Hungary will not catch up with Poland, let alone Austria - Zsiday

Lack of competition is the biggest problem in the Hungarian economy and the cause of low productivity,

said Viktor Zsiday, Portfolio Manager of Hold Fund Management, Citadella Derivatives Investment Fund, at the Portfolio Budapest Economic Forum 2024 conference.

He continued this train of thought in a blog post titled "The lack of competition".

"Over the past 15 years, labour productivity in Hungary has grown by only about 1% a year, which is terribly low. What causes this low rate? Probably a number of factors, but if I had to pick just one, the most important one, I would think it is the lack of competition," writes Zsiday.

1. The Hungarian government intervenes in the market in a myriad of ways, typically on an ad-hoc basis, which is difficult to predict and makes normal operation extremely difficult (regulations that change overnight, sometimes retroactively or immediately, special taxes, etc.).
2. In addition, the independence and speed of the domestic institutional system is often questionable. Without independent, professional and responsive institutions, there can be no well-functioning market economy.
3. In some sectors, there are only a few players, typically government-linked, and it is almost impossible to enter these.
4. In other sectors, the government supports some actors and penalises others, typically following the logic of socialism, taking from the more efficient and redistributing to the less competitive.
5. For economic actors, optimising to obtain EU and public funding is often much more profitable than competing in the market, which obviously distorts their incentives: if I have to be good at writing tenders, lobbying, God forbid corruption, I'm not going to focus on the market. It is a kind of "resource-curse".
6. There are also some elements of economic policy which, instead of increasing efficiency, are aimed at helping weak players, a prime example being the constant devaluation of the forint, which helps exporters in the short term but is harmful in the long term.

"The question is whether these factors will, or are expected to, change in the coming years. If not, then in the 5-10 year horizon, more than the 1% productivity growth of the past is neither expected nor realistic. In the 1-2 year term, of course, it is possible to revive the economy, even to the coveted 3-6% [growth] range, but in the longer term, it is almost impossible in this structure," writes Zsiday.

Until the above problems are addressed and there is real market competition in Hungary, we will not catch up with Austria or even Poland for that matter.

Cover photo (for illustration purposes only): Getty Images