Following its successful protection of the economy, Hungary’s economic reboot now takes center stage

Last year, the pandemic challenged countries, families, people and governments alike. In Hungary, we promised to create as many jobs as the epidemic destroys. Considering that by December 2020 there were once again 4.5 million Hungarians at work, we can announce that the Economy Protection Action Plan has reached its goal. Following a successful economic protection, our offense, namely rebooting the economy, will now take center stage.

The Economy Protection Action Plan was a success. It was a success because we remained loyal to the goals we have consistently followed for 10 years: The government made data-based decisions by listening to all stakeholders. Staying committed to the patriotic and pragmatic economic policy we began back in 2010, served as a guideline, and we remained committed to the vision of a workfare and knowledge-based society.

This patriotic and pragmatic economic policy organized our Action Plan around four key principles.

(1) The first principle was the pursuit of mutual responsibility and balance. In several Western European countries, the state and the workers alone (picture an indebted state that is handing out aid from taxpayers’ money) had to take on the burden of the pandemic, while in Hungary, this burden was shared among the state, the employees and the employers. This way, each of the three actors had to bear less of the burden. We managed to find a balance between offering short-term assistance and retaining our competitiveness in the long run. This is further underscored by the fact that between Q4 2019 and Q3 2020, Hungary’s external debt increased only half as much as the Eurozone average; meanwhile, we came out as a top performer in Europe in terms of preserving wages and finished toward the middle of the leaderboard in 2020 GDP growth. Hungary’s debt as a percentage of GDP increased roughly as much as the conservative Germans and Austrians. Regarding the structure of economic protection measures in the European Union, we can see that, guided by the fear of a social crisis, the majority of Member States have instead focused on aid and compensating for lost revenues.

(2) Hungary, however, opted for a different path: Besides preserving jobs, we strived to strengthen and create employment by stimulating investment. This is how we were able to end up in a situation where, even though debt rates have spiked almost everywhere in the EU in 2020, the highest investment rates were recorded in Hungary, Ireland and Estonia. With a 27 percent increase in investments, Hungary outperformed the V4 average by 5 percent and topped the EU average by 6 percent. This is going to become important with the reboot of the economy, once the restrictive measures have been lifted, as significant savings accumulated will reappear. Once trust has been restored, this money will seek out available products and services.

We have therefore stayed true to a workfare, knowledge-based society; we preserved and created jobs instead of handing out aid; we made adult education more attractive and provided a free, eight-week IT course for those who have lost their jobs. This last measure was even commended by the European Commission as “unmatched” in Europe.

There is a Hungarian saying: “Help yourself and God will help you.” This is also an economic principle, because when it comes to helicopter (free) money, as the Americans say: “There is no free lunch.” Free money would have increased the country’s financial vulnerability without any accompanying performance; plus, excessive relief goes against international recommendations. Behavioral economics has pointed to the fact that aid does not encourage people to work, even if hard work is what’s required in times of crisis. The UK government’s decision to cover 80 percent of wages, even for those who did not work, has created tensions. Many have received the same amount of money without having to work as those who went to work every day. Meanwhile, the country’s leaders have admitted that the British economy may be on the edge of the biggest downturn since 1709.

It is also evident that people favor fair inequality. That is, they prefer equitable progress, over unfair equality. People feel and know that while work is constructive, aid is destructive. Prior to 2010, Hungary experienced the failure of the politics of aid and debt. This is why we stuck to our workfare model even during the pandemic. The success of the workfare model is not only made evident by the fact that in the third wave of the coronavirus there are almost as many Hungarians (4.5 million) employed as there were before the crisis; Eurostat’s data also shows that Hungary has led Europe in preserving wages. These two statistics, of course, correlate: Full employment ensured crisis-proof wages. While average wages in Hungary fell a mere 0.8 percent, according to Eurostat’s estimates, Croatia and Slovakia have seen a 12 percent and 9 percent drop in median wages, respectively, compared to 2019.

International statistics prove that Hungary’s performance is exceptional even on a global level, as real wages grew by 7.7 percent between December 2019 and December 2020, and the country’s unemployment rate has also stabilized at a low level.  The high wage growth is not a result of any statistical distortion, as gross wages also saw an 8.4 percent increase as of December 2020 compared to one year earlier. Thanks to its crisis-proof employment model, Hungary avoided the pressure of having to provide general relief, and economic policy could stick to the tool of targeted intervention. This way, Hungary could hand out support to those in need and allowed itself more room for deliberation. According to data from Eurostat, in most EU countries, wages plummeted to a higher degree than they did in Hungary, even after governmental wage compensation programs. This goes to show that the best way to manage the crisis is by adhering to a crisis-proof economic model where decision makers do not have to act as economic planners in managing the crisis (and implement the extremely complex economic mechanisms that come with this) because the model ultimately restores itself.

(3) The third guiding principle has been to protect the knowledge-base built up by Hungarian businesses. During our transformation into a market economy in the 1990s and following the crisis of 2008, policymakers invested relatively little energy in defending our decades-old industries and brands. Instead, listening to our economists blinded by ideological optimism, they allowed these businesses to be swallowed up mostly by foreign companies, in many cases, for the sole purpose of gaining market share. The knowledge available at Hungarian companies was therefore lost. If domestic companies and jobs disappear, the state will not be able to pay out any aid; if, however, we protect them, there will be no need for aid. This is why we have developed a wage subsidy program that is unique in Europe for those working in research and development as well as in innovative jobs and have also created an act that serves to keep an eye out for hostile foreign investments. In critical sectors, we are closely monitoring who — and for what purpose — is looking to purchase Hungarian companies that have been temporarily weakened due to the crisis and whether the acquisition of foreign ownership would pose a security risk.

(4) Despite the crisis, in addition to directly helping sectors affected by the emergency measures, keeping in mind both the medium and long term, we have been investigating since the very beginning how we can emerge from this crisis as winners of the global economic restructuring brought on by the pandemic. On March 11, 2020, the government decided on investment incentives worth HUF 877 billion within the framework of emergency measures, three-quarters of which helped small and medium-sized enterprises grow and made a direct contribution to protecting at least half a million jobs.

For the past year, we have sought to divert the attention of economic actors from short-term fears to long-term opportunities, as a crisis is always an opportunity as well. After 2008, multinational companies were willing to relocate their production to the East for an extra penny of profit, but today, security of supply has become the pivotal issue.

Certainly, Europe is one of the largest markets in the world, and within that, the V4 is the most competitive region. Some economic actors thanked us profusely, saying that while they had to stop production elsewhere, Hungary was the only place in the world where they could operate continuously and safely thanks to successful public health measures, which took industrial policy considerations into account. We believe that investment incentive schemes, together with continuity of operations, can make Hungary excel even within the V4. 

From now on, in the spirit of relaunching the economy, we continue to support investments. The new action plan will be implemented in three stages. The first consists of housing subsidies and soft loans, whereas the second and third stages will serve to build the economy of the future, with a focus on high tech and the green economy. The government will spend at least HUF 1.5 trillion on higher education, while the circular economy and green energy are also central elements of the action plan. The government has decided to use development funds worth HUF 6 trillion within the framework of its action plan, demonstrating that Hungarian economic policy will not be satisfied with mere survival.

In an economic crisis, the most revolutionary policy is one that seeks balance and preserves stability. Because when times are tough, a warm heart is good, but a cool head is even better.

The author of this blog post is Hungary's State Secretary for Economic Planning and Regulation.

Photo credit: Gergely Vogt