The succes of the Hungarian model

Viktor Orbán says that EU funds are not the reasons why the Hungarian economy is growing, and the Hungarian model is an absolute success. Economists who are close to him share this view and believe that they have managed to create a rather unorthodox economic model which is stable and will bring sustainable economic growth. (Wish it was true!) Of course, we cannot exactly tell what contributes to the growth and to what extent, but we can try to draw certain quantitative and fact-based conclusions from the success of the ‘Hungarian model’. Furthermore, it is extremely important: the assessment of a government’s economic achievements can never be absolute – it always depends on the circumstances. In a crisis, if the domestic economy does not shrink, it can be viewed as a great success; however, if there is growth everywhere, then it is not too interesting if our economy grows as well, but whether our development is below or above the others’. In this regard, let us have a look at how much the countries of the region have grown between 2010 and 2016. The best way to measure it is PPP-based GDP per capita:

Hungary 24%

Slovakia 22%

The Czech Republic 25%

Bulgaria 28%

Poland 32%

Romania 38%

It is important to note that despite we receive the most EU funds per capita, in terms of economic growth, we still are at the bottom of the list – only Slovakia’s was somewhat slower than ours. Even according to the most unorthodox view, EU funds do have SOME impact on growth, yet we can still say that Hungary’s development is the weakest in the region and among its competitors. This is a fact, not an opinion!

EU countries which are richer, but also close to us:

Slovenia 18%

Austria 19%

This means that we are getting close to them at a snail’s pace: Leitha is too far from here. This is also a fact.

So, the Hungarian model has only accomplished a slight growth in contrast to the other countries in the region, and it cannot bring about the desired convergence in the foreseeable future either. All in all, it does not add anything to the standard, orthodox economic models; it is even amongst the weaker ones. It would be nice, but we did not reinvent the wheel (if we had, we would notice that we grew by an annual 2-3 percent faster than the others in our region, and we would converge towards Europe faster – but this is not what is happening).

It is important to know, that the economies in Eastern Europe are in the middle of a grace period: Europe absorbed their excess labour force during the crisis, so benefit systems did not collapse, and since unemployment rates did not skyrocket, we exported the unemployed (and the politically discontent). The money our economic migrants transferred home maintained domestic consumption during those difficult years, and now the resulting labour shortage created a strong wage convergence, which significantly boosted domestic wages and also results in a domestic consumption boom. There has not been such a favourable environment in this region, and unless something happens unexpectedly, its effect could last for years (rising consumption – increasing investments – higher tax-income – better budgetary situation – lower taxes – higher spending capacity – increasing consumption, and back to the start). This can last until we reach the average Portuguese-Greek wage costs until we lose our advantage coming from low wages/prices, and by the time it happens, we will have also run out of EU funds, so we will see how our economy actually performs on its own (sometime between 2020-2022). This is quite far from now; for 3-4 years, even an annual 10% wage rise is possible until then. It is likely that the Hungarian economic growth will continue, however, not because of the Hungarian model, but despite it, since it has not noticeably increased our performance in comparison to our competitors.

Of course, we can compare the 24% domestic growth between 2010 and 2017 and the economic growth seven years before that: between 2003 and 2010, the Hungarian economy increased by 39%, even though the crisis happened in 2008-2009. There were no EU funds back then, but instead, there were abnormal budgetary spending/indebtedness and the people’s obsession with Swiss franc loans (its extent was similar to the EU funds, as I mentioned it in one of my earlier writings), so these two periods are comparable, since both of them were supported by external resources. Even in the light of this, the growth in the past 7 years is still not outstanding, and one might wonder how much the economy would have grown without the EU funds. I have already said it numerous times that without any tailwind, the domestic growth potential is hardly over zero (it is about 2%), but fortunately, they are abundant now: a stronger Europe, EU funds, the great Eastern European wage convergence, and the resulting consumption boom. However, as soon as they are exhausted, we can expect another time of the lean kine. Until then, we shall make the most of the years of recovery and welcome the success of the Hungarian model!

Oroginal date of Hungarian publication: September 11, 2017