logo

Hungary’s Competitiveness – Improvements or Fata Morgana?

imd2018

By 2018, the Hungarian (47th) competitiveness seems to have reached a relative turning point by ostensibly breaking the declining path that followed the year 2016.In reality, by this move, Hungary has just returned to the levels where it always belonged to.
Since the Hungarian competitiveness is covered by the dense fog of uncertainty in many domains (uncertainties over autocratic and anti-democratic governance, uncertainties over the structural reform plans of the new government, high dependency on EU funds, administrative burdens above the EU average etc.), the following months and years will tell whether this 5-places-improvement is a real and sustainable turning point or just a fata morgana at today’s sunshine.
As far as the changes in the dimensions of economic performance, government efficiency, business efficiency and infrastructure are concerned, the following observations can be made:
  • economic performance: despite the strengthfulness of the domestic economy (57 to 37) – trade to GDP ratio (7th in the ranking), exports of goods (7), gross fixed capital formation – real growth (4) – the economic performance has plummeted slightly from the 36th place to the 39th position by 2018. This change was mainly driven by the following factors: (1) the seemingly firm but withering employment situation in reality (e.g. the big share of public workers, the increasing brain drain, the shortage of qualified labour force etc.); (2) anaemic international investment position (direct investment flows abroad (63), direct investment flows inward (62)).
  • government efficiency: it has improved from the 54th position to the 48th one owing to the more disciplinarian fiscal policy (51 to 44), the more business and investor friendly tax regime (58 to 49, e.g. Hungary is the first in the ranking in terms of corporate tax rate on profit). While there are still areas requiring further and conceptional economic governance (social cohesion (52), protectionism (53), ageing society (62), consumption tax rate (62) etc.). For instance, Hungary is above the EU average in terms of people at risk of poverty or social exclusion by age and sex, or the net income of the upper 10% of the population has been almost 10 times higher than that of the lowest 10%.
  • business efficiency: it seems that the businesses in Hungary are to become more efficient (60 to 58). This change was earmarked by the improvement in productivity and efficiency (57 to 45) and the issue of financing has been in a better shape (54 to 52) too. Further improvements in this dimension require the government, at least, to (i) act in regenerating positive attitudes toward globalisation (63); (ii) to spark the supply of skilled labour force (63); (iii) and to increase the room for manoeuvre by increasing flexibility and adaptability (62) whereby the phenomena of brain drain (61) can be largely mitigated and the efficiency of small and medium sized enterprises (61) can be liberated.
  • infrastructure: it has moved up from the 41st place to the 39th Only hardly perceptible improvements have been recognisable in fields being highly relevant in the dawn of the emerging digital economy interspersed with the next production revolution (Industry 4.0). Still there are weaknesses in those fields, such as the digital/technological skills (60th) and language skills (59th) that are inhibiting the development of collaborative culture (technological cooperation was at 54th place) but also makes the Hungarian infrastructure beset with difficulties in keeping abreast with such transformations (e.g. Hungary is at the 56th position in terms of the use of digital tools and technologies).
All in all, the Hungarian economic governance has been seemingly achieving some improvements in the country’s international competitiveness, but it is mainly due to the more peaceful and promising European economic context.[1] Consequently, the fact that the Hungarian economy is highly exposed to shocks and is relying on external sources of growth (EU funds) are to be unquestionably continued. Economic governance should go beyond the ongoing practice of uncertainty generating jury-rigged policymaking in an effort to cultivate good governance and the sanctuary of democratic values within the European Union.

——-

[1] In terms of economic growth and business confidence, the year 2017 was the best since 2011. The forecasts have been continuously upwardly updated for 2018 due to the unusually good growth conditions (e.g. in 2017, Euro area’s growth rate was 2.4%, while it was 1.8% in Japan and 2,3% in the US).

See the more detailed analysis: IMD Competitiveness Yearbook 2018 (ICEG European Center)