dangerous parliamentary sub-committee that is hard at work falsifying history. Or the allegation that Viktor Orbán was responsible for the disturbances that occurred in September-October 2006. I read a fascinating article about the return of corporal punishment sanctioned by the Hungarian parliament in 1920. Or a comparison of Kazakh and Hungarian media laws. After all, Jobbik is in love with Kazakhstan and the Kazakhs, the closest relatives of Hungarians. According to them.

However, I settled for a more mundane topic, a critique of the New Széchenyi Plan by an economic research institute called GKI Gazdaságkutató Zrt. The economists of GKI didn't find too many positive items in the document György Matolcsy and Viktor Orbán released at the end of July.

The first Orbán government made hay out of the original Széchenyi Plan when in fact it was a modest government attempt at stimulating the economy way back in 2000. Fidesz politicians and government spokesmen talked about the Plan as if it were the ultimate solution to all the economic ills of the country. In reality, relatively little money was allocated to the project--120 billion forints, which as we hear often enough nowadays from MSZP politicians was about the same amount the town of Debrecen received over the last four years from the Gyurcsány-Bajnai governments. However, if one believed all the propaganda surrounding this relatively modest amount of money that was dispersed mostly among Fidesz supporters, one would have thought that it was the most important attempt ever to transform Hungary's economy.

It seems to me that a repeat performance is under way at the moment with the New Széchenyi Plan (Új Széchenyi Terv/ÚSzT). The economists at GKI try to find a few nice things to say about the Plan to sweeten the bitter pills that follow. They consider it a positive that its authors think about the long run, 10-20 years. Perhaps, but as I mentioned a couple of days ago György Matolcsy talks about goals that will be achieved in twenty years without the slightest attempt to point the way toward those goals.

GKI finds something else praiseworthy in the Plan. It is allegedly not the final product but a preparatory document. According to Matolcsy, the government is expecting expert advice, a discussion of the text which they will take into consideration. If you ask me, they will not. They will not because they are unable to put together a coherent plan. Or, perhaps they don't even want to produce a plan that would please GKI's economists because that would require a total reorganization of Hungarian administrative, professional, and economic life from health care to education and public administration. And such reorganization--reforms if you wish--would hurt certain groups' interests. And somehow Viktor Orbán thinks that one can govern in such a way that "no one will be hurt," as he himself said not long ago during one of his television interviews. I have to disappoint Viktor Orbán: one cannot.

After this faint praise GKI comes to the heart of the matter: "This study ... in its current form is neither methodologically verifiable or convincing." Desires, wishes, goals are often linked to verbs like "should be" or "must."

I'm not going to go into the fallacies of building a "curative Hungary" here because we've talked about this a lot. Hungarian medical know-how might be excellent (and I even doubt that), but the Hungarian mortality rate and the poor health of the population serve as counter-propaganda to marketing efforts in this direction. There is no discussion of health-care reform in the Plan. But without it--which again cannot be achieved overnight--there is no chance of inducing foreign visitors to seek medical help in Hungary.

The New Széchenyi Plan also spends quite a bit of time on house construction. There is no question that house construction is one of the important indicators of a country's economic well being, but in Hungary there are some fundamental problems with the whole industry. First, there is a severe shortage of capital and, as a result, a whole chain of contractors and subcontractors don't get paid for months on end. Or ever. GKI's critique of the Plan mentions that 60% of owners of newly established companies have already failed once, leaving unpaid bills behind. There are also problems with expertise; there are too many people who simply don't know what they are doing or are doing a substandard job by, for example, using inferior materials. The poor homeowner rarely has the knowledge to supervise the work. I personally visited a  luxurious home of some friends where there was a substantial crack, at least an inch wide, on one of the supporting walls. He sued. I don't know how the story ended. Most likely not well.

If I lived in the country I certainly would not buy an apartment in a co-op. Laws governing such dwellings are so poorly written and so toothless that it is practically impossible to make any repairs to the building outside of own's own apartment. Thus, a simple repainting of the stairwell can be stopped by a single owner's refusal to give his consent.

GKI Zrt also has some harsh words to say about ÚSzT's handling of the concept of "employment." According to their verdict, the authors lack an in-depth understanding of the problem that is by now twenty years old. They seem to be unaware of earlier attemps to remedy the situation and the causes of their failure. Often they suggest solutions that have been tried earlier without any results. Our economists concentrate on a chapter called "Lagging behind in employment" which brings up Czech, Polish and Slovak examples. Behind rapid growth there is greater employment. Of course, this is true but only if the people are engaged in work that allows for high productivity. In the countries mentioned it meant foreign investment by large multinational companies. But the New Széchenyi Plan is concentrated on domestic small- or medium-size companies with relatively low productivity.

These are the most important observations. The document is available in Hungarian on GKI's website.

 

 

Comments

[Pásztor Szilárd]

Yes, the Széchenyi Plan is always criticised, particularly by those who don't have enough economic expertise to put it together (read: socialists+liberals), but the first Széchenyi Plan has been proven to work. We can hope the second one will do just as good.

[John T]

Szilárd - In what areas do you think it worked?

[Mark]

" Our economists concentrate on a chapter called "Lagging behind in employment" which brings up Czech, Polish and Slovak examples. Behind rapid growth there is greater employment. Of course, this is true but only if the people are engaged in work that allows for high productivity. In the countries mentioned it meant foreign investment by large multinational companies."

I think there are a number of assumptions here that need unpacking. After all let's just look at the statistics shall we?

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-04082010-BP/EN/3-04082010-BP-EN.PDF

Hungary's performance is dreadful and worse than the other countries. But of the four mentioned only the Czech Republic has an employment rate above (and even then only just) the EU average. Though Slovakia and Poland perform better than does Hungary their performance remains pretty bad despite their ability to attract FDI.

In fact there are two things that are striking. One is that Central and Eastern Europe performs badly generally on this indicator because of the legacy of previous job destruction. And because the rate of job destruction in the 1990s was higher than in any of its neighbours, it may not be too surprising that it performs less well.

Furthermore, if you begin to probe the competitiveness statistics it is difficult to avoid the conclusion that in CEE FDI has been a mixed blessing. After all, Slovakia's loss of competitiveness has actually been greater than Hungary's since 2002. FDI seems to transform parts of the economy and not the whole and creates uneven development - one can see this in differential economic development between eastern and western Slovakia, just as between eastern and western Hungary. What foreign capital inflow seems to do is raise wages and prices in those parts of the economy it does not transform, thus creating a dual economy which makes it as much part of the problem as the solution.

Of course, high productivity is important. But as the Camrbidge-based development economist, Ha-Joon Chang has written in his new book (which all Hungary's policy makers ought to read): "It is not simply because they are cleverer or better educated that some people in rich countries are hundreds of times more productive than their counterparts in poor countries. They achieve this because they live in economies that have better technologies, better organized firms, better institutions and better physical infrastructure - all things that are in large part products of collective actions taken over generations" (http://www.amazon.co.uk/Things-They-Dont-About-Capitalism/dp/1846143284/ref=sr_1_1?ie=UTF8&s=books&qid=1285414391&sr=8-1)

In other words there are no magic bullets - invest for long-term in the people - and eventually an economy will get results. No-one is going to get rich quick by building spas, or cutting spending, or privatizing their economies. These are illusions.

[Gábor]

And Mark even did not mention the distortive effect of mass emigration on employment figures, usually nobody takes into account. From Slovakia, Czech Republic, Poland at least a 10th of the workforce went abroad. As a weird effect especially in Poland but also in Slovakia (and one can mention Romania as well) a massive labor shortage emerged even though the employment rate remained lower than the EU average and unemployment figures realtively high.

[Pásztor Szilárd]

@John T: it worked in the primary sense it was meant to work, that is, to induce economic growth by fuelling up the inner markets. Roughly for every 1 governmental Forint into the economy got 3 more Forints added by the working force (enterprises, people), that is, people were encouraged to work more and put more effort into realizing their plans, be it a house renewal of a large scale construction project. Many opportunities were ignited throughout the country, and in the end, the Plan resulted in more tax income than the original amount pumped into the economy by the government.
This means that the Plan was financially beneficial for both the government budget and for the economy.

This method of the Plan was widely acknowledged and in 2002, even the socialists said they would continue the plan because it had been proven to work, and they said they didn't intend to stop working ideas.
Of course they were lying and they stopped the Plan as soon as they seized power, but that's history.

Why not try this Plan once more?

[John T]

Szilárd - Thanks for the answer. I'm certainly not against a package to stimulate growth. But what you have outlined does seem somewhat short term and on a relatively. I'd like to see investment in sustainable areas that not only look at the internal market, but also abroad, through exports. Additionally, it needs to be diverse, as there is a danger in putting all your eggs in one basket. For instance, if every town sets up wellness facilities, if there is not a significant increase in users, these extra facilities have to fight for the same customers and many will struggle to survive.

[Pásztor Szilárd]

@John T: this type of Plan is not necessarily short-time. What keeps the government from doing it persistently? Of course, this is not a comprehensive economic strategy, but it isn't meant to be one. This is intended to stimulate inner growth, and proves very helpful in demanding times when external circumstances are bad.
Other types of investment are additionally required of course, take for example the latest 2 billion-euro investments by Opel and Audi. I'm not surprised that Eva is very silent on such topics.

[Eva S. Balogh]

Szilárd: "Other types of investment are additionally required of course, take for example the latest 2 billion-euro investments by Opel and Audi. I'm not surprised that Eva is very silent on such topics."

I can only handle a certain number of topics. But if you insist I can certainly mention here the Open and Audi investments. I do hope you don't think that the deal was sealed in two or three months. These negotiations have been going on for years. The beginnings will most likely go back to even the Gyurcsány government. The only good thing is that the Orbán government continued these negotiations and agreed to the terms worked out earlier.

However, I would like to point out that in the case of the Audi deal they refuse to talk about how much this will cost Hungary. They announced the deal but the final stamp of approval by the government will take place only in mid-October, after the elections. Then, apparently they will tell what kind of subsidies Audi will receive in return.

[Gábor]

Szilárd, you still have serious problems with basic math. 500 million euros (Opel, Szentgotthárd) and 900 million euros (Audi, Győr) add up to 1,4 billion euros. Or, if you wanted to round it: 1 billion, according to the rounding rules I was taught in elementary school. The real problem is that it is again a proof of your propagandist activity, you certainly know how to calculate the sum of two numbers and round the result.