Orban's Economic Model in Hungary Is Trump's Dream

(Bloomberg View) -- Can Donald Trump's dream of beating back globalization and lifting the fortunes of its victims actually work? With a third landslide election victory since 2010, Hungarian Prime Minister Viktor Orban proved that it can -- at least for a while.

Orban has been accused of creating an authoritarian government, setting up a Russian-style propaganda machine and playing to citizens' basest xenophobic instincts. But Hungary remains a functioning democracy, and his party, Fidesz, owes its success to an economic policy that grew wages and lowered unemployment.

When Orban took over in 2010, Hungary was near collapse. The country was soldiering through a Greek-style debt program administered by the International Monetary Fund and the European Union. He moved decisively to clean up the country's finances, slash the budget deficit from 5.3 percent in 2011 to 2.4 percent in 2012 (it was down to 1.9 percent last year) and pay off the debts to the EU and the IMF, cutting the share of foreign currency-denominated debt. To be able to do that, Orban nationalized Hungary's private pension funds and raided their cash stash. He introduced a flat 15 percent income tax (which greatly improved collection) and raised value-added tax to 27 percent, the highest rate in the EU. He imposed special taxes on sectors dominated by foreign-owned companies -- energy, utilities, finance, telecoms, retail and media -- taxing revenue and assets, not profits, to make optimization unfeasible. And he renationalized some key firms to sell them on to Hungarian investors, often to his friends and allies.

Over coffee in Budapest's Buda Castle, the chief economist at Szazadveg Ecoonomic Research Institute, the Orban government's key economic think tank, described the Hungarian economic policy. It was correcting for a flirtation with what U.S. economist and Bill Clinton's Labor Secretary Robert Reich dubbed "supercapitalism," Laszlo Gyorgy said. That system is dominated by global corporations whose quest for lower costs has led wage growth to fall behind productivity increases. Hungary, he told me, had lost one-third of its jobs during its post-Communist transition, compared with Poland's 20 percent and the Czech Republic's 10 percent. Between 1995 and 2010, according to Gyorgy, the share of wages in Hungary's economic output dropped from 52 to 44 percent. At the same time, key industries were dominated by foreign firms that exercised oligopolistic power and paid far less taxes than Hungarian businesses: The pharmaceutical sector, for example, had an 18 percent effective tax rate in 2010, while the average local mid-sized business paid 52 percent. 

In Gyorgy's telling, the Orban government merely set out to redress the injustice. The income tax cut and generous tax breaks for families with two or more children, funded by the special sectoral taxes (they yielded 1.5 percent of GDP last year) and the reduction of interest on foreign debt, drove up net real wages by 36 percent between 2010 and 2017. The economy only grew by 16 percent in real terms over the same period. The government has also spent extra revenues on generous social benefits like free schoolbooks and lunches. According to Gyorgy, Hungary redistributed 3 percent of annual GDP from capital owners to wage earners since 2011.

Helped by a favorable economic cycle and by a massive public works program that gave work to many long-term unemployed in Hungary's poor rural areas, unemployment dropped faster than in other eastern European countries. The Orban government boasts of adding 750,000 jobs to the economy since 2010 after promising to deliver a million in 10 years. In a country of 10 million, that's nothing to sneeze at.

Orban's Economic Model in Hungary Is Trump's Dream

When I asked Gyorgy if he saw a contradiction between such a leftist, redistributive economic policy and Orban's resolutely right-wing political stance, he protested. "It's not a leftist policy, it's a balance-setting pro-capitalist one," he said. "We don't want to give money to the poor unconditionally, we want to create a balance between capital and wage earners to give people a decent salary and enable them to consume more."

Essentially, Orban did what U.S. President Donald Trump has promised to do -- alleviate the effects of globalization on its losers, primarily low-wage workers. They have repaid him with their votes in the nation's poorer regions. But the government's glossy economic story fades somewhat when one considers the broader picture. 

Attila Chikan, now a professor at Budapest's Corvinus University and a member of several top Hungarian companies' boards, served as the economy minister in Orban's first government, in the late 1990s. He told me he wouldn't work for Orban again: Their economic views have since radically diverged, and the ex-minister has denounced the asset redistribution to Orban cronies as corrupt.

Chikan points out that Orban's fiscal victories, which have helped him offset his black sheep reputation with European Union officials, came at a price. Thanks to Orban's raid on the pension system, it's unclear whether today's 50-year-olds will receive any pension to speak of when they retire. "Orban has achieved his equilibrium at the expense of education and health care," Chikan said. "Today's higher education budget is half of what it was 10 years ago."

As for the added jobs, Chikan believes the government numbers are inflated. According to Gyorgy, about 100,000 of the 750,000 extra jobs came from the public works program -- but people in it work much less than full-time, going out to work only when their communities invent something for them to do. "If you work one day a month, it shouldn't count as a job, but in Hungary it does," Chikan says. Besides, the 750,000 number includes some 70,000 jobs held outside Hungary by Hungarians whose registered address is in their home country -- seasonal workers and cross-border commuters. Orbanomics had nothing to do with providing that kind of employment.

Hungarians have never been as mobile as Poles or the citizens of Baltic states, millions of whom left to work in the U.K., Germany and other Western European countries. But Hungary, Chikan says, has lost 400,000 to 500,000 people in the Orban years to emigration. Largely, these are educated, adventurous people driven out of the country as much by a stifling sense of missing opportunity under Orban's rule as by economic considerations. They aren't being replaced: Hungarians from Romania, who came in large numbers in the 1990s to look for work, have little economic reason to leave today. Romania grew 6.8 percent last year, compared with Hungary's 4 percent. Indeed, the Czech Republic and Poland both grew faster than Hungary last year, too. The Czech Republic did so from a higher base: It's wealthier than Hungary in terms of per capita GDP.

Eastern European countries haven't just been as dynamic as Hungary (or more so), they have also largely kept up with its wage growth (Hungary's was noticeably faster only in 2017) -- all without Orban's unorthodox "balance-setting" policies.

Orban's Economic Model in Hungary Is Trump's Dream

Hungary's neighbors are also receiving less money from the EU on a per capita basis. Orban's political experience and knowledge of EU levers is evident from his ability to obtain about 4 percent of GDP's worth of annual funding despite ostensibly fighting against what he sees as Brussels-led infringement on Hungary's sovereignty. "What kind of independence is it if it's EU-funded?" Chikan questions.

Orban's Economic Model in Hungary Is Trump's Dream

Orban allies view EU funds as compensation for opening Hungary's market to Western European firms that easily outcompeted local ones in the 1990s and 2000s. But that doesn't mean Hungary is automatically entitled to keep receiving it as it seeks to erase the competitive advantages of multinationals through various means. The economists I met this week in Budapest all told me that Hungary could only continue growing at 3 to 4 percent a year -- the normal rate for the region's economies -- if the funds keep coming. "In effect, the EU is keeping Orban in power," Viktor Zsiday, an investment fund manager and economic blogger, told me.

Perhaps that's not such a paradox as it seems, either. Europe may be wise to finance the experiments of Orban and other nationalist governments, such as the one in Poland, just to see how their results hold up next to neighboring countries' more orthodox policies. As long as the nationalists don't engage in gross macroeconomic and fiscal mismanagement -- and with Orban, that hasn't been a danger -- it's useful to watch different models implemented rather than imagined by academics. Europe, with its diverse governments, provides a unique opportunity for policy competition and comparison. Orban's experience is relevant to Trump's U.S., too: Some of his methods might just work there if the Republicans get up the courage to try them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

©2018 Bloomberg L.P.