Exclusive interview with Dr. György Matolcsy, governor of the National Bank of Hungary

Dr. György Matolcsy, governor of the National Bank of Hungary, talks about the decisive factors in the 21st century for a country, the role of the Single Economic Zone of the Carpathian Basin and what Hungary can do to be successful in the coming years.

What are the decisive factors in the 21st century for a nation or a country to become and/or remain competitive?

Economic thinking is going through a major renewal, which has crucial implications for economic policy and competitiveness. The new economics recognizes that the old economic paradigms are obsolete and the economy of the 21st century is governed by new laws. The prices of basic resources, like information, money and energy, converge to zero. We must take into account all aspects of sustainability, and we have to find a new balance between the state and market economies.

What does this mean in practical terms? In short, three factors are vital for competitiveness in the 21st century: digitalization, the green economy and knowledge. The most recent success stories of catching-up economies (Estonia, Lithuania) were built on digitalization. Plus, we have to facilitate the transformation of our economy into a green one because there is no alternative. Finally, although our software and gadgets are becoming smarter and smarter, and we are not far away from the practical use of quantum computers, nothing can substitute the creative energy of the human brain. It has been the single most important source of economic development in the past, and it will remain so in the future.

What is the role of the Single Economic Zone of the Carpathian Basin and the V4-6 Economic Zone today in the global economy?

This year, we celebrate the 30th anniversary of the Visegrád cooperation, which has its roots in the meeting of the kings of Czechia, Hungary and Poland in 1335. It shows that the countries of this region are tied together not only by their economies but also by a common cultural and historical heritage. In recent years, the Visegrád region has proved to be the growth engine of the European Union. Since 2013, its average GDP growth was 3.3 percent, almost double that of the EU. As a result, all of these countries overtook Greece in terms of economic development; Czechia also surpassed Portugal, while the others nearly caught up with it.

Besides the role of the region in the EU, it also serves as a bridge between the West and the East. Eurasia is the biggest player in the 21st century; therefore, serving as a bridge benefits the whole continent and the countries concerned as well. The Visegrad countries as a whole are the main trading partners of Germany (with a 13.6 percent share of German imports) and are also important partners of China (with around a 2 percent share of China’s exports).

A number of factors make a country fit to catch up. Does Hungary have a so-called sustainable economic model, and, if so, what does it look like?

After 2010, we managed to create a formula for achieving economic balance and growth for the first time in the last 100 years. The new government recognized that the element missing in the past was full employment. Hungary lost more than a million jobs during the economic transition in the 90s, and no government was able to find a suitable answer for this problem until 2010. After 2010, successful fiscal and tax reforms resulted in a boost in employment, resulting in 850,000 more people working before the coronavirus outbreak. As a result of a series of bold and innovative reforms, Hungary’s economic development overtook Poland and Slovakia, reaching 73 percent of the EU average. At the same time, Hungary maintained economic balance in all areas, indicated by the declining rate of public debt, low inflation and a favorable international trade balance.

How difficult was the recent pandemic period for Hungary’s economy?

The pandemic caused an unprecedented crisis because it threatened both our economy and our health, and it also caused a lot of fear. Hungary dealt with the crisis successfully owing to the strong immune system of the economy, the adequate measures of the government and the central bank, and the efforts of those working on the frontlines. The economy contracted by 5 percent in 2020 (less than the EU average), the investment ratio remained above 27 percent, and the unemployment rate increased to only 4.5 percent by the start of 2021, which is the fifth most favorable figure among the 27 EU member states.

Still, the pandemic has adversely affected the lives of many families and businesses. In economic terms, the government and the central bank have provided strong support to those who have been most impacted. Hungary introduced an across-the-board loan moratorium for borrowers, and MNB injected HUF 5.9 trillion (13 percent of GDP) into the economy through the financial, corporate and government sectors as a much-needed form of support. These funds prevented the emergence of financial turmoil, which could have deepened the crisis.

What can Hungary do to exit the pandemic as a winner?

The pandemic brought about the fifth-worst recession of the last 100 years in Hungary, but we expect the fastest recovery. The reason behind this optimism is that, despite the pandemic causing much painful damage in the short run, it has not damaged the main pillars of the successful Hungarian economic model.

After we overcome the virus, economic growth must be restored first, followed by instilling balance. The economic recovery must be built on investment, as it fosters not only short-term growth but long-term competitiveness as well. However, a pick-up in investments after a crisis does not come about automatically. Investments must be supported by an appropriate supply of credit because a credit-less recovery is inherently slow and prolonged. Owing to the targeted measures of the government and the central bank, the growth of credit outflows to enterprises and households in Hungary was among the fastest in the EU. This will remain vital in the future to provide an accessible, cheap source of financing to every business willing to invest and every family wishing for a greener, bigger home.

In what areas does Hungary have a disadvantage compared to the leading countries? Can Hungary close these gaps?

In the past, Hungarians have shown that we are capable of extraordinary performance, but unfortunately, the waves of history set back the development of the country. The last decade was the most successful in economic terms in the last 100 years, but there is still plenty to do to catch up with the most advanced countries. One of the most important areas is the productivity gap of the SME sector, which can be closed via investment, innovation and an upsurge in export activity. Of course, thorough competitiveness reforms should support this, as is strongly advocated by MNB. These reforms are underway in many areas, but we have to double our efforts to implement them in spite of the pandemic.

What can Hungary do to be successful in the coming years and decades? What will success look like?

The success of the convergence process depends on whether or not Hungary is able to escape the middle-income trap—a feat achieved by only a handful of countries in the past 100 years. The long-term catching-up of Hungary requires annual economic growth exceeding the EU average by at least 2–3 percentage points, which was realized between 2013 and 2019. This growth differential must be maintained in the 2020s and beyond, but it is only achievable if Hungary finds niche areas where our companies can grow into national champions, like Singapore, Finland and Estonia did in the past. Manufacturing has previously provided such an opportunity, while recently, the service sector has done so due to its global reach and economies of scale.

We have already found the successful formula to achieve full employment, growth and economic balance, all at the same time. In the new decade, we have to add digitalization and environmental sustainability to this recipe. Digitalization must be supported in all areas of the economy in order to prevent the emergence of a digital gap in the economy between digital frontrunners and those who lag. There is a long way to go, as only 14 percent of Hungarian companies sell their products online, which is the sixth-lowest rate in the EU. Incentivizing the green transformation is also crucial, and the central bank is strongly committed to this in the financial sector. By these means, we can fulfill our vision to get close to the average living standard for the European Union by 2030.

Should the government’s activity be measured and if so, how? Is it being measured now?

As the saying goes: “If you can’t measure it, it doesn’t exist.” We can rephrase this for the sake of the new economic thinking I mentioned at the beginning: “If it exists, you must measure it.” We have more data available than ever before, and at the same time, economic activities are shifting toward areas scarcely covered by the orthodox ways of measuring the economy: from goods to services, from tangible to intangible investments, from fixed prices to free access and the sharing economy. Thus, we must reinvent economic measurement in the light of the new age of data. This is especially true for the assessment of the government’s activity. Traditionally, it is measured by input and output indicators. Instead, it should be assessed by its efficiency and its multiplicative effects on the private economy. As the measurement of competitiveness evolves, I am sure that the measurement of government activities will improve soon thereafter.

Your nomination in 2013 as governor of the National Bank of Hungary was initially met with skepticism and some sharp criticism. Some analysts warned that it would “spook the markets,” that risk premiums would rise and the forint would fall. Yet you held firm, rejecting, as you wrote, “traditional economic models… that kept the forint ‘strong’ to suppress inflation” and brought interest rates down. Has recent history proven you chose the right course for Hungary?

The roots of those doubts lay in the debates surrounding whether or not a country can prosper based on its own resources and innovative ideas. As the results verified our approach, the critical voices faded, and by now, the achievements of the Hungarian model are widely acknowledged. The milestones of our monetary policy turnaround were the introduction of the Funding for Growth Scheme back in 2013, which ended the credit crunch, and the support of domestic financing to radically decrease the external vulnerability of the economy. We also maintained financial stability, and most importantly, the central bank fulfilled its mandate regarding price stability more successfully than ever before.

After a while, it was hard to argue with the facts. First, market investors voted with their money, which helped us repay IMF loans in advance; then, upgrades of Hungary’s sovereign credit ratings indicated a wider acknowledgment. Lately, we have experienced a change in approach by some large international institutions as well.

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