Hungary becoming a sort of Potemkin economy

On the surface, for an outsider the Hungarian economy may look hunky-dory, but it is deteriorating inside like a Potemkin economy, Bloomberg reported in a story about Hungary on Friday. Experts talking to the news agency claim that regardless of the fiscal rigour and credit rating upgrades, investors lack trust in the government for its unpredictable and anti-market measures, as a consequence of which the country’s growth potential keeps on eroding. The most important task for Prime Minister Viktor Orbán’s government would be to do away with cronyism and restore market confidence but there is apparently not much will to do that.
Hungary becoming a sort of Potemkin economy
Bloomberg run a piece on Hungary and its self-proclaimed “black sheep" of Europe, Viktor Orbán, headlined ‘Populist Magic Fades in Economy of Europe’s Big Trump Supporter’ on its front page today.

It said that while the ruling party’s dominance makes Orbán the overwhelming favorite in the next election, “the economic outlook is clouded by allegations of cronyism and intervention that undermine competitiveness, hamstring growth and drive away investors even after Hungary regained its investment-grade debt rating."

Hungary is a story of a gradual decline of growth and growth potential as a result of state capitalism, which is being propped up by short-term interventionist measures

, Bloomberg cited Evghenia Sleptsova, an economist at research institute Oxford Economics.

“Hungary is becoming a sort of Potemkin economy

," József Péter Martin, head of Transparency International in Budapest, summed up Hungary’s position.

It looks good from the outside (public debt being reduced, fiscal discipline is strong), but “is deteriorating inside," he said. This view is also reflected by by Hungary’s plunge down the table of worldwide competitiveness. The country ranked ahead of only Madagascar and Venezuela in government transparency among 138 countries in the 2016 Global Competitiveness Index of the World Economic Forum, which is based on a survey of executives.

“A magnet for foreign investment flowing into eastern Europe in the 1990s, the Hungarian economy is dominated by Orbán’s allies, with an increasing state role," Bloomberg said.

It reminded that the government took over utilities and rewrote the rulebook for entire industries from banks to chimney sweeps and tobacco shops, citing strategic interests.

Bloomberg said Orbán was “quickly able to reshape the economy:
  • as he spurned checks and balances;
  • had independent institutions run by his people (the head of the state prosecutor’s office is a former lawmaker of the ruling party, the central bank chief is an ex-minister Orbán once called his "right arm" and the Constitutional Court is stacked with loyalists.)
  • Parliament, dominated by Orbán’s lawmakers, routinely fast-tracks government legislation.
  • Independent media is disappearing and outlets have come under the control Orbán’s allies."

The news agency cited Anders Svendsen, chief analyst for global research at Nordea Bank in Copenhagen, as reminding that all of the above has had an impact on investments, which slumped more than 14% this year through September, and on economic growth, which is the slowest in three years. Morgan Stanley estimates the country’s potential growth at 1.7% through 2030, below Poland and the Czech Republic.

Companies are reluctant to invest in Hungary, because at the most basic level there’s a lack of trust in the government. There’s a lack of transparency and a lack of predictability

, Svendsen remarked.

The criticism is misplaced as competition rankings that are “completely subjective and based on the opinion of a few executives" misinform investors, Bloomberg cited Antal Rogán, Orbán’s chief of staff, as saying in an interview.

Yet it’s not just outsiders who see a problem, the news agency said, citing János Lázár, minister in charge of the Prime Minister’s Office, as telling a conference in November that there’s been a “brutal" decline in competitiveness even after billions of euros flooded into the country in the form of EU funds, ostensibly to help poorer countries like Hungary compete and to close the wealth gap with western Europe.

The situation is dire," Lázár said. “The trend is obviously bad and needs to be changed as countries in the region have left us standing."

“As long as the government keeps grabbing a bigger and bigger slice of the private economy and as long as the decisions are based on who you know and not on market forces, there won’t be lasting improvement," said Attila Chikán, a professor at Corvinus University in Budapest and former Economy Minister for 18 months in Orbán’s first term from 1998.

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