What does “balanced economy” mean, and is the Hungarian economy balanced or do we need to take further steps to achieve this?
The main objective of economic policy is to create dignified living conditions. But this goes beyond economic policy, since in the broadest sense, it is the duty of politics to strike a balance between the key values of social organization, including (national) security, freedom, order, justice and welfare.
The overriding theme and the idea behind the title of the book is the need to achieve this balance. We consider the market economy to be the most desirable form of economic system, in the framework of which we have the highest chance to achieve this situation. But the market economy itself has no automatic tendencies towards this complex notion of balance.
The market economy is the equilibrium position between the two extremes of the pendulum: communism,as the economic system dominated by politics, and supercapitalism, as the form dominated by the interests of the most powerful economic players.
The theoretical equilibrium position represents the balance between the five fundamental values – security, freedom, order, justice and welfare. But it also represents the balance between labor and capital, the balance between domestic and foreign ownership and the external and internal balance of the economy. The balance in the economy helps to reach a balance between the five values as well. So economic balance is not a goal but a tool to reach a balance in our social life.
What methods can be used to balance an economy?
Creating balance requires continuous actions from policymakers, even though the context is constantly changing – our sense of freedom may be undermined, our national security may face external threats or the conditions for creating well-being may be at risk. Successful states have protected their critical infrastructure and have helped their global value chains to be more effective and efficient in international competition.
What all successful states have in common is that they have adhered to their economic policy priorities for an extended period of up to decades. All of them pursue an export-oriented and mixed economic policy, including both mercantilist and liberal features, while protecting their domestic markets and industries, especially their strategic sectors. Furthermore, from the early stages of their development, they invariably maintain good political and, hence, economic relations with the most developed countries and preserve their society’s fundamentally work-oriented nature.
All of them – even the most developed states that proclaim liberal economic principles and free competition – perform effective interventions whenever their national interests and strategic industries are at risk. This kind of economic policy, the aim of which is to first and foremost sustainably increase the welfare of citizens (in social, financial and environmental terms), may be called pragmatic or patriotic. This implies that we are pragmatic in terms of the tools applied as well. First, we need to have clear objectives; then we can use the methods of economic policy. Fiscal, monetary, income or innovation policies all need to point in this direction. We have to focus on the goal, and we will find the means.
What tools does Hungary use?
Firstly, Hungary redistributes 2.5-3 percent of its GDP from global capital owners to working families with children. It stems from the special taxes levied on players of the world economy (which operate on restricted markets with far less than perfect competition, causing so-called deadweight losses to society) and from savings on debt service by the state. The distributions go to wage-earning families with children through flat income taxation, family tax allowances for children, family housing allowances and free school meals, just to mention a few important measures.
Secondly, the Orbán government decreased the tax burden of small and medium-sized enterprises by more than 30 percent in just nine years. These companies provide work to more than two-thirds of Hungarian employees.
Thirdly, based on feedback, we have an effective, flexible and quick investment promotion agency called the Hungarian Investment Promotion Agency (HIPA). HIPA attracts multinationals with high-tech knowledge. We create an environment for those who join us to build up a high-tech, high value added economy. Based on IBM statistics, we are in the top 10 of those countries where FDI creates high-tech workplaces.
What is the current stage / maturity level of the Hungarian economy and what other measures are planned to improve it?
I would refer to my article (or my book as well) that identifies seven successes and seven tasks ahead. First, it is a great achievement that our finances are in order. Public debt rose by 25 percentage points in the eight years before 2010, but, in contrast, it may be set to drop by more than 15 percentage points between 2010 and 2020; currently, it is 11 percentage points lower than in 2010.
We also buy back national assets instead of selling them. Between 2002 and 2010, socialist governments privatized close to 190 companies using state assets, but we have managed to strengthen domestic ownership in the telecommunication, banking and energy sectors. We strengthen Hungarian companies. Following 2010, we gradually reduced the average tax burden on an SMEs from 52-56 percent to 36 percent by 2019. We strengthen Hungarian families; this is why taxes on labor have dropped by one-fifth since 2010. We are attracting multinationals that provide jobs and create knowledge, and we impose taxes on rent-seekers. We are building a labor and knowledge-based economy – 850 thousand new jobs have been created since 2010.
As a result of all of this, wages have started to rise. Between 2002 and 2010, real wages increased by 13.3 percent, but between 2010 and 2019, they increased by close to 50 percent. Finally, Hungary achieved the second-highest GDP growth in the EU on a quarterly basis in the third quarter of 2019.
In order to be successful in the future, in addition to maintaining the previous seven results, we also have to accomplish seven new goals. (1) The first is to increase our energy independence while guaranteeing clean, smart and affordable energy. (2) The second is to build a clean country with a circular economy, protecting our water resources. (3) We are also building university-centered innovation ecosystems to strengthen our knowledge-creation and innovation capabilities. (4) We are developing our digital infrastructure and capacities. (5) By developing traffic infrastructure, Hungarian economic policy connects Hungary to international distribution and establishes the conditions of creating a unified region in the Carpathian Basin. (6) We are transforming our adult and vocational training systems to prepare Hungarians for the challenges of both the present and the future.
(7) And finally, we have to build on our creativity. This is why we are focusing our scientific, research and innovation capacities in areas that are global trends as well as important to us, areas in which Hungarians “do well” and, as such, merit particular attention. It is these areas where Hungary truly has a lot to offer to the international community and global market players, thus contributing both to the strengthening of Hungarian companies and to the lasting and sustainable rise in the standard of living of the Hungarian people.
Regarding the economic strategy, what is behind the “everywhere” opening policy and how do you get it right?
It is simply the nature of economic relations. When we open up to the South and to the East, we are not doing anything different than what developed nations are doing.
Who are the most important strategic partners of Hungary?
Hungary is not pursuing protectionist policies, but it needs pragmatic approaches to support those economic actors who contribute the most to the sustainability of the economy and society. Families having children or domestic and foreign corporations providing high added value jobs – these are our most important partners in the process of value creation.
How is our partnership with China?
China is an example for pragmatism. With its huge foreign currency reserves, its potential (due to its sheer size) and practices often cited in Western literature, China has recently been a fine example of how to create global value chains. We have a strong partnership, and we have a lot to learn from our Chinese partners.
How was the “Creating Balance” lecture roadshow in the US? What was the experience?
I visited top American universities over the course of ten days to present my book and give a first-hand, data-based view of the Hungarian economic model. I also met World Bank and IMF officials during my visit. It was a positive shock that the policy solutions created in the Hungarian economic policy “laboratory” have become mainstream ideas, recommended also by the IMF and leading Nobel laureate economists. We should remember the sequence of harsh critiques because of the unique Hungarian way of managing the crisis by increasing employment and incomes instead of implementing austerity measures.
Hungary and Greece were in a similar position after 2008, but Hungary did not accept the recommendations of international organizations in the post-2010 period. Later, the IMF admitted that they failed to realize the damage austerity would do to Greece. Greek real GDP and real wages have not increased since 2008, while Hungary today boasts one of the strongest growth rates for real wages and GDP. One article reporting on my lectures wrote that Hungary squares the circle of globalization and – at a time when much of the rest of the continent is drifting – Europe might benefit from policies modeled on Hungary’s economic reforms.
Educating future generations is key. What is the reason behind the “Let’s Teach for Hungary” program? What does the program teach and what have been its the results?
Let’s Teach for Hungary brings a new approach to mentoring, helping students in small communities. University students spend one day a week with 7th-graders in small villages far from work and secondary-schooling opportunities. Mentors take their mentored pupils to secondary schools, workplaces and cultural events to show them a wide variety of options in order to help them realize their dreams. On the one hand, the program helps primary school students in small communities to successfully complete their studies. On the other hand, it proposes mutual learning, supporting each other and strengthening communities. We are aware of the fact that there are small settlements in the country working under graver economic conditions, and we also need to make the opportunity for those living there to succeed in life. We believe that aid or basic income is not the solution; instead we need to provide the opportunity to successfully learn and find employment in the labor market, which is the essence of our work-based society. The mentoring initiative comprises four areas: the university mentor program, the middle school mentor program, the student government mentor program and the enterprise mentor program.