Péter Ákos Bod: Hungary is driving down a sorry dead end, going faster and faster

In the few years before Covid, living standards rose in Hungary. More and more jobs were created and the purchasing power of wages increased, emigration stopped and even some return migration was observed. But now it seems that more and more people are emigrating from Hungary again.

The trend in Hungarian emigration has always been slightly different from that of the region. The emigration from Poland and Romania was largely driven by those who lost their jobs due to changes in the economic structure. Desperate Romanian farmers who could not find work in their home countries went to the West to try their luck. The situation was different here, however: well-educated young people started to emigrate from Hungary after EU accession. Although there was a period when this subsided, the issue of emigration has now resurfaced. In addition, the demographic problems at macroeconomic level have so far been masked by the fact that in recent decades people have been living longer and working longer, while many Hungarians from neighbouring countries have moved to Hungary. Now, however, people from across the border no longer come to work here, and we can no longer earn better. We could try to lure back Hungarians who emigrated earlier, but I think it will not work. There are few success stories of people coming home after gaining experience abroad and building up a big company. The Hungarian economy is not growing particularly dynamically and we are not seeing wages catching up. I can imagine that the Baltic countries or Romania will manage to reverse the emigration trend, but Hungary is unlikely to do so.

Employment figures are positive after all.

Hungarian data hide structural tensions. The statistical office counts as employed the 100,000 Hungarians working abroad who still have family at home or have an address here. This is fine, of course, as it is part of their well-being that the head of the family works abroad, and remittances improve macroeconomic statistics, but do not increase the labour supply here. Public sector workers are also considered as employed, but are in fact rather active unemployed. The consequence of the current situation is that there is both a labour shortage and regional unemployment. It is very difficult to reintegrate the long-term unemployed into the labour market, especially if they are unskilled and live in dead-end villages far from any job opportunities. Meanwhile, more and more assembly plants are coming to Hungary, where people have to work 10-12 hours a day. Tens of thousands of these monotonous, unskilled jobs are being created. Hungarian people do not want to work here, which is why more and more foreign workers are coming.

So why are such assembly plants being built here? We have been hearing for 30-40 years that low-value-added, cheap labour is moving to China. Now, however, we are seeing more and more factories coming to us that are at the saddest point of the smile curve.

I wrote my first article on industrial policy more than 40 years ago, which attracted a lot of interest and a lot of attention. It argued that Hungary could be stuck at the medium industrial level if the share of low-value-added machinery in the economic structure continued to grow. But there is little profit in such activities. From the data at the time, I concluded that most Hungarian industry was at the lowest point of the U-shaped development curve. I did not call it a smile curve, but it is essentially the same: medium-demand activity generates little added value. Later, with the regime change in 1989, it became clear that these companies could not compete on the international market. As Minister of Industry, I saw the dramatic fall of the Hungarian manufacturing industry. These companies could not even compete at the low Hungarian wage level, but of course people wanted to live a better standard of living, like Austrians. This problem has not gone away, and now it seems to be returning, as the policy of re-industrialisation is once again focusing on production. On the one hand, there is a push for the establishment of battery factories and automotive plants with low to medium added value, while on the other, the desire to bring society closer to Austrian standards is still alive.

It is therefore legitimate to ask why at this point economic policy is increasing the exposure of the Hungarian economy to the automotive industry, since it was already a truism ten years ago that our economy was too dependent on the automotive industry. In the past, at the beginning of the regime change, there was sufficient justification for setting up such plants, since they created jobs at a much higher technological level than the existing ones, even if only mainly of an assembly nature. In two decades, a new industry has indeed developed, and the people who were fit for military service are now working. The situation for battery factories is therefore quite different from that which justified reliance on industrial working capital imports after 1990. It is now foreseeable that manufacturers will largely import workers from abroad. Moreover, the activity is electricity and gas intensive, with serious environmental risks. Will they import more demanding activities? Let us remember that when the German car companies came to Hungary, for the first decade or two they were largely involved in assembly and parts production. Only later did they start to move into research and development. However, the German automotive industry is structurally and culturally much closer to us, so we have a better chance of being integrated into the whole production chain than the big companies in the Far East. I find it hard to imagine a Chinese battery factory bringing a strategically important activity to Hungary that is at one of the happier ends of the smile curve.

If things are so clear, why is the government supporting the entry of Chinese battery factories?

This is not easy to answer because, although official government strategies mention higher added value as a goal, this is not what is happening. One reason could easily be the unfortunate division of labour in government. One minister is investing enormous energy in luring big industrial companies to Hungary. Another minister is in charge of state, budget support. In time, it turns out that there are physical constraints to implementation because the project lacks infrastructure, energy and water. But this is the responsibility of a third minister. However, once the process is underway at the top political level, the project has to be invested in. Of course, from the point of view of social well-being, what is needed is not the kind of infrastructure investment that the factories that are going to be built need. So, in the end, infrastructure will have to be developed with a substantial public subsidy. So, one minister wants to force industrialisation without addressing the issue of state aid, even though the projects involve a significant public investment at a time when the budget is in a dire situation. I do not understand why these discussions are not held within the government before a decision is taken.

In the process, it soon becomes clear that there is not enough labour in the region. The unemployed do not live in the big cities where these factories are located. However, once a readiness point has been reached, it is in the interest of all decision-makers to start production, so foreigners have to be recruited because of a lack of domestic labour. Yet demographic trends over the past decade have shown how a broad section of the workforce is retiring, while a growing proportion of the mobile, young workforce will no longer be in the country. This demographic problem can only get bigger over time. But it's not just a quantitative shortage; the industrial capacity that is being pushed now includes jobs that here in Europe feel almost like 19th century. People here are not prepared for the long, monotonous working day. Then the manufacturer really has no choice but to bring in workers from third countries. It is a sorry dead end, and one that we are driving ever more impetuously down.

The number of foreign workers is constantly increasing, with official figures showing that there are now nearly 100,000 foreigners working in Hungary, compared to 60,000 three or four years ago. The chairman of the catering industry association said that they work much more than Hungarians for two-thirds as much pay. This does not sound good for Hungarian workers.

It is not just a theory as to how much it does not sound right. We have seen a number of examples of how a rapid influx of foreign workers has caused problems in a country's labour market. This can be a problem even when well-qualified workers are coming, but this is not always the case. In Germany in the 1950s, motivated young men were brought in from Yugoslavia or Turkey to rebuild the destroyed infrastructure and replace the dwindling middle class after the war. Each had a complex impact on society, on the labour market. Here, a new situation may suddenly arise. It is no longer the case as it was in the past 10-15 years, when Ukrainian guest workers came to the construction and agricultural sectors on a supplementary basis, not en masse. Now, factories that are huge by our standards spring up in isolated spots. The number of guest workers in those cities will necessarily grow. It may well be that the wages of contract workers in a given industry or field can stymie the rate of wage increases. So the problems of Hungarian employment, the problem of long-term unemployment and our regional problems will not be solved by importing foreigners, while new problems will arise. Partly cultural, since society is not prepared for this situation. The factories are located in such a way that there will be municipalities where thousands of foreigners will arrive in a short space of time.

Do we not benefit from it even at the macroeconomic level? After all, these factories add substantially to GDP.

It is quite possible that politicians are not aware of the meaning of the metrics. Gross domestic product (GDP) is one thing, national income is another. The fact that the entry of new capacity as a result of capital imports increases exports and, of course, imports because of the high import share of the production in question, does not make people live much better off. The question is domestic value added and how much of it goes to whom. In a capital-intensive production, the share of capital income in the GDP generated here is significant. The profit, on the other hand, belongs to the capital owner. So what is left here? The tax content. It belongs to the Hungarian state, but often the tax is "negative", because the state basically pays the wages instead of the company for the first few years as a subsidy. What remains is the salary. Indeed, this part of the new value stays at home. It can be significant, provided that well-paid Hungarian workers are employed in the factory. But if they are foreigners, this is no longer true. In other words, although GDP, exports and the industrial production index will indeed be boosted by these factories, national income (GNI) will not increase at all by the same rate.

This case also points out that there should be more discussion in this country about the fact that GDP is not a suitable measure for everything. Other indicators measure a country's well-being and quality of life. For example, per capita consumption is a more direct indicator of growth in national income. In this respect, it was a big news story that Romania overtook us in real consumption, and by 2022 we were only behind Bulgaria in the EU. We can disagree about the comparative figures and talk about what problems there are elsewhere, but the indicators of economic trends show that it is simplistic, and even wrong, to think that it is enough to bring foreign capital into Hungary to kick-start the economy. It is clearly not the case.

In the book Economic Systems and Regime Changes, published in honour of your 70th birthday, one can read about missed opportunities for catching up. And from our conversation just now, I get the feeling that you don't expect rapid growth in the future either.

Governments have responded to the 2008 crisis in different ways. Re-industrialisation has even been mentioned in the European Commission's documents, but it does not mean forced industrialisation. Europe, Hungary, needs better industry, not more. It is sad that we are having to discuss this now, because we could have had a decade and a half to go down a better road. And yes, there are examples of success. The Baltics, working closely with the Nordic countries, have made great strides in this direction. In other words, we are not talking about an impossible mission, but a path that can be taken. That is why we should not believe the voices that say that here on the periphery there is no other way. So those who responded to the 2008 crisis by wanting to become more part of the European value chains can now show success. But those that have turned to the "old" industry, like Hungary, have had a persistent problem with productivity growth rates. The structure of the Hungarian economy has made the country vulnerable to energy prices, labour conditions and external financing, which is why it is difficult to answer the question of what we should do now, given that our heavy weight in the automotive industry, with the addition of battery production, is becoming a given. The problems of the automotive industry are also evident in Slovakia, but, for example, Poland is much more diversified, while Romania is also on the right track, with service centres being set up in many large cities. In Hungary, much of the resources and money have already been channelled into industries that generate low to medium added value. We can say that there is nothing to be done, we can run after our money... Yet I think that we could make progress by investing in health and education, for example, if we integrated European education and research processes, networks...

...we have just been cut off from Erasmus.

Well, you see, even as we speak, one can't help but sigh that it's gone. It would be nice if we could at least move up in Europe through education. What is certain, however, is that the country does not need two or three or four more assembly plants, and that is not the right direction. Not a single coin should be used to subsidise such investments. The good news is that economists know what more money should be spent on, which would lead to the well-being of society, and the chapters in this book are worth reading. The bad news is that we are not going in that direction. In the past, we had a decades-long development advantage over the region, but unfortunately we no longer have that.

Photographs on the cover and in the article: Ákos Stiller/Portfolio