Hungary under Orbán: Can Central Planning Revive Its Economy?

Simeon Djankov of PIIE has a nice piece on Hungary’s political economy.

Since Viktor Orbán was elected prime minister of Hungary in 2010, the state has had a rising role in many sectors of the economy, either through nationalization, as in banking and energy, or through aggressive regulatory changes, as in insurance and retail. Economic policy in Hungary is moving towards centrally planned capitalism, similar to the economic development model pursued in Russia and Turkey. The apparent success and popularity of Hungary’s economic policy, in contrast to a lack of growth models in Europe, is moving some leaders in other former communist bloc countries to emulate Orbán, with the possible consequence of undermining the European Union’s structural reform efforts. The dominant political figure in Hungary over the past 15 years, Prime Minister Viktor Orbán shares three features with Russian president Vladimir Putin. First, both frequently refer to their countries’ imperial histories and the uniqueness and exceptionality of their societies, invoking nationalist memories of past glories and fostering an attitude that leads to aggressive foreign policy. Second, both Orbán and Putin consider the increasing role of the state to be beneficial for their economies. And third, both consider the Western European economic and democratic model to be flawed. For these reasons, in recent years Orbán has carved out a regional leadership niche as a proponent of closer ties with Russia and a frequent fighter against the European Union’s fiscal and foreign policies.

The main economic policies in Hungary under Orbán are fivefold. First, reduce the fiscal deficit to below 3 percent of GDP through nationalizing the second pillar of the pension system and levying higher taxes on the banking, telecom, insurance, and retail sectors. Second, nationalize some strategic assets, primarily in the energy sector. Third, increase the role of the state in banking through nationalizing some banking sector assets and restructuring the state-owned development bank and postal services to deliver credit. Fourth, create monopolies in certain sectors, for example the production of tobacco and alcohol products. And fifth, reduce mortgage and small business lending rates through government subsidies.

Will this strategy succeed? Unlikely as we have seen in the past. Worst is it is already leading to some followers of Hungary model:

The increasing role of the state has created greater opportunities for corruption. Dealing with this challenge may be one of Prime Minister Orbán’s biggest tests; previous scandals in Hungarian politics have shown how sensitive voters can be to allegations of corruption. Repairing Hungary’s relationship with the European Union, long regarded by Orbán’s administration as a public adversary, is another challenge. But the biggest challenge that Hungary faces is to establish a fiscally sustainable growth path, something that no Hungarian government has managed to do in the post-communist period. In the past five years, the European Union has been preoccupied with the euro area crisis and the continued problems in Greece and more recently Ukraine.

These crises have reduced the European Union’s opportunity to pay sufficient attention to Hungary. When the time comes, the major focus of discussion will be how to ensure sustainable economic growth for Hungary within the European economic space. Brussels is currently struggling to enunciate an economic model that can appeal to post-communist politicians like Viktor Orbán. Failure to provide a compelling growth model will result in an increasing draw towards interventionist state policies in other East European countries. The recent Polish presidential election has demonstrated how imminent this danger is.



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