A defense of Hungarian economic policies and prospects

by on June 14, 2011 at 3:06 am in Current Affairs, Economics, Uncategorized | Permalink

It seems that Hungary has climbed out of its slump and it is now growing at 2.5 percent a year, at least during the last quarter.  This interesting but self-serving editorial serves up a few reasons why:

We are increasing small- and medium-size businesses’ access to capital through grants and loan programs for product development, and reducing corporate-income taxes for these firms to 10% from 19%—among the lowest in Europe. These businesses are vital to Hungary’s export-driven recovery. As they continue to grow, so will private-sector employment, which in turn will reduce the heavy burden on our welfare system.

We would rather receive the same total tax revenues from a larger number of employers—each paying less tax—and have more employed Hungarians spending their wages and driving consumption. We’ve significantly lifted the tax burden off consumers by slashing the personal income-tax levy to a flat rate of 16%, from a tiered system where the highest rate was 32%.

We are also tackling welfare reform. Our government-run system has been plagued by spiralling costs, systemic abuse and inefficiencies that were exposed by the deteriorating economic conditions after the financial crisis. We believe that any welfare cuts should aim to boost employment and embed a work ethic among Hungarians. So we have reduced unemployment and disability benefits and pharmaceutical subsidies, and are in the process of reducing back the red tape that makes employing workers complicated and expensive.

I would stress caution is interpreting these arguments and note they are from a member of the current government.  Luck, positive real shocks (agriculture), and mean reversion are also at work.  Still, it is interesting to see that the Hungarian recovery is far outpacing that of the PIIGS countries; Hungary of course is not on the euro and it has avoided wrenching deflation, instead experiencing mild inflation.  Furthermore the Hungarians seem to be putting a spending freeze into operation and they are addressing pension liability problems.  It is unlikely that is the cause of their recent turnaround, but it hasn’t hindered it either.

All this is true:

Our economy has grown for six consecutive quarters, unemployment levels are falling and the Hungarian forint is one of the world’s strongest-performing currencies this year.

Budapest is now an expensive city, and it no longer makes for a good cheap vacation.

1 memyselfandi007 June 14, 2011 at 3:23 am

You forgot to mention that Hungary is addressing pension liability problems mainly by nationalizing private pensions plans http://www.reuters.com/article/2010/10/14/hungary-funds-idUSLDE69D0IS20101014

I am not sure if this is a role model for PIIGS countries.

2 Marian Kechlibar June 14, 2011 at 3:55 am

I have traveled extensively around Hungary as a backpacker in 2009.

They have a huge problem: enormously bloated state sector. The state employs more people than the private sphere. At that time, it was visible everywhere – massive overemployment. The private businesses worked quite normally, but the public ones (say, metro or museums) were full of people doing minimal work.

Unless they tackle this problem first, nothing helps them.

I could not help but wonder, back then: if the Austrian bankers, who lent big money to the country, traveled less by limousines and more incognito by metro, they would soon see that something is wrong with the structure of employment in the country. It defies economical logic if you meet 3-4 teams of 4-5 ticket controllers in a single short metro ride, every freaking time. It defies economical logic if a distant museum with not-very-unique items has many more visible employees than visitors, with an old lady in every single room instead of a camera, and an admission fee of 10 cents. Etc.

3 Rahul June 14, 2011 at 7:32 am

The comment about the camera is obvious only when assuming typical western-world labor-to-capital relative costs. Whenever I visit India I’m appalled by what seems like massive over-staffing everywhere. But at prevailing low labor costs, it makes sense to use humans instead of technology at weird unexpected places.

e.g. My parents’ apartment complex recently discussed installing access control cards and security cameras. But when you can employ two security guys 24x7x365 for less than $3000 / year technology just cannot compete.

When an input is so cheap it tends to be over-utilized.

4 tkehler June 14, 2011 at 12:42 pm

Yes, but can you trust the security guys the way you can trust the technology? At that wage, they could be easily bribed, I’d think…

5 J Thomas June 19, 2011 at 10:23 am

They could be bribed by rich people who care to spend a lot of money.

But anyway, we’re talking about two security guards, versus at best one security guard and a bunch of cameras. The one security guard watches the cameras, and then when he sees something he runs to catch it?

And it’s only recently that you can get good cameras for less than $10 each. A $100 camera is worth stealing.

6 David Wright June 14, 2011 at 4:02 am

Lessons for the US?

We’ve already done our welfare reform, but as disability roles have grown tremendously in the last decades, a disability reform could be helpful.

Our nominal corporate tax rate is very high, but because of loopholes our average corporate tax rate is pretty typical. Those loopholes, however, are taylored for politicaly influential incumbent enterprises. To the extent that a recalculation is required that shifts production to new players, our large headline rate probably is hindering that transition, because those new players have not yet become large and politicly influential enough to get their own loopholes, and thus face something closer to the headline rate.

7 a canadian living in hungary June 14, 2011 at 4:33 am

one of the world’s STRONGEST currencies? are you kidding? the WEAKEST in the world, people are committing suicide on a weekly basis because of their mortgages made in CHF (Swiss Franc) which they are unable to pay because of the WEAK FORINT, weak economy, huge unemployment, hence losing their homes, getting on the street with their families due to foreclosure.

8 Marian Kechlibar June 14, 2011 at 5:14 am

Yes, the CHF mortgages are a huge problem, going underreported outside Hungary.

(On the other hand, Hungary has an immensely strong tradition of “heroic suicide”, not found anywhere else in the Christian world, so high suicide rate isn’t necessarily caused by the mortgage problem. They had high suicide rate for the entire 20th century, as far as I know.)

9 Andrew Montgomery June 14, 2011 at 5:34 am

That problem is the incredible strength of the CHF, not any weakness in the HUF. Looking at a HUF/USD chart, it doesn’t exactly scream “strong currency”, but it has indeed performed well over the last 12 months. Against the EUR there is also an increase, but less pronounced.
Five-year chart: http://finance.yahoo.com/q/bc?s=HUFUSD=X&t=5y

10 Rahul June 14, 2011 at 7:40 am

Housing loans denominated in currencies other than the native should be frowned upon. The typical lay-person is simply not competent to predict the fluctuations nor to hedge himself appropriately. The information symmetry is obvious. Seems like a classic predatory practice.

If a Swiss financier wants to loan out money in Hungary it’s healthier to make him assume the Forex risk (even at the cost of borrowers being billed the risk premium)

11 scineram June 14, 2011 at 6:42 am

Tax cuts for the rich is what it was. Increase for most of those who make less than twice the national average. I certainly have less after taxes. So yes, fuck Viktor!

12 Marian Kechlibar June 14, 2011 at 6:53 am

I must say that I am appalled by the policy of the Orban government re media. The newly instituted bureau for “balancedness” is basically censorship house.

13 Tomasz Wegrzanowski June 14, 2011 at 7:13 am

Comparing Hungary to eurozone countries is just ridiculous.

How it compares to other non-eurozone / non-euro-pegged European countries like Poland, Czech Republic, Slovakia etc.?

14 Matthew June 14, 2011 at 7:32 am

Also of note, Hungary has just joined a new military alliance (http://www.stratfor.com/weekly/20110516-visegrad-new-european-military-force).

15 FYI June 14, 2011 at 9:24 am

This sounds interesting but I wonder how important it really is. What is the goal of these countries? Defend from Russia if NATO bails out? I don’t think they would be able to last 1 week (1 day if you think about russian nukes…)

16 Hondo69 June 14, 2011 at 7:47 am

I’d like to see a simple chart of economic growth rates:

Column A: countries that have lowered taxes and implement austerity measures since 2008

Column B: countries that have not

17 J Thomas June 14, 2011 at 8:38 am

Hondo69, such a chart would be inherently biased.

Nations introduce austerity measures when they are already in trouble. Nations that are enjoying economic growth do not start austerity.

So of course the nations which do that would look bad compared to nations which don’t.

You’d need to start just with nations that were already in trouble, and somehow quantify how much trouble they were in. But that leads to other kinds of bias, since there are a variety of ways to measure how much trouble they were in, and no clear way to decide which to choose. Depending on your choice of metric you could generate whatever result you wanted, and then publish it as if it meant something.

18 Miguel Madeira June 15, 2011 at 6:20 pm

Perhaps 4 columns:

Column A: countries that have lowered taxes and implement austerity measures since 2008
Column B: countries that have raised taxes and implement austerity measures since 2008
Comumn C: countries that have lowered taxes without implementing austerity measures since 2008
Column D: countries that haven’t lowered taxes neither implementing austerity measures sonce 2008

I bet that countries in worst situation will be the Column B

19 Steven Kopits June 14, 2011 at 3:20 pm

See the contribution of Hungarian born economist, George Kopits. To the extent Hungary’s situation has improved, I think we can assign him some credit, even if it cost him and the country one of its important initiatives.

http://www7.economist.com/blogs/easternapproaches/2010/11/hungarys_economy

20 Newt June 14, 2011 at 6:21 pm

Budapest is now an expensive city, and it no longer makes for a good cheap vacation.

Then where are the best cities for a good cheap vacation nowadays?

Chennai? Buenos Aires?

21 Rahul June 14, 2011 at 10:16 pm

Kabul?

22 DK June 14, 2011 at 10:35 pm

Lots of places in the former Yugoslavia.

23 CBBB June 15, 2011 at 3:22 am

The fact that Hungary is not a Euro country is the key here.

24 JM June 16, 2011 at 7:33 am

Budapest is more expensive relative to what it was for an American tourist 10 years ago. However, it is still one of the cheapest place to live in Europe.

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