Catch Up With The West Or Go West?

Jonathan Knott, the British ambassador to Hungary recently quipped that London is the fifth biggest Hungarian town on the planet. Perhaps something of an exaggeration as things stand but probably not for too long. The Facebook group called Londonfalva (“London village”) had attracted a membership of over 22,000 by early 2013 – a good indicator of the number of Hungarians who work, live or intend to live in London.

The British capital is clearly in. There is not much specifically Hungarian in this respect; the United Kingdom and its vibrant hub has long been a magnet for young people and jobseekers from all over the world. Large-scale immigration and the increased mobility of the young and not-so-young from Eastern and Central Europe to the UK and elsewhere in Western Europe is relatively new but on the rise; so why would Hungary be an exception? Still, recent data on Hungarian labour mobility and migration has stirred debate in Hungary. Cross-border mobility may be commonplace for the Dutch or, for different reasons, the Poles or Romanians; in contrast, Hungary has been until very recently one of the few European countries without a significant record of emigration or indeed immigration. But those days appear to be over. The present situation radically differs from what characterised Hungary in the last half century or even during the twenty years after the political regime change in 1990, the dawn of a borderless era. The Magyars have proved rather reluctant to move. Until recently, that is.

Now, it seems, attitudes and values have changed drastically: a recent survey conducted by TÁRKI, a Hungarian research institute, states that 13 per cent of the adult Hungarian population plans to go abroad to work for at least weeks or months, another 11 per cent would leave the country for a couple of years, while six per cent of the population would plain and simply emigrate. The ratio of those considering some kind of migration is above the national average among males (22 per cent), those with secondary education (30 per cent), the unemployed (35 per cent), and to a remarkable extent among students (56 per cent).

Whether such survey results come across as surprising or obvious can be properly judged if they are looked at in wide angle, longer timeframes and in comparison with countries in a similar situation as Hungary. One cannot look back much in time since such surveys were not around in the People’s Republic of Hungary before 1990, when citizens did not have the option of pondering as a realistic life strategy working abroad or emigrating for economic reasons. At that time, even studying abroad was a privilege enjoyed by the few. Interestingly, in the 1990s, when borders were already open, only 1 percent of those surveyed planned to emigrate for good, and only 5 to 6 percent were attracted by the idea of a shorter or longer period of migration. That has all changed: since 2008, the rate of those with migration intentions has risen, albeit with some fluctuations, to around 16 percent. This figure, methinks, is a serious sign. Obviously a sign remains just a sign, such intentions only partially materialise if at all. Still, when one reads that half of all students over the age of 18 imagine their life outside their homeland on a longer term basis, that has to be taken seriously, even considering that the mobility of the young has radically increased. The actual migration rates, meanwhile, have grown to a thought-provoking if not alarming level.

As far as international comparisons go, other countries of the region have had a much longer history of labour mobility and demographic movement than Hungary. Looking for shorter or longer employment is more typical of the region than outright emigration: a noticeable proportion of the workforce of the Baltic States, Poland and Romania left their homeland since these states obtained EU membership, or even before that. Economic migration reached significant proportions from the beginning of the 2000s even though some EU member states (among them the two most obvious destinations for workers from the east: Germany and Austria) took advantage of their rights to apply labour market entry restrictions as provided by EU regulations and for seven years did not let in any legal migrant workers. The British, Irish and Swedish, in contrast, decided to keep their labour markets open at the time of the EU enlargement in 2004. For a while, everything went well: the number of employed grew in the “open” Western economies as their markets absorbed lots of Poles, Lithuanians and others. The GDP of the British, Irish and Swedish economies also grew in tandem. And in the sending countries, their high domestic unemployment rates began to ease, while their balance of payments also improved due to the transfers sent home.

But then came the international financial turbulence at the end of 2008, and the recession which followed in its wake. In Western countries, companies suddenly stopped demanding labour, and unemployment began to grow throughout Europe. Not entirely surprisingly, local communities became sensitised to the presence of migrant workers. 2008 may have been some time ago, but the economic boom has failed to return to Europe ever since. However, with the legally mandated seven years passed, the German and Austrian restrictions were lifted in summer 2012. The move partly explains a new wave of migration, and this time one with Hungary also involved. This is a new phenomenon forus: we are experiencing noticeable net outflow, and one not just about seasonal jobs or short term employment as before, but increasingly people are emigrating for good. Here is the German data: in the first half of 2012 there were 25,000 immigrants originating from Hungary, whereas 13,000 persons moved to Hungary from Germany: in other words, a migration surplus of over 12,000 in favour of Germany.

Labour statistics also show a sudden lurch: at the end of September 2012, according to Austrian official labour data, 52,000 Hungarian employees were registered as working legally in Austria, a figure which represents a steep increase. The number of Hungarian workers was nearly as high as that of the Turks; and higher than the Polish or Romanian numbers. You may find this natural: we are neighbours after all. However, Turkish or Yugoslav economic migration has had a history of over fifty years, and, for historical reasons, first the Poles and later the Romanians set out to look for migrant jobs earlier and in larger numbers than Hungarians.

The whole phenomenon is remarkable. Even five years ago we took it as fact that the Hungarian workforce was an immobile force: Hungarian labour was in the main not just unwilling to move to well-paying British or Nordic labour markets, but even refused (although in many cases was unable) to move even from one Hungarian county or region to another for a job. But things have quickly changed now leading to a genuine turn in behaviour patterns. We are just at the beginning of working out the reasons for the turnabout, as well as its social and economic consequences.

Beyond work-related motives, a variety of migration purposes exist. Some migrate to spend their retirement years abroad, others are just longing for a better life, more money or political stability. While Western societies have for long been relatively open, the Hungarian story differed a lot from Western Europe’s for quite some time: after the vast exodus following the defeat of Hungary’s anti- communist Revolution and freedom fight in 1956, both our emigration and immigration levels remained low for decades. Although at the end of the 1980s and at the beginning of the 1990s there was a temporary uptick in immigration, predominantly of ethnic Hungarians from the neighbouring countries, this gradually slowed to a trickle. Less job opportunities here may also have played a part in the decision of, for example, Transylvanian Hungarians (and not only Hungarians) on the move to choose countries west of Hungary as their preferred emigration destination.

“Go west” seems to sum it up: surveys show that half of Hungarians asked mention Austria, Germany and the United Kingdom as their top three destination countries for emigration (followed by the United States and Canada). And it is not only about intentions, as seen from German statistics: a new migration situation has arisen. The motives of the emigrating Hungarians are diverse: the reasons why our Nobel Prize winning writer moved (or rather emigrated) to Germany, and a star musician settled in Austria are obviously very different from why unemployed Roma people from Miskolc (a struggling city in the north-east of Hungary) travelled to Canada in large numbers – until Canadian authorities concluded that enough was enough. Cross-border migration goes hand-in-hand with globalisation: the world has become more open, and due to advances in transportation and communication conditions moving abroad is much easier now than a century ago, or even just twenty years ago, which explains a lot how global migration has increased. However, the balance of migration of a particular country is a complex issue. What exactly made Hungary’s migration balance turn negative?

It is worth considering, on top of hard economic data, softer components such as those surveyed in an international study by the Nielsen market research institute at the end of 2012. Its results indicated 88 per cent of Hungarians perceived the country’s economic situation at that time as “critical”. Some 85 per cent of those called the situation as “recessional” (accurately it has to be said, given the contraction in GDP in 2012) and thought that there would be no economic recovery in the following 12 months. It revealed an extraordinarily pessimistic public mood, even set against the moody public opinion data elsewhere in Europe.

According to the Nielsen study, which covered 58 countries, public opinion in Europe was largely pessimistic at the end of 2012: 64 per cent of those who felt the existence of a crisis thought that their country would not emerge from recession in the next 12 months; whereas in North America the corresponding figure was 55 per cent, in Asia, Australia and Latin-America around 40 per cent, and just around 36 per cent in the Middle East and Africa. Incidentally, macroeconomic data shows that the set of phenomena called “global” crisis is a misnomer: it is the advanced world (Western Europe, the United States, Japan, and closely connected regions) that have suffered recession. Problems abound elsewhere too of course, but other parts of the world are experiencing slower growth rather than recession, a significant difference.

Within a gloomy European continent then, Hungarian society appears especially pessimistic and anxious. Here, uniquely in Europe, the number one problem is the financial burden caused by outstanding loans: 21 per cent of Hungarians are mostly worried about their financial debts (compared to 17 per cent of Greeks, 15 per cent of Romanians, and 14 per cent of Irish). It has been well known since 2008 that Hungarian households have become excessively indebted, primarily in foreign currencies. Since then numerous government efforts have been made to find a solution for them, although recent government measures have tended to ease the situation of the better-off. Hence, in such an economy with a soaring unemployment rate and stagnating real wages, it is no wonder that so many households are worried about their debts. This leads us on to an important and well-documented aspect of the problems: the economic situation. What particularly bothers me is the loss of impetus in the Hungarian economy: dynamism has been simply lacking for many years now. Statistics present us with some alarming facts: the level of economic output fell by 1.7 per cent in 2012. This is a serious drop: among the 27 member states only Greece, Portugal, Cyprus and Italy had deeper recessions. It should be noted that the fall was not as deep as that in 2009, when the recession of almost 7 per cent was far worse than the European average or indeed that of our neighbouring countries. But the 2009 fall – even if not its exactrate – could be explained by the intense international monetary turbulence at the time as well as the fall of European demand which it caused, all compounded with a credit freeze. In contrast, 2012 was a lack-lustre year in Europe, but not for all economies: the problems were concentrated in the southern part of the continent, while several northern countries and even some healthier Central and Eastern European economies managed to grow. Unfortunately, Hungary was not among them, the government blaming external circumstances and bad weather hitting agriculture for the local recession.

One should caution against drawing damning consequences from a single year. In Hungary’s case, it is not 2012 that worries me. Economies can experience some bad years as we have seen in our region. Poland had a couple of years of stagnation after 2000 even with a favourable external business climate. Before that the Czechs went through a bad patch due to a sustained bank crisis. Slovakia’s period of record growth from the beginning of the 2000s was also preceded by a long deep crisis in the second half of the 1990s. Hungary’s problem is not that there was a recession in 2012 or that the gap in output was widened between its regional peers, Slovakia or Poland boasting around 2 per cent growth last year.

The real problem is that we lost pace long ago. In Hungary, contrary to other new EU member states, the economy had lost its momentum even before the outbreak of the crisis at the end of 2008. In Hungary, a recession-cum-stagnation has been going on since the middle of 2006: the growth rate has not been able to exceed the 2 per cent per year mark ever since, not to mention the two years when the economy even shrank. Although the average Hungarian growth rate was 4 per cent from the end of the 1990s to 2006, its economic dynamic was driven by strong inflows of foreign capital, as well as by the growing indebtedness of the state, municipalities and households. The accumulation of debt, unsustainable in the long run, helped to keep the economic growth rate above its natural level for some time, until finally the then government was forced to make a drastic correction under the EU’s excess deficit procedure which was triggered by our massive budget deficits. Hungarian GDP growth, following the success of the first decade, started first to approach the average of the other transitional countries before falling below it. Strangely enough, our continuous catch-up with the EU average stopped right after 2004 when we gained full membership. Joining up brought us a set of economic and diplomatic advantages as well as a significant amount of transfers by dint of being a less developed member. Each and every new member state managed to get closer to the EU average between 2004 and 2012, with the exception of Hungary: the already better-off Czechs and Slovenians as well as the Baltics, Slovaks and the Polish, who started off behind us. Poland overtook Hungary in GDP per capita terms in 2011, Slovakia two years earlier. It will not be easy to close our relative lag: according to the European Commission’s recent winter forecast, the Hungarian economy will stagnate in 2013 (-0.1 per cent), and possibly slightly grow in 2014 in contrast to the much more favourable Central European average growth forecast. The World Economic Outlook of the IMF, released in April 2013, forecast a flat year for 2013, and a 1.2 per cent growth for 2014– again less than in most countries in the region. Hungary is a regional exception.

As I have been saying in columns for years now, efforts by governments to strengthen the Hungarian economy have been plentiful but largely unsuccessful. Domestic suppliers’ programmes, cluster and industrial park developments have been launched, financed mostly from EU funds, part of a series of public initiatives to boost productivity. On the other hand, politicians have spent much money to woo economically inactive segments of society. As voters these segments can be politically active or can easily be made active; but buying votes this way is very costly. We have witnessed numerous election promises (both broken and kept ones) aimed at winning over current and future pensioners, those receiving social transfers, and the employees and clients of loss-making state-owned companies – constituencies that have a stake in big government. We still remember (winning) election slogans such as “more money to the people, more money to the municipalities”. And the voters did not raise the obvious questions: How will the municipalities or “the people” have more money? Out of accelerated economic output? Or from taxes collected from “the people”? Or – as it turned out – from public borrowing?

It was not without reason that the crisis of 2008 hit the Hungarian economy more than other new member states. Deficit and debt indicators are high, not enough people create value and income (legally) in Hungary, and too many live on state redistributed social transfers. Those with jobs work long hours – and, according to data on the foreign-owned sector, efficiently –, but the rate of economic inactivity of the Hungarian society, by European standards, has been high for long years.

The new government in 2010 was right to set as one of its main goals the invigoration of the economy and the restoration of the “prestige of work”. The government indeed introduced fundamental reforms in the system of social provision, unemployment benefits, early retirement pensions and disability pension systems. However, besides the announcement of the justified restrictive corrections, the government could not resist seeking popularity by tinkering with the pension system: it facilitated the retirement of women before their pensionable age – a benefit 100,000 took advantage of, as data later showed. Then there came the unexpected act of forcing older judges into retirement, a very questionable measure that – not surprisingly – turned out to be clashing with our constitutional norms as well as EU laws. Instead of an elegant withdrawal, the government extended the restriction to work above the official retirement age for all categories of public employment, just to fight off charges of discrimination. No wonder that employment statistics do not improve: labour market activity increased only due to communal work projects, supported by taxpayers’ money.

We could keep on listing high profile plans, public initiatives and social programs aimed at invigorating the economy – and still the economy refuses to grow. As for the concept of economic growth, an elementary rule has to be recalled even if it sounds a truism: any form of economy needs labour (workforce) and capital (physical and financial). Commonplace or not: there is no growth without capital formation, the indicator of which is the rate of investment. Now, this rate has been on the decline in Hungary since the middle of the 2000s, and in the past years investments made have not been enough to replace the physically obsolete fixed assets, let alone to increase capacity. This is why the demand of companies for workforce is not increasing: there are few new plants, and, in addition, the business outlook is not rosy either. Cancelled investment plans will never turn active. Investment projects postponed may fail to ever come about. Shrinking capital stock holds back future economic growth.

However, a cure for such a state of affairs does exist as proved by a successful European case. By making its labour market more flexible, its educational system more efficient, and by supporting research and development, German economic policy contributed to a turnaround. After weak years around 2000, the German economy has become the engine of European growth again, while at the same time the federal government has not given up the principle of financial discipline either. The Germans have remained advocates of tight state budgets ever since. Although the budgetary policy of most European countries loosened at least for a short while during the crisis after 2007 (supported by Keynesian policy arguments), once the recession of 2009 was over, it soon became objectively necessary to control the public debts accumulated during and after the crisis.

In many other countries, however, social relations, conditions of capital formation, institutional factors of competitiveness did not work out as well as they did in Germany, thus austerity measures turned out to be painful, bringing little efficiency gains on the short run. One of the documents of the 2012 general assembly of the International Monetary Fund elicited heated press reaction by revealing that financial restrictions had led to much greater contraction than previously forecasted on the basis of earlier factual data, especially in the southern periphery of Europe. This research note became political dynamite, as the figures gave strong arguments for those opposing the policy of austerity. Unfortunately, the relation is reversible: increased public spending from borrowed money seems to lead to less additional growth surplus than previously experienced, while the next generations are left with the terrible financing burdens of public debt. You can repeat a hundred times that austerity is not a solution to the European situation, but then you can also add that public spending is not a solution either.

Let us place the Hungarian economic processes in these European circumstances. In Hungary, the huge decline of 2009 was followed by growth in 2010, although minor. The deficit rules of the EU and the conditions of the joint EU–IMF loan contract made it impossible for the incoming Orbán cabinet to apply a one-time increase of public deficit in order to “kick-start the engines of the economy”. What could not be done then, the government did try a year later: in 2011, by spending half of the assets of nationalised semi-private pension funds, and by imposing taxes on banks and some key sectors, the government applied a fiscal stimulus to the Hungarian economy. The result was disappointing; growth could not even reach 2 per cent a year. Kickdowns failed to accelerate the engine of the Hungarian economy. Then came the recession of 2012: banks had both limited ability and willingness to grant loans, leading to a halt in industrial investments and an astonishingly low number of home constructions; this situation proves what I have mentioned above concerning the role of capital in economic growth: a modern economy is unable to perform without capital.

Interestingly, in today’s open world economy capital shortage can be eased relatively quickly, since there is enormous amount of funds in the world looking for investment opportunities. If the owners of capital believe that return is nice and secure, they will be willing to come forward with their savings – it holds true for domestic and foreign capitalists alike. In the spring of 2013, the Hungarian state was able to issue international dollar bonds, although at a high price, illustrating that it is possible to acquire loan capital.

For an economy to grow, numerous factors are needed, and many of them are very difficult to change, and fall outside the scope of this piece. What can be stated: a lack of dynamism has characterised the Hungarian economy for many years now. Slow growth under favourable external circumstances, a sharp decline during the European crisis, and poor output results in the fragile post-crisis economic environment, have been the story of the last decade during which various governments have tried different measures and policies, all to no avail. Without economic growth the sustainability of the public debt stock is questionable – credit rating agencies recognise it clearly when they place Hungarian public debt rating in the risky (“non-investment grade” or “junk”) category.

Catching up, converging – the thought lives in individuals just as much as in politics. The Hungarian public has indeed been concerned about catch-up, people frequently ask when we will get closer to some desired target. Some years ago a pseudo-professional case dominated the political dispute: how many years it will take for Hungary to reach the EU average (or three quarters of it, or Austria, or some other arbitrary indicator). I call it pseudo-professional as although real convergence is a genuine professional issue, reaching an arbitrarily chosen reference level, and the estimated time requirement of attaining that level have degenerated into a game of political promises. It is over now; there has been no convergence worth the name since 2005, so it does not make much sense to ask the question: “how many years will it take to reach the EU average”.

The goal of catching or ”keeping up with the Joneses” pushes politicians to force economic growth which, in turn, fuels voluntarism in economic policy making – a phenomenon that has reappeared in Hungary. I say ”reappeared”, as we have experienced voluntarism time and again. During the planned economy era, economic common sense was widely discarded in the pursuit of unrealistically determined plan targets. Convergence dreams are somewhat similar. I have been following for years how political parties, public personalities and opinion-makers in the powerful media speak of such a historic event as EU accession exclusively in terms of catching up with wage or pension or EU average in comelevels. Let us not be naïve: the public judges Hungary’s situation and relative international position not in terms of productivity or integrity of public life or the savings rate or foreign language skills, but in terms of consumption and income measured against our rich neighbours.

To approach the national income level of the member states is not a condition of entering the EU or joining the eurozone – luckily for us. Gaining membership does not automatically mean swift convergence, with tangible improvements in your everyday life – unfortunately. There were, however, some voices like those of Jörg Haider, a populist Austrian politician opposing the enlargement of the EU, who would have set as an accession criterion a certain level of material advancement (say, 75 per cent of the average wage of the core member states). Accepting such a proposal would have meant postponing the enlargement for decades. Hungarian, Polish or Lithuanian wages were a fragment of the average of the EU15 then. The level of wages and pensions basically depends on the income-generating ability of the Hungarian, Polish and Lithuanian economies, and on income distribution within those societies.

On the whole, EU membership has indeed contributed to faster growth within the region, and, in most cases, the dynamic growth of real wages. For all the economies of the region, remarkable additional growth was derived from our entry into the biggest economic and commercial organisation of the world. Mutual cancellation of customs barriers, opening of national markets, the absorption of European norms into national standards had already taken place well before the accession as part of the preparation for the common market conditions. We, in this region, have already paid the costs of alignment.

However, the nations have not equally benefited from the advantages of the membership. As already mentioned, the more well-off Czech society which started from 65 per cent of the EU average GDP per capita climbed to 75 per cent in one and a half decades; Slovakia surged to 65 per cent from less than 45 per cent during the same period, the Poles rose to 55 per cent from under 35 per cent. A methodological remark: GDP per capita at local prices is an indicator that provides the most favourable picture of the countries of the region as GDP represents added value produced in the territory of a country, but not only the incomes of the residents (the profits of foreign-owned companies are also included in the GDP data, although those profits belong to foreign economic actors). Moreover, the above measurement takes into account local price levels; East Central European prices, in the case of most product lines and services, are below the Western ones. We could find less glorious relevant macroeconomic indicators, according to which real convergence has been slower. Still, on the whole, it is safe to state that the CEE region has gone through a convergence process of historic dimensions in the last one and a half decades. In addition, a number of forecasts predict that growth potential for the region will be above the European average.

In this favourable overall picture Hungary is now the odd one out: from a 45 per cent starting position, we climbed to 55 per cent of the EU average in a decade, but unlike our regional peers, in the last few years we have been unable to continue converging. With regard to the move from 45 to 55 per cent, let us turn back to history. For a good part of Hungarian society, traditionally Austria serves as the country of reference. As Béla Tomka has shown on the basis of recent economic history books, Hungary was closest to Austria’s level of economic advancement in the years preceding the Second World War: our economic output per capita at that time reached 75 per cent of our western neighbour’s, better in fact than the 60 per cent level measured in 1880 during the Dual Monarchy. Currently Austria’s income level is well over the EU average, whereas we lag way behind at slightly over half the EU average. But there is nothing extraordinary about it. Modern international analyses show that since the middle of the twentieth century we have lagged increasingly behind: Hungarian GDP per capita was 67 per cent of Austria’s in 1950, 52 per cent in 1970 and only 42 per cent in 1980: the divergence between the two countries was the weakest in the 1950s. Now we are again at 50 per cent or below of the Austrian level; but the problem as outlined earlier is that we are stagnating.

As for a picture of the future life strategies of members of Hungary’s complex society, not too much can be deduced from the convergence data. The various social strata do not react to our advancement lag behind our traditional reference countries in the same way: the elderly and the less educated would not easily decide to emigrate even if their position deteriorates in absolute terms or measured against what they would consider fair. The young are obviously more mobile. Those of active age are exposed to all the different attractions of the West, depending on the type of their education and professional skills, though push factors as much as pull factors shape economic migration. Let us take the example of the Hungarian health service: its difficult present conditions influence the intentions of doctors and nurses as much as the attractions that foreign employment could offer. On a macro level, increased emigration within such a profession may not be remarkable; but the large-scale departure of doctors and nurses can lead to serious social tensions even in the short run. At the same time, those having less exportable professional skills will not move easily, or they require stronger push/pull factors to turn an intention to migrate into an action.

The conclusion then is that in the CEE region, and especially in Hungary, further palpable and lasting convergence is needed to stop the negative, self-reinforcing processes caused by the temporary or long-term migration of the young and the educated. It is easy to state such a goal but the question “how” is more complex. Knee-jerk government interventions can easily cause more harm than good. Convergence and divergence are complex social processes; it is pointless to offer a single and simple solution. Similarly, emigration and immigration are phenomena shaped by various factors. If one wants to make recommendations on future policies, one must study first the experiences of countries in similar situations since, as a rule, we are not alone with our problems.