Begegnungen
Schriftenreihe des Europa Institutes Budapest, Band 25:19–30.
INOTAI, ANDRÁS
The Hungarian Economy and Accession to the European Union
The success of economic modernization in Hungary as well as the gradual reduction of the backlog accumulated for decades (and to some extent for centuries) was very closely linked and depended greatly on West-European integration, as was very clear not only from the moment the system was changed, but it was evident already then for those who were preparing the economic reforms launched at the end of the sixties, but naturally then they were – consciously or not – hiding this fact. In the 1980’s getting involved in international monetary organizations seemed to be the possible way to go, while the institutionalization of the relations with the Community depended on the official contacts between the EC and the COMECON.
It is a long way out of “the cold”
The breakthrough came in the summer of 1988, and the well prepared Hungarian negotiating positions yielded their results in only two months: besides the legal recognition by the EC, we managed to sign the first trade and cooperation agreement. A funny twist in history was that practically without any effort, just following the Hungarian example, almost all of the Central and East European countries had a similar agreement within six months. Another one of such turns was that the accelerated speed of events threw almost everything into the waste bin in weeks, for which a highly qualified expert team had been preparing for 15 years. The PHARE programme, at the time developed exclusively for Hungary and Poland, was set up in May, 1989, and starting in 1990, a great number of our products could enter the West-European market duty free, or with significant duty allowances (using the GSP principle); in December, 1991 we could sign – accompanied by Poland and Czechoslovakia – the first (European) Association Agreement with Brussels, this time without any debate and counter-interests.
This Agreement was a milestone for many reasons. First of all, it determined the direction for Hungarian politics and economic policy for a decade since it defined the membership in the Union as the primary objective. Secondly, it made reference to the differences in opinion, for Brussels was not willing to commit itself to membership at a later date, even though the associated countries certainly considered the Agreement as the first indispensable step on the road leading to it.
Just as so many times in European history, the pan-European processes themselves, which started after 1989, seemed to help in solving this dilemma. The so called Copenhagen Criteria were drafted in June, 1993 which defined the general conditions for membership. The specific handling of the region became clear by this time in many aspects. On the one hand, the EU had never ever prepared any similar criteria before related to any of the countries which acceded to the Union (those were all set out in the Treaty of Rome, that is to be a European country and a democracy). On the other hand, one of the criteria specifically applied to the enlargement capacity of the EU, which no candidate country, even the most prepared ones, could influence at all. And thirdly, promises stayed at the general political level, without any schedule or road map, without setting any dates. This should have been the moment, at the latest, for everyone to realise that the EU had no idea whatsoever – except for political support – how to go about these relations with Eastern Europe, which they wished for and ideologically supported for decades, but which, after 1989, suddenly overwhelmed them, and most of all, there was no clear vision at all about the future of Europe, not only in terms of the “threatening” enlargement, but also in an environment of increasing global challenges.
However, the very fact that the Community had no clear vision and concept, and even more so the fact that it was very busy to implement objectives still defined in a divided Europe, goals which were mostly “inward-looking” (single market, monetary union, common currency), could not halt the dynamism breaking out from the new European realities. This process included extending to and ratifying the association agreements with practically all the countries, as much as the submission of the applications for membership (this too, was started by Hungary on 1 April, 1994), furthermore, the acceleration of economic and political transformation with all the tensions and social costs involved, and also the possible consequences of the civil war in Yugoslavia which was a deterrent to all. In December, 1995, they had to announce the expected date when the accession negotiations would start, and in the summer of 1997, the Commission finally presented its first strategic document on an enlarged Europe, naturally without a clear road map. Nevertheless, one thing became certain: accession talks with the first group of applicants who were considered to be mature enough – Hungary being one of these countries – could start in April, 1998. Later the „Luxembourg group” was joined by the „Helsinki group” in 2000, and this fact made it very clear that the EU had no political courage to separate these countries with very different levels and ways of preparedness, with different transformation experiences, with different competitiveness and social flexibility, and to implement a gradual, step-by-step enlargement in several groups. Though the Community Budget for 2000-2006 adopted in 1999 was building upon small group enlargements, as a matter of fact designated the year 2002 as a possible date for enlargement, already in 2000 it was clear that the political will opted for a different scenario. By this time the priority was not the correct and fair handling of the countries with different levels of preparedness and development, but rather the foremost priority for many countries was to prolong the enlargement process for as many years as possible. But this was not made possible by the inertia of the talks that were already under way, by the clear and firm direction the Swedish Presidency took, and last but not least by the recognition that delay might possibly incur serious economic and social-political costs. Thus for the first time the desirable date to close and finish the accession talks was set, and one could derive the possible date for actual accession from it, including the necessary ratification process in the 15 Member States of the European Union and in the European Parliament, as well as the referendum in the accession countries, except in Cyprus.
The historical significance of accession
1 May, 2004 was a historical date to all the accession countries, therefore for Hungary as well. It was not simply a return to Europe, from where we never really were separated in the geographical and cultural sense. It was much more about integration into the European value system, into the European institutional structure, it was about the dialogue, the behaviour standards, and last but not least, making Hungarian positions in the economic circulation of the Continent firm and stable. Most of all, however, it was a unique opportunity to enrich Europe, which, in the 21st century, had to find its voice and place amongst growing global pressures, risks and opportunities, and promote its comparative advantages in the widest international competition.
But ever since we have known when we would become legally a Member State in the EU, that is since the beginning of 2003 at the latest, the most fundamental task was to define the requirements and comply with them, which were needed so that Hungary could become a successful Member State in the European Union in a short period of time. Success is measured in two ways: first, the majority of Hungarian society must feel in a very short time span that EU membership brings us tangible prosperity and accelerated catching up. This does not appear all the time in an immediate increase in our personal incomes, but it must be seen in the transformation of the environment, including the modernization investment projects visible to all, in the creation of new jobs, in social and economic security, in the enhancement of predictability, in the spreading of European values in Hungarian public life such as the will to compromise, to carry on a dialogue, to tolerance, to respect for the values of others, and above all, to working and acting together in determining, defending and promoting the interests of the country. We think it is a success if Hungary can pursue an active, future oriented policy promoting and enhancing European competitiveness, if she can advocate interests and make compromises in a European way, and if she does not see in such action the giving up and betrayal of the hardly definable “national interests”, but rather the defence of strategic interests. Learning Community behavioural patterns is vital, and so is understanding the interests of others (even if our own interests clash with those), and making strategic and tactic alliances. But all this is possibly only if the country has a clear strategic vision covering the present and future areas of Community policy. Working these out has been an urgent responsibility for years, and the backlog in this field is much more than in case of any economic area or institution building; this latter one – as a short term task for public administration and economic activities – has been in the limelight all the time as a measuring gauge for the level of development.
Hungary’s maturity for integration – an economic perspective
Ever since 1997, the European Commission’s annual country reports have been considering Hungary as one of the most prepared in the group of candidate countries. The first of the economic issues of the Copenhagen Criteria, the condition of having a “functioning market economy”, has been complied with from the beginning, and the second one, on competitiveness, we met a few years ago.
However, it is worth looking at integration maturity from different aspects as well. Such as, for example, (a) real economic processes, (b) comparison with the level of preparation of the neighbouring countries or other candidate countries (c) successful action in an enlarged Europe in connection with present and expected Community economic policy priorities, and finally (d) in connection with global competition requirements set against the European economy as a whole.
(a) As a result of nearly a decade and a half of “institutionalised” adaptation, the Hungarian economy is one of the most integrated economies of the EU as compared to the other accession countries as well as to the old Member States. 75 percent of Hungarian export is directed to the Community, and after Portugal and the Netherlands this is the largest intra-regional export proportion, and it is well above these indices of all the other countries acceding to the Union together with us. After accession this will go well over 80 percent since trade with countries acceding with us will become intra-regional, too. But more important than that is that Hungarian trade with the EU clearly bears the signs of the developed countries. Even if Hungarian production relies significantly on import (technology), it is evident that structurally our division of labour is more developed than in the other accession countries, mostly due to the market compliant privatization process and the early and tight cooperation with foreign capital. Nearly two thirds of Hungarian export to the Union is made up of modern, high or medium technology products (machines, facilities, electronic and telecommunication goods, vehicles, optical products, medication, etc.). This proportion is 55 percent in the Czech Republic and Slovakia, 45 percent in Slovenia, 35 percent in Poland, and under 20 percent in each of the Baltic States in their EU oriented export. Another important point is that nearly 10.000 euros are paid for one ton of Hungarian export to the most important industrial product market for Hungary, while for the same amount of export, the Slovenians and the Slovaks get less than 6000, the Czech hardly more than 4000, and the Polish less than 3000 euros. The above mentioned structural differences do not develop overnight, just as you cannot eliminate them overnight. Economic policy naturally has a great impact on comparative advantages, whether we look at foreign trade or the choice of international capital to settle, but the deep lying micro-economic differences will prevail for a long time either as an advantage or as a disadvantage. Economic policy has a determining role in preserving the advantages accumulated with a lot of effort and cost (for example indebtedness, social sacrifices) throughout the decades, and in turning them to “yield their fruits”. Hungary was not very successful in this in the past few years. We used to be the only potential candidate that could accede to the Union in a way that she could separate (to tear away) economic transformation burdens from the burdens of adopting as a new Member State. Hungary had all the opportunity for this in 1998, however, she could not turn it to her advantage, unfortunately. No comprehensive, future oriented reform was born even with stable macro-economic conditions and fast growth (but we managed to step back into the past, we “managed” to turn around or at least to question the reforms that had been started, to get stuck at the higher level of the first stage of cooperation with international money, etc.) On the contrary, a populist-patriotic economic policy was started (especially after 2000), whose basic objectives cannot be questioned, but the ways of implementation and timing were very questionable. It was evident that increase in wages was “part of” European Union membership, the more so because in the first years of the 1990’s a significant restructuring of incomes took place to the advantage of capital (and investments). Thus evidently there was a productivity reserve to increase consumer demand. It was also clear that the exchange rate policy typical after the 1995 economic successes needed to be changed and that the successful modernization path of the Hungarian economy was very well indicated, among others, by the gradual revaluation (appreciation) of the Hungarian Forint linked to an increasing productivity. Unfortunately, however, both steps fell victims of short term political power policies, with all the related consequences. The increase in wages (started by a one and a half fold increase in minimum wages, then followed by a warm welcome in the civil service sector) reduced Hungarian competitiveness significantly just at a time when our delayed neighbours opened their gates wide to international capital (direct foreign investment) and learning from their earlier similar experiences, started to implement a restrained wage policy. A huge revaluation of the Hungarian Forint occurred at the same time, which also increased the cost level in Hungarian economy. Nevertheless, both could have been compensated for since most of the micro-economy was prepared for this (except the national “entrepreneurs” supported by “patriotic economic policy”, most of whom remained uncompetitive exactly because of such economic policy) if the two steps had not been taken by the government(s) on power at the time simultaneously, and especially not when the European economic growth rate was dropping, or particularly stagnating. The strength of Hungarian micro-economy is indicated very well by the fact that in spite of a number of detrimental economic political steps, it has been gaining strength since around the middle of 2003, the production structure got re-valued and appreciated, and could enter the Union with good chances. Assuming, of course, that the monetary (anti-inflationary) and budgetary policies will be well coordinated in the coming period, and the desirable harmony will be found between growth opportunities and balance requirements.
(b) Some of the international surveys comparing the economies of those countries which acceded to the Union together with Hungary warn us that Hungary was not in the leading group. This categorization could be expected based on the economic policy followed in the past few years, however, the question is to what extent you can compare countries with different levels of structural development using the same criteria. Because the latter ones – assuming the necessary adjustments – could very quickly deny the above, or similar “judgements”. Such is, for example, the ability to attract international capital or direct foreign investment. It is only natural that Hungary cannot get as much “fresh”, or new direct foreign investment as the Czech Republic or Slovakia, where real privatization evolved with several years of delay. At the same time Hungarian statistics until 2004 did not include the most important investment source in our country, namely the re-investment of the profit produced in Hungary by international companies working here. (This question is not really important in Slovakia, for example, because they hardly have any profits from the newly launched investment projects.) The capital balance is very much influenced by the fact that Hungary – as compared to her level of economic development – switched very early to capital export, that is to say to the otherwise positive balance of incoming and outgoing capital is far not enough to cover the deficit of the current account, meaning that external indebtedness is growing.
As for the countries which had acceded to the Union earlier, all comparison is a mistake and “unhistorical”. First of all, the global and European environment in which we accede is totally different than that when Greece was actually “adopted” and Spain and Portugal became Member States. Community policy is much more wide-spread, the pressure to adapt is much stronger (see: single market, monetary union, etc.), and the globalisation impacts are felt much more. Nevertheless we could say that Hungary is much better prepared with regard to almost all the economic indices to accede and get integrated successfully into a much more developed integration than any of the South-European countries were in the eighties. There are facts supporting and proving this statement, such as free trade with the Union before membership, the extent of trade relations, the commodity structure of export, the level of privatization of the economy, the competitiveness of the micro sphere, and the depth and quality of cooperation with international capital. The South-European countries needed derogation in all these areas, and it took them a long time to ease the (relatively) closed nature of their economies, and a huge Community subsidy was given to their budgets to overcome these problems from the very first moment of their membership (which cannot be said of us at all). The truth is, however, that the big advantage of those countries – especially of Spain – was the practically untouched institutional structure still preserving the experiences of a colonization history, which was not knocked down and torn to pieces after the collapse of the Franco regime, on the contrary, it was renewed and thus built into the European Union decision making process, naturally making Spanish “national” (or rather strategic) interests prevail.
(c) But a successful economic performance in the enlarged Europe cannot be founded solely on the evident micro-economic advantages and on the competitive advantages resulting from the economic political adjustments implemented from the middle of 2003, which will hopefully materialise very soon.
First of all: the environment in which the Hungarian economy will act after membership will be shaped mostly by Community economic policies. A lot depends on how quickly and how comprehensively can those economies which have a determining impact on the future of the Community, renew themselves, that is to say what reforms will they be able to carry through (Germany, France, Italy). It would be nice if the positive shock of the enlargement could provide the minimum critical mass so necessary for such reforms, but it is also possible that contrary trends will gain momentum and support in the period after enlargement.
Second: one of the key issues of the sustainability of the modernization process is the budget of the Union, the amount and possible structure of use of the financial resources available to Hungary (and to the region). Unlike the financial resources defined for 2004-2006 based on the principle of “remnants”, which provided a total of 1.5 billion euros at net value to the Hungarian economy in the first, and always very critical years after accession, in 2007-2013 based on the recommendation of the Commission (February, 2004), Hungary could receive an amount over 3 billion euros a year, which, according to our calculations, seems to be enough for successful modernization. Assuming of course that these funds will support Hungarian development priorities, and Hungary will be prepared enough in all respects to absorb these funds quickly and efficiently. Well, in this regard we still have a lot to do in our own backyard. Yet it would be worthwhile to think about the EU using some of this Union money to cross border infrastructural developments because in May, 2004 – except for the two island countries – a geographically united, singe European region will be part of the Union. This kind of development strategy could significantly improve the efficiency of using such available funds, and it would also carry a positive political message towards the entire region (including countries which are neighbouring countries but which will accede later than us), and it would significantly stimulate domestic and international capital to come and settle in this region.
Third: in a number of areas the liberalization process of the internal market of the EU will accelerate just after enlargement (energy sector, railway transportation, perhaps fiscal policy). This will provide some advantages to the Hungarian economy in spite of the lower development and financing levels because we were stronger in our liberalization process in the past ten years than a number of West-European countries, and also partially based on the transformation experience we have had, we were more flexible in adapting to the new situations. But we can make good use of our potential advantages only if not only the economy, but also the entire society is prepared to absorb the new. That is to say if it does not start out of risks, possible losses and inexistent threats, but rather it makes efforts to hold on to the arising new opportunities, thinks and acts with a future oriented mentality.
Fourth: in the coming years we will have to live together with the fact that the West-European countries will open up their labour markets only gradually to the Hungarian labour force. But the Hungarian context is different in this than the Polish one for example. Hungary has the lowest official unemployment rate in the region (6 percent), labour force mobility is extremely low even within the country, which is rather a barrier to a quicker re-structuring. Besides, the free movement of labour has not only advantages, but also disadvantages, above all in the economies which are going through the most critical phases of modernization. On the whole, advantages outweigh disadvantages if – partially due to the restriction – direct foreign investment comes to Hungary and creates jobs here, instead of Hungarian labour leaving to find these investments. Therefore the consequences of the labour market restrictions in the coming years could be turned into a significant competitive edge with the right corresponding economic policy.
Fifth: we need a clear economic political road map in order to know when and with what kind of an economic competitiveness (and at what fixed exchange rate) can we join the monetary union. There are several views on this. Some people opt for joining as soon as possible (however, we do not comply with a number of basic economic requirements to do so), others support the gradual approach. On the one hand we need an economic policy that generates trust and confidence within the economic sphere towards the government and is clearly committed to compliance with the Maastricht Criteria (especially the reduction of the budgetary deficit and of the inflation rate). On the other hand, the instruments used to achieve the above objectives and the time span must not choke a healthy economic growth and permanent structural modernization. Working out a clear road map will enhance trust, but one must also consider that external factors may change the dates set by such road maps. The Hungarian road map could be influenced and changed by problems regarding the common currency of the Community (re-defining the requirements or interpreting them differently, problems of competitiveness among the Member States, the relationship between the euro and the dollar), or the euro related policies of the newly acceded countries (the demonstrational impacts of early or late joining of the euro-zone). In case of all scenarios and road maps, the implementation of an economic policy that promotes the quick and permanent increase in Hungarian competitiveness is imperative.
And finally sixth: the trade and capital relations with those countries that acceded to the Union together with Hungary will have a significant impact on Hungarian competitiveness and economic performance in the coming years. As of 1 May, 2004, all the trade barriers that we had been witnessing so often – the short term beneficiaries being the producers and the evident losers being the consumers – will be terminated once and for all within the frameworks of CEFTA. The dynamic development of regional trade will most probably follow from this. International and Central and East European capital movements will support it, too because a number of translational companies will transform their strategies as corresponds to the requirements of an enlarged Union. It is worth mentioning that the amount of working capital export of Hungarian companies (or those working in Hungary) was over 5.5 billion euros at the end of 2003, which is well over the “performance” of the other countries of the region in this field (the next in line Czech Republic and Slovenia Article are under 2 billion euros, each). One can also expect a significant interest in the site advantages for the head office in the new Member States coming from the smaller and medium size West-European companies. In the past, these companies decided not to have international production or services due to legal and institutional uncertainties, in the future, however, partially due to the wish to meet the challenges of increased global competition and partially because of the negative impact of the domestic environment on competition, probably will enter the markets of the new Member States in great numbers.
(d) It is a vital interest for Hungary to be a full fledged and active member in a globally competitive integration which is not lagging behind in international competition. Hungary can play this role in several areas better than a number of current Member States. True enough, our level of development measured in per capita GDP is at around 55-60 percent of the European Union average. Yet our growth rate is well above the Union average, and no income gap separates us from the less developed Member States. As a matter of fact, if we adjust the official Hungarian statistical data with the performance of the “grey economy” not included in statistics, and we add the EU funds that the Greek and the Portuguese for that matter enjoy every year, then most of the statistically significant difference will simply disappear in the next few years. More important that that, however, is the inclusion of longer term and sustainable economic development factors into all kinds of comparison. Taking the eight factors determining international competitiveness in the Lisbon Agenda (especially as compared to the US) into account we can state that Hungary – together with Estonia, the Czech Republic and Slovenia – is better in a number of areas than the EU average, and is not one of the weakest economies of the EU. The above group of countries are better prepared for the future than the EU average in building an information technology based society, in providing the conditions for free enterprise, in telecommunication and in the modernization of their social services, and in most cases Hungary is among such countries. Therefore when judging the future it is more appropriate to take the above dynamic indices as starting points rather than sticking to the over-mentioned per capita GDP as a yardstick. This is the only way for the Hungarian economy to take an active part in promoting and enhancing European competitiveness, to oppose the closing of the European market against any competitors, and to actively contribute to such a reform of the European Union budget that can link solidarity and regional cohesion with technological renewal and with global enhancement of competitiveness.
Beyond the economy: some other conditions for successful membership
Actually, no country that had acceded to the European Union earlier was prepared fully for membership. They could not be prepared because adaptation in certain areas is a learning process that one cannot “simulate” from the outside. For these one would have to be full fledged member, above all in areas such as agriculture, or the use of European Union funds, but also participation in the decision making process. Furthermore, the changes in Community policy cannot be predicted and planned in all of their aspects, and one cannot always foresee and prepare for such changes. Naturally one can and must prepare to meet the requirements in a lot of aspects and make good use of the opportunities arising from membership. The Hungarian economy, save most of the uncompetitive tiny smallholders, could be considered as prepared at the micro-economic level, and will be able to perform as necessary using own efforts in the Union (a part of the small enterprises sector). The latest macro-economic steps certainly contribute and help for us to be successful members on the medium run. Union funds also help towards this, above all the much larger amounts than those of today to be transferred after 2007, assuming that the corresponding Hungarian absorption environment and users of such funds will be well established in the near future. The positive world economic competitive environment, as well as the implementation of urgent internal reforms in the Member States, which are so vital for the Hungarian economy, above all Germany, can also improve the conditions for successful integration.
However, successful economic integration has non-economic components to it, too.
First: the significance of the non-economic factors of competitiveness will clearly increase all over the world in the first decades of the 21st century. This will be especially evident in two areas. On the one hand, the quality of public administration will become a determining success factor at all levels, not only at the central one, but also at regional and local administrative levels. On the other hand, the role of social flexibility, and even more of social cohesion will gain more value, especially in case of smaller countries. One hardly has any chance to survive on the world market with a fragmented, atomised or consciously split society, no matter if within or outside regional integration.
Second: successful integration into the Community decision making process and the increase in the Hungarian scope for action could be important preconditions for successful economic integration. However, a very patient, ready to compromise Hungarian policy is needed which takes the interests of others also into consideration. Hungary has two historical advantages regarding Community politics. First of all, the country was capable to prosper in history at times when she had a very narrow scope for action, and the job was to expand it step by step. The scope for action as provided by the Union based on the geographic-economic characteristics of the country could hardly be called wide. Hungary provides 2.2 percent of the population and more or less 1.2-1.3 percent of the GDP of the 25 strong Union. Yet she will have a more weighty role to play in the decision making process, for in the Council we will have a 4 percent representation, and in the European Parliament 3.3 percent with 24 MPs. And with the right kind of preparation and sense of multilateral diplomacy we could play an even larger role in shaping Community policies. The very fact that even though the Hungarian nation has been living closely together with other nations throughout the centuries and has developed in multi-national and multi-religious countries, nationalities and social communities with very different sets of values will be a special advantage as a Member State in the Union as well as in global competition. Assuming of course that our behaviour will not be determined by exclusion of others, on the contrary, by inclusion of all (just as in the other EU Member States).
Third: economic success is an indispensable condition for Hungary to have a clear and flexible Community strategy in all areas where some level of Community policy is present or will evolve in the future. This is the only possible way we can play and active role in shaping and participating in the Union decision making processes, and “divert” Union policies towards Hungarian interests. A regional interest harmonisation process could be an organic part of this – naturally depending on the willingness of the other accession countries as well. But the range of our strategic and tactical allies will reach well over the boundaries of the Central and East European region from the very beginning.
Fourth: the very foundation of every sustainable economic success is of course the preparedness of society to absorb changes. Successful Hungarian integration into the EU as a Member States cannot be imagined without a society feeling and experiencing this success. However, this feeling of success takes some time, a rather long time to come, and it is not at all only economic and welfare success in the narrower sense. For it to be felt we need to have a sincere and sensible dialogue with society from the very beginning. Naturally attention must be called to the pressures to adapt and to the costs, and above all to the tasks everyone has to fulfil in this changed and changing environment (most of these changes, such as prices, labour market structure, production structure, institution building, legal harmonisation are already behind the Hungarian economy). The new opportunities need to be emphasised which rise from the very membership, and which we could access only with a lot of difficulties, or not at all, without such membership. Only a target oriented, well mobilised society can achieve and actually feel the success in integration. A society talked out of action or paralysed and demobilised by the false and unilaterally demonstrated fears and threats can only be a loser in this process. Therefore it is our joint responsibility to prepare our society well and to carry on a continuous dialogue above all in the most critical first years of membership, when breakthrough success stories are not yet felt, but the burdens of adaptation are already present in a number of areas in the economy.
The manuscript is closed in April 2004