Begegnungen
Schriftenreihe des Europa Institutes Budapest, Band 25:95–110.
MIKLÓS LOSONCZ
Hungarian Industry in the European Union
Accession to and Membership in the EU
Hungary’s accession to the EU cannot be limited only to the signing the Accession Treaty and the Accession Document and to their entering into force. (The Accession Treaty is about the enlargement of the EU, whereas the Accession Document details the conditions of accession of the individual new members.) Accession to the EU is a process that started as of 21 December 1991, with the signing the Europe Agreement or Association Agreement and lasted up to the signature of the Accession Treaty and to its entering into force as of 1 May 2004. The Europe Agreement solved the regulation of several areas including the abolishment abolition of barriers to trade much before accession to the EU that otherwise would have been left to the Accession Document. Thus, Hungary had acquired significant advantages earlier, before its EU membership, particularly in the field of trade policy.
The signing of the Accession Treaty in April 2003 indicated that the EU had acknowledged the fulfilment of the Copenhagen accession criteria by Hungary. When the Accession Treaty entered into force, Hungary joined the European Union but has not become an EU Member State with a status equal to that of the 15 old members of the Union for different reasons, partly beyond its control. The Accession document does not grant equal treatment to the new Member States in general and Hungary in particular in several areas, in other words, every element of the acquis communautaire was not extended to Hungary (and to the other new EU countries) as yet. There are temporary rules in the following areas1:
– Until the end of 2006, i.e. the end of the current Community budgetary period, the amount of money allocated for Hungary from the Structural Funds and the Cohesion Fund is about half of that she should get access to if the general rules were applied.
– An adverse specific treatment will be applied after 2006, too, in the sphere of direct agricultural payments.
– A restrictive treatment will be maintained after 2006 in the flow of labour, particularly by Germany and Austria, as a seven-year period was fixed for the liberalisation of labour flows.
– The European Commission may apply protective measures against the acceding countries without juridical procedure in case they violate their obligations concerning the single market and co-operation in home affairs and justice. Currently, such measures against the present Member States can only be implemented on the basis of the decision of the European Court of Justice.
– The control of passenger traffic was not abolished along the internal borders, in other words, the rules of the Schengen Agreement were not introduced following the enlargement of the EU. The reason for this is that the European Union is not able to ensure the necessary conditions in the control of passenger traffic before 2007.
– Hungary, together with the other new member countries participates in the Economic and Monetary Union (EMU) as a “Member State with derogation”. As it is commonly known, the Hungarian government is set to accomplish the conditions for the introduction of the euro, and Hungary’s accession to the EMU up to 2010.
Apart from the interim transitory rules, the operation, the quality and the efficiency of the institutional order linked to the implementation of acquis communautaire (the culture of public administration and law, etc.) also lag behind the standards of the old Member States.
Therefore, it is straightforward to make a distinction between accession to the EU and becoming an EU member. Based on this distinction, the economic participants do not have to prepare themselves for EU accession, but for EU membership, that is to the requirements of the single European market.
The achievement of a status equal to that of the old EU members would require another 3 to 10 years. Integration to the single European market of the Community is closely linked to becoming an EU member, though it is largely independent from equal treatment. This has two closely interrelated dimensions. The first dimension is the accomplishment of legal alignment, and its continuation with a new content, together with the adoption of those parts of the acquis communautaire that are not embodied in legal rules, the second one is the development of an efficient regulatory and legal system necessary for the implementation of the acquis communautaire and Community law (with people trained to implement the acquis), including a professional public administration, by the diffusion of the European culture of public administration and law. Legal harmonisation defined broadly also reflects the requirement that the approximation of Hungary’s legal rules to those of the Community is something more than substituting domestic law by community legal norms.
With the Europe Agreement and later the Accession Treaty taking effect (the trade policy chapter of the Europe Agreement entered into force as of 1 March 1992, and the full Agreement as of 1 January 1994, when the process of ratification was completed, whereas the Accession Treaty became effective as of 1 May 2004), the Hungarian economy was and is being exposed to regulatory and competitive effects. The concept of regulatory effects or regulatory environment includes the identification of the consequences of those practices, standards, norms and co-operation mechanisms not put in the form of legal rules that affect the economic actors, and directly or indirectly have an impact on their profitability. The economic effects comprise those economic factors (the economic cycles, inflation, changes in the cost of labour, etc.) that shape economic conditions more or less independently from the regulatory environment. In many cases, it is difficult to separate the regulatory and the economic effects from each other.
Hungarian industry at the threshold of accession to the European Union
By the time of accession to the EU, a stable and competitive industry has emerged in Hungary, in close relationship with the transition to the market economy. In 2004, industry accounted for 25 per cent of the GDP, and the one million people employed by industry one-fourth of total employment. In 2003, almost 80 thousand enterprises were in operation in the manufacturing industry, representing 9 per cent of all enterprises. At the same time only 2587 enterprises employed more than 49 persons each (3.3 per cent of all organisations in manufacturing), accounting for 95 per cent of total sales in industry. Despite the extremely large number of small and medium-sized companies, it is the large companies that play a decisive role in Hungarian industry.
The results of structural modernisation carried out in the 1990s are indicated by the fact that in 2003, 45 per cent of industrial output was produced by technically modern, knowledge- and technology-intensive industries including the manufacture of machinery and equipment, electrical machines and instruments as well as road motor vehicles. Industry also determines Hungary’s involvement in the international division of labour, because the share of industrial goods in exports exceeds 90 per cent. The quality of the export structure is indicated by the fact that the relative share of technically advanced machines and equipment totalled more than 60 per cent of Hungarian exports in 2003. This is a high proportion even by international standards.
The role of industry is outstanding in the economic relations between Hungary and the European Union. The share of direct exports in the sales of industrial products amounts to about 60 per cent, to which another 10 to 15 per cent of indirect exports through suppliers should be added. Since about 80 per cent of Hungarian exports are directed to the enlarged European Union, it implies that 55 to 60 per cent of industrial production is absorbed by the EU. There is no branch in the national economy other than industry that is dependent to such an extent on the regulatory and cyclical conditions prevailing in the European Union. Therefore, Hungary’s accession to the European Union was of vital importance for industry.
The role of foreign investors is indicated by the fact that the 3525 companies with foreign participation (and capital totalling HUF 4500 thousand million, of which almost HFU 4000 thousand million belonging exclusively to foreigners) account for 45 per cent of employment, 80 per cent of investments, and more than 85 per cent of exports. EU accession had different effects on the industrial companies belonging to various size and ownership categories.
Industrial free trade and the adoption of the common trade policy
The Europe Agreement aimed at creating free trade in industrial goods between Hungary and the European Community by the end of 2000. It may be regarded as a regulatory effect that obstacles before Hungarian exports of industrial products to the EU were eliminated in 1996, and the Hungarian customs tariffs levied on industrial products originating in the EU were abolished in early 2001.
The trade policy chapter of the Europe Agreement laid down the foundations of a reduction of barriers to trade in industrial goods (implying growth in export revenues of economic organisations). In a static approach, i.e. excluding any change in the volume of trade, the abolition of customs tariffs resulted in savings totalling about USD 230 million in 1992, and altogether USD 1 thousand million between 1992 and 1996, compared to the most-favoured treatment. This sum did not have to be paid in the form of tariffs by the industrial sectors of the European Community and Hungary respectively.
The Europe Agreement contributed to the acceleration of Hungary’s industrial exports to the EC and the EU, respectively. In the first part of the 1990s, the major driving force of Hungarian exports was the improvement of the trade policy environment made possible by the Europe Agreement.
The improvement in trade policy conditions, closely associated to the Europe Agreement, too, contributed to the acceleration of the inflow of foreign direct investments in Hungary. Apart from the Europe Agreement, low labour costs, too, boosted foreign direct investments of companies registered in EU Member States and third countries alike aiming at setting up footholds with production and export bases.
With the Accession Document having become effective, no further trade policy advantages accrued to Hungary. As a member of the EU, Hungary may not conclude new international trade agreements, and she had to resign those that were not in line with the provisions of the common trade policy. In addition, Hungary had to adopt the preferential trade agreements of the Community concluded with third countries. With the customs union established between Hungary and the European Union, Hungary had to apply the common external customs tariffs. As a result, the general customs tariff level of industrial products dropped from 6.9 per cent to 3.6 per cent, in other words, the protection of Hungarian industry by customs tariffs was lowered. However, its extent was negligible, because the customs burden on industrial products weighted by the actual foreign trade turnover did not change significantly. On the company level, however, it is somewhat different. For some importing companies, the reduction of individual customs tariffs allows for a significant saving of costs, whereas the protection of productive companies by customs tariffs is becoming more moderate, not so much for the nominal decrease, but because of the weakening of effective customs protection. (The basis of effective customs protection is not the value of a good, but its added value, which is the difference between the value of the good and that of the imported inputs.)
Community customs tariffs are lower for 5660 items and higher for 1621 ones than the earlier Hungarian ones were, while they are identical for 366 items.2 Community customs tariffs that are lower than the Hungarian ones are concentrated on groups of goods such as electrical machines and equipment, machines and equipment, vehicles and spare parts of vehicles. Large companies involved in this sector, primarily foreign ones have to face sharper competition after Hungary’s accession to the EU. At the same time, their competitiveness may improve on the import side, for they may acquire imported goods from those third countries with which the Community has no free trade agreement on industrial products.
The level of Community customs tariffs is higher than the earlier Hungarian one for textiles and clothing as well as certain raw and basic materials (mostly aluminium meant to be processed and vinyl-chloride). In the case of these two products, however, a three-year derogation that is transitory exemption could be achieved. According to the estimates of the government, it constitutes savings valued at about HUF 10 million for the Hungarian aluminium industry.
After accession to the EU, the average level of customs tariffs for raw and basic materials went up from 1.2 per cent to 3.9 per cent. With the increase of tariff rates, the competitive disadvantage of those producers increased that build the raw materials in question into export goods.
As 80 per cent of Hungarian foreign trade was conducted on the basis of free trade agreements even prior to the accession to the EU, the reduction of customs tariff rates as a result of the adoption of the Common customs code, affected a relatively small proportion of Hungarian imports. The reduction of customs tariff rates weakened the competitive disadvantages of countries which did not belong to Hungary’s former free trade agreements (EU, CEFTA, EFTA; the Baltic States, Turkey, Israel, Croatia, Serbia and Montenegro) in the Hungarian market. The adoption of the common trade policy has not caused significant changes in the industrial relations of Hungary maintained with the Western and Central European countries. The effect of the changes of the regulatory environment on the real economy is rather small.
The adoption of the common customs tariffs and the common trade policy of the European Community leads to a further liberalisation of Hungarian imports, and a further sharpening of competition as a result of weakening effective customs protection in the domestic market. The domestic and foreign companies already operating in Hungary and foreign companies that would come to the country in the future will have to face stronger competition than earlier. The new level of Hungarian customs tariffs and the reduction of effective customs protection erodes the trade policy advantages foreign companies settled in the country have enjoyed until recently, and weakens the motivations of new foreign direct investments aiming at evading the customs tariff barriers.
On the other hand, Hungary’s bargaining power has grown enormously at negotiations on international trade policy which cannot be expressed by figures. The external economic interests of the country are represented by the European Commission supported by the 25 Member States and their economic strength instead of the Hungarian government having a modest bargaining power in international comparison. In addition, Hungary adopts the sophisticated tools of market protection of the Community, too, which would ensure more effective protection against dumping and other market disturbances than the former system.
Zone of Pan-European cumulation of origin rules, customs-free areas
The European Community unified the rules of origin of the free trade agreements concluded by it within the framework of the so-called zone of Pan-European cumulation of origin rules3. Thirty-one countries (the 15 old and the 10 new Member States, Switzerland, Norway, Iceland, Liechtenstein, Romania and Bulgaria) belong to the zone. Uniform origin rules are effective in the zone. It improves the conditions of market access for Hungarian exports in so far as the goods imported from the 30 Member States of the zone of Pan-European cumulation of origin rules are considered the same as those originating in Hungary. In other words, if the imported good is the input of goods aimed to be exported to the EU, its value is added to the local (Hungarian) value- added content and may be exported to the EU without paying customs. Only goods that comply with the rules of origin may be exported without paying customs to countries belonging to the zone.
With joining the zone of Pan-European cumulation of origin rules, Hungary had to abolish the former practice of reclaiming customs charges. (This means that if a company added imported goods to a product to be exported then, if it met the conditions stipulated by the legal rules, it could reclaim customs charges paid on the imported component.) The termination of refunding of customs charges adversely affects imports from countries outside the zone of cumulation, compared to imports from within the zone. It adversely affects the competitiveness of Hungarian exports when inputs imported from outside the zone are built into products to be exported. At the same time, the unification of the origin rules and the prohibition of customs refunding encourages production co-operation among countries belonging to the zone of Pan-European cumulation of origin rules. It should be noted that refunding of customs charges is not related to the origin rules, and presumably it is due to technical reasons why the refunding of customs charges is prohibited in relation to the zone of Pan-European cumulation of origin rules.
Accession to the zone of Pan-European cumulation of origin rules weakened the international competitiveness of those industrial companies owned by Hungarians and partially by foreigners that built import products purchased from third countries into their exported goods prior to the country’s accession to the EU. The government reduced these adverse effects by temporary measures (setting up customs contingents and providing the possibility of partial refunding of customs charges). The definite and final prohibition of the refunding of customs charges made the competitive disadvantage of the affected companies complete and permanent after EU membership was achieved.
Customs refunding was one of the competitive advantages of several export base affiliates of foreign industrial companies originating from countries outside the zone of Pan-European cumulation of origin rules. A significant incentive of foreign direct capital investments disappeared with the new rules. On the other hand, the regulations of the zone of Pan-European cumulation of origin rules encourage co-operation among enterprises registered in the European Union and in the countries belonging to the zone. The abolition of customs refunding has an adverse affect on branches of the chemical industry and the iron and steel industry where the imports of semi-finished goods from third countries, and notably from Russia and Ukraine is rather significant.
In the 1990s, companies settled in free trade zones played a prominent role in the growth of the Hungarian economy, in exports and in encouraging the inflow of foreign direct investments. Free trade zones accounted for 46 per cent of Hungarian exports (and 68 per cent of engineering industry within it), and 30 per cent of imports in 2003. The advantages of free trade zones were related to the imports of the means of production free of customs duties and VAT and to the elimination of exchange rate risks because the settlement of accounts was done in foreign currency. As long as customs duty refunding was available, duty-free imports lowered the financing burden of companies involved. Freedom from VAT again meant a lower financing requirement. All this improved to some extent the competitiveness of companies operating in free trade zones in comparison to the others which have to pay customs duties.
With the Accession Document becoming effective, customs tariffs and value-added taxes are levied on fixed assets invested in Hungarian free trade zones, since according to Community law the means of production imported are to be charged with customs duties and VAT in the European Union. As a result of the implementation of the Europe Agreement and the EFTA and CEFTA free trade agreements, customs duties have to be paid for the means of production only that are imported from countries outside Europe. In most cases, those means of production would be imported form third countries only if they cannot be purchased in the European Union and in the broader zone of Pan-European cumulation of origin rules.
Prior to accession to the EU, companies operating in free trade zones were relieved of paying customs duties and VAT after the means of production autonomously, independently from the Community legal rules, by the modification of the domestic laws on customs and VAT.
After the Accession Document entered into force, Hungary’s foreign trade with the European Union has become a special foreign trade. Free trade zones lost their former advantages for those companies which produce goods to be exported to the EU from imported inputs originating in the EU.
Companies producing goods to be exported to third countries and using inputs imported from third countries obtain the permission of the Community to operate in free trade zones. A small number of large companies in the electronics and IT industry export their products to the EU and third countries, using inputs that are imported from the EU and third countries. Companies producing for exports to the EU and using imports from third countries were not granted permission for activity in free trade zones. This reduces their competitiveness, for they have to pay customs duties for imported goods and cannot reclaim them.
When the Accession Document entered into force, trade policy conditions in Hungary deteriorated somewhat for the indigenous firms as well as companies with foreign participation4. The modified trade policy conditions (with special regard to the zone of Pan-European cumulation of origin rules and the regulation of free trade zones) affected Hungarian industrial exports valued at EUR 1 thousand million – EUR 1.5 thousand million, amounting to 2.5–4 per cent of exports in 2003.
Integration into the single European market
Apart from the implementation of the Europe Agreement, three major areas of integration into the single European market can be distinguished. The first area is the removal of non-tariff barriers to trade, including the administrative barriers, or at least their reduction along the internal borders to the level identical to that the old Member States have to apply among themselves. Thus the cost of border-crossing will be lowered, which enables the elimination or at least the reduction of delays, since there would be less red-tape and other formalities, etc. at the internal borders. After the Accession Document entered into force, customs clearance and procedures were eliminated at the internal borders of the EU (at the Austrian, Slovak and Slovene segments of the border), and the Hungarian industrial firms already enjoy advantages related to the disappearance of physical obstacles.
The second area concerns risks. Integration into the single European market reduces the risks and uncertainties of the economic organisations. One such risk is that an undertaking goes bankrupt in the value chain connecting producers and consumers. It is particularly important in the case of goods moving from Hungary to the EU, because the systems of export loan guarantees are less developed in the new EU Member States than in the old ones. The small and medium-sized companies registered in the old Member States with a more modest capital endowment had been waiting for the Accession Treaty becoming effective, since they needed the legal guarantees to strengthen their business relations, and to start their investments in the new Member States of the EU.
The third area is associated with the gradual, but full adoption of the acquis communautaire relating to the single European market, including legal rules as well as standards, procedures and practices not embodied in legal rules. As a result those technical obstacles between Hungary and the EU would also be eliminated that are related to the still existing differences between the domestic and Community standards.
Within the acquis communautaire, there are lots of prescriptions, practices and co-operation forms (technical norms, quality management systems, tests for conformity assessment, CE conformity marking, professional liability insurance, etc.) that are not binding legal rules, but they had and have to be adopted by Hungarian undertakings in order to ensure their competitiveness.
In European law, too, there are a lot of legal rules that serve the safety of the consumers and the protection of the environment and their implementation may not restricted to the publication of the respective Hungarian legal rules in the Hungarian Official Gazette. These legal rules are partly specific ones; they aim at reducing pollution caused by the procedures and products of an industry or a branch of industry. There are legal rules for environmental protection that aim at the reduction of industrial pollution in general. A common feature of these legal rules is that the corporate sector, and in many cases even public administration and local governments have to possess adequate capabilities and resources for their application.
The adoption of Community standards, the various quality management systems, product conformity certification, professional liability insurance does not improve the international and domestic competitiveness of the Hungarian industrial firms, it does not create competitive advantages, but it only eliminates their competitive disadvantages. (The possibility cannot be excluded that until it does not become generally introduced, the existence of quality management systems may, for instance, result in competitive advantage in the Hungarian market.) If all this is missed, it would damage competitiveness and would often hinder even market access. Therefore, the adoption of these systems is a necessary but not sufficient precondition of competitiveness. Only those companies may submit proposals to Community tenders that meet the above-mentioned conditions. It is straightforward to consider the related costs as necessary long-term investments so that Hungarian companies may benefit from the opportunities and advantages created by the single European market. Thus, the preparation costs of accession to the EU will certainly recover in the long run for companies that are otherwise competitive.
It would be an illusion to believe that the cost of adjustment, aiming at eliminating or dampening the competitive disadvantages of Hungarian industrial firms could be saved without accession to the EU or integration into the single European market. On the one hand, there is an ever decreasing possibility to do so in a globalising world economy, for the rules of the single European market would sooner or later appear in global regulation, too, in a somewhat weaker form at the most. On the other hand, the European Union has been traditionally the biggest export market of Hungary; therefore, it is inevitable to adjust to it. Hungary’s accession to the EU has speeded up and institutionalised this process that has been unavoidable at any rate.
Accession to the EU can be considered a forced adjustment for industrial firms in the short run, with considerable costs, whereas the advantages deriving from it would unfold in the longer run. It is justified to regard accession to the EU as an opportunity.
First and foremost, large companies with foreign participation in general and those having their headquarters in an EU Member State in particular can meet these requirements. Hungary’s accession to the EU did not cause any problem to this group of companies. These firms prepared themselves for the new regulatory environment with the help of their mother companies.
The accession to the EU posted a challenge to large companies in Hungarian ownership, but mostly to medium and small-sized ones. Such large companies like MOL, Richter Gedeon, BorsodChem, TVK, Dunaferr Inc., etc. were able to preparing for accession to the EU, relying on their own financial and human resources. In addition, large companies operating in so-called globalised industries had to meet the requirements mentioned above irrespective of Hungary’s accession to the EU. It is the small and medium-sized companies that needed and still need help for adjustment, because their own financial and human resources are inadequate for the preparations for accession, and to adjusting to the new regulatory conditions produced by it.
The Member States of the European Union spend sums equivalent to 10 per cent to 12 per cent of their GDP on public procurement. 400 to 500 new calls for tenders are published daily in the Official Journal of the European Community. In other words, the market of public procurement is a rather significant segment where tough competition is compensated for the lack of risk of on-payment, or this risk is minimal. The participation at tenders of the public sector of the EU Member States should become an element of growing importance in the strategy of Hungarian companies in the long run.
According to the Europe Agreement, Hungarian companies may participate in the public procurement tenders of the Member States on the basis of national treatment since 1994. From 1 February 2004, Hungary has to ensure conditions to companies registered in the European Union that are equal to those the domestic ones have to meet, in other words, the preferential treatment of domestic undertakings had to be stopped. This led to the sharpening of competition in the Hungarian market of public procurement. In addition, with the Document of Accession entering into force, the companies of the new EU Member States may also appear in the Hungarian market of public procurement, further enhancing competition. The opportunities of acceding to the Community market of public procurement are the best for small and medium-sized Hungarian industrial companies.
Community transfer of resources
With the Document of Accession taking effect, Hungary got access to Community transfers. In the Structural Funds and the Cohesion Fund, EUR 2.8 thousand million (HUF 700 thousand million is allocated for Hungary between 2004 and 2006 for investment projects. With the inclusion of indigenous contribution, funds totalling HUF 1500 thousand million – HUF 1600 thousand million will be available for development purposes. They may induce an additional inflow of foreign direct investments valued at EUR 1500 million.
Strict conditions were set by the European Community to the transfer of Community resources earmarked for Hungary (elaboration of a seven-year national development plan, discussed with the European Commission, institutional infrastructure, demonstration of own resources equivalent to Community resources). The absorption of about 70 per cent of the Community resources available to Hungary is probable, which is a rather high proportion according to international experience.
Industry may have access to a certain part of the sources that can be obtained from the Structural Funds and the Cohesion Fund. Due to the specific features of the procedure of public procurement, a strong competition among the economic undertakings of the old and new members of the EU is expected. Therefore, access to part of the Community resources would be possible in tough international competition.
Five operational programmes were elaborated for the absorption of Community resources within the framework of the National Development Plan. In addition, technical assistance is linked to each of the five programmes. With the partial exception of agricultural and regional development, Hungarian industrial firms may be involved in each of the operational programmes either as beneficiaries or as implementing organisations (Table 1).
|
Table 1. Estimates of the National Development Plan for 2004 to 2006 |
|||||
|
|
EU |
Hungary |
EU + Hun |
Private resource |
Total |
|
Structural Funds |
|
|
|
|
|
|
Economic competitiveness |
412 |
137 |
549 |
672 |
1221 |
|
Agricultural and regional development |
305 |
101 |
406 |
798 |
1205 |
|
Environmental protection and infrastructure |
191 |
64 |
255 |
41 |
296 |
|
Regional development |
316 |
111 |
438 |
40 |
478 |
|
Human resource-development |
489 |
164 |
653 |
0 |
653 |
|
Technical assistance |
52 |
17 |
69 |
0 |
69 |
|
Cohesion Fund |
994 |
497 |
1491 |
0 |
1491 |
|
Total |
2759 |
1091 |
3861 |
1551 |
5412 |
|
Source: Office of National Development |
|||||
The operational programme of economic competitiveness offers most opportunities to Hungarian industry, as its aim is to improve the competitiveness of the enterprises in the productive sphere. The programme consists of five priorities (the promotion of investments, the development of small and medium-sized companies, R & D and innovation, information society and the development of the economy, technical assistance).
In addition to the operational programmes of the National Development Plan, Community resources can be obtained within the framework of the so-called Community initiatives. This is the market of European programmes that requires programme proposals from the economic organisations, and first of all from the regions among them so that they may enter into force. As the economic organisations of every EU Member State may submit project proposals, therefore it is not possible to assess the magnitude of resources that may be claimed directly from Brussels.
Economic effects
Accession to the EU does not influence directly, that is through regulation either the price of products and services, or of labour (that is wages). In fact, no Community legal rules are in force aiming at the approximation of the price levels, the prices of products and services, and wages of the Member States. The overwhelming majority of tools suited to influence prices and wages (pricing by the authority, minimum wages, personal income tax, etc.) is in the competency of the nation-states. Therefore, the regulatory conditions of the Community do not imply directly the convergence of prices and wages. Nevertheless, the approximation of the per capita GDP of backward countries to that of the developed ones would be accompanied by a catching up of prices, the wage level and wages in the long run, but it is mostly independent of economic integration. This process is described by the Balassa–Samuelson model according to which there is a relatively close correlation between the price and wage levels and changes in per capita GDP.
There are, however, Community legal rules and policies created for the accomplishment of other objectives of economic policy the implementation of which affects prices as well as wages, usually reducing their rate of growth. Price stability is a priority of co-ordinated economic policy, setting limitations to catching up of prices and wages by increasing the rate of inflation. The aim of the Community directives concerning electrical energy and natural gas is to strengthen competition by market liberalisation among others, a consequence of which is reduced prices, or at least a moderation of the growth of prices.
Despite the rational barriers to wage increases, Hungarian wage policy cannot disregard the dilemma that the encouragement of labour or hindering massive job-seeking in the EU may justify a more vigorous catching up of wages to the EU average. In addition, greater attention should be paid to the elaboration of a wage policy that is not so much focused on the catching up of wages but on increasing employment.
The erosion of the advantages of labour costs cannot be associated with EU accession, but it can be traced back primarily to the wage increases implemented in 2002 and 2003. Their adverse consequences are counterbalanced by the favourable qualitative features of the Hungarian workforce and pressures aiming at the improvement of productivity.
The outstanding improvement in the competitiveness of Hungarian industry even in international comparison is indicated by the fact that the average annual growth rate of industrial productivity of labour (per capita industrial production) was 9.2 per cent between 2000 and 2003, while its growth was much slower in the Czech Republic (6.7 per cent), in Poland (6.5 per cent), in Slovakia (4.5 per cent), and in Slovenia (3.5 per cent)5. In Hungary, there was an explosive improvement in industrial labour productivity in 2000. The significant wage increases might have played a role in the fact that labour productivity grew modestly in 2002. The dynamic growth of industrial labour productivity counterbalanced even the appreciation of the forint affecting adversely Hungary’s international competitiveness. This counterbalancing effect is supported by the dynamic growth of Hungarian exports basically consisting of industrial products.
The Hungarian manufacturing industry completely lost its competitiveness in branches where it had been weaker earlier as well, as a consequence of the vigorous wage rises and the considerably stronger exchange rate in real terms (textile and clothing industry, the manufacture of shoes, etc.), but it continues to be efficient in European dimensions in fields requiring higher levels of value added and better specific knowledge (information technology, electronics, manufacturing of vehicle parts and units, pharmaceutical industry, etc.).
Catching up to the wage level of the European Union and maintaining international competitiveness may be asserted to the detriment of each other. The contradiction between the two requirements is the smallest if real wages and real cost of labour in a broader sense of the term grow at the same rate as or slower than productivity does.
Conclusions
The implementation of the Europe Agreement and subsequently the Accession Document has exercised the most significant influence on Hungarian industry which plays the most important role in the production of GDP and which is embedded in the international division of labour most deeply. As the Europe Agreement has dismantled several obstacles in the way of trade policy, the regulatory effects of the Accession Document have been relatively modest.
The adjustment to the modified regulatory environment (the adoption of the common customs tariffs and the external economic policy, the joining of the zone of Pan-European cumulation of origin rules, the adoption of Community regulations for free trade zones and tax allowances) is eroding former competitive advantages. Integration into the single European market (the implementation of the elements of acquis communautaire that are not embodied in legal rules) requires additional costs, it does not improve the international and domestic competitiveness of industrial companies; it does not create competitive advantages for them, it only eliminates competitive disadvantages that often hinder market access. Therefore, meeting those requirements is a necessary but not sufficient precondition of competitiveness. The initial investments would recover only after a longer period of time, the advantages of membership would be apparent later. It is the domestic small and medium-sized industrial firms that are in the greatest disadvantage when they have to adjust to the changing regulatory conditions because of their limited human and financial resources.
Meeting the conditions mentioned earlier is necessary to ensure competitiveness not only within the European Union, but also on global scale. Accession to the EU can be considered an external disciplinary force; it partly cut short the time required to adjustment, and partly put it into a definite framework with strict time sequencing.
The submission of proposals at Community public procurement tenders, primarily in the Central and East European countries that have joined the EU together with Hungary, creates new business opportunities for Hungarian industrial companies. It is a huge and solvent market where the risk of non-payment is negligible. The cost of market access is also smaller than in the competitive markets. The advantages related to the enlarging external markets are somewhat reduced by the disappearance of advantages formerly ensured to domestic companies in the Hungarian market of public procurement, since treatment equal to the national firms has to be ensured to companies registered in the European Union. This market segment is best fit to the specific features of the small and medium-sized domestic companies.
It is large industrial companies in general and those with foreign participation in particular that apply with best chances for the resources of the Structural Funds and the Cohesion Fund because of the specific features of planning (wishing to avoid the fragmentation of Community resources) and the large scale of projects. The opportunities of small and medium-sized domestic companies are more limited for direct participation, while they may be involved in projects financed by Community funds as suppliers to large companies.
The economic effects of accession to the EU and those that may be expected would be relatively modest. There are no binding Community legal rules either for the catching up of prices or wages in the European Union. Nevertheless, it is the consequence of economic development that the growth of the per capita GDP in backward countries will be accompanied by the approximation of their prices and wages to the level of more developed countries and this process will be bolstered by the real appreciation of their national currencies. The erosion of the international wage advantages of the Hungarian industry is counterbalanced by its growing productivity. Relative international competitiveness does not deteriorate if real wages grow slower than productivity in industry.
Accession to the EU creates challenges as well as additional opportunities for the Hungarian industry. Benefiting from them is not automatic, but all efforts in this direction would sooner or later bear fruit. The high competitiveness and technical-structural development of the Hungarian industry that have been reached by the time of accession to the EU offer a good foundation to it.
Notes
1
Martonyi, János: Magyarország helye az Európai Unióban (Hungary’s Place in the European Union). Figyelő, 29 April–5 May 2004.
2
Meisel, Sándor: Az Európai Unióhoz való csatlakozás rövid távú kereskedelmi hatásai. (Short-term Effects on Trade of Accession to the European Union). Magyar Gyáripar, 1001, 1. 7–9.
3
Kele, Anna: Az európai szabad kereskedelmi megállapodásokban alkalmazott származási kumuláció formáinak és szabályozásának jelentősége. (The Significance of the Form and Regulation of Cumulative Origin Applied in the European Free Trade Agreements.) Külgazdaság, 2002, 9. 59–64.
4
Antalóczy, Katalin: Vámszabad területek Magyarországon. (Free Zones in Hungary.) Európai Tükör, 1999. 5. 47–64.
5
IMF International Financial Statistics, Washington. Calculated on the basis of its January 2004 data.