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Birmingham Business SchoolWhat Makes Hungary Attractive Laura Ipacs

MA, MBA, FCCA11 April 2011Central European University

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Outline – part 1

Hungary – basic facts Politics in the region What happened in 1990? Start of transformation – growing pains

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Outline – Part 2

Hungary now: The economy – indicators Major issues Doing business in Hungary

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Outline: Part 3

Competitiveness in the region

Good to know

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Hungary

Trivia – what do YOU know?

Capital Language Population - makeup Currency Life expectancy ….

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Hungary - factsheet

Surface: 93.000 sq km

Slightly bigger than Scotland or Ireland No sea Mostly flat Four seasons

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HUNGARY – Background: Landmarks Christian kingdom in A.D. 1000 Bulwark against Ottoman Turkish expansion

in Europe Part of the polyglot Austro-Hungarian Empire Communist rule following World War II

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The immediate past

1956, a revolt - massive military intervention by Moscow.

"Goulash Communism." First multiparty elections in 1990 joined NATO in 1999 EU in 2004

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Central and Eastern Europe – A Brief Overview

The „Westernized” group: Czech Republic, Hungary, Poland, Slovak Republic, Slovenia

The Baltic countries: Estonia, Latvia, Lithuania South Eastern formerly socialist group: Albania,

Bulgaria, Romania, former Yugoslav countries (Bosnia, Croatia, Kosovo, Montenegro, Serbia)

Russia The other member countries of the former Soviet

Union

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The „Transformation”

Key date: 1989 / 1990

Collapse of Soviet system – „democratic” reforms started

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The Heritage of Socialism

The political system – one party rule The Soviet bloc as a political, military

and economic alliance State ownership and central planning Collective irresponsibility – low

productivity and production efficiency Paternalistic state – citizens demand

state tutelage

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The socialist economy

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The Socialist System (J. Kornai)

The direction of causality

Politicalsystem:

one partyrule

Stateownership

Bureaucraticcoordination

PaternalismCentral

PlanningWeak market

incentives

ShortagesForced growth

HiddenUnemploymentWeak links tointernational

markets

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The Political Transition to Multi-Party Democracy (1)

Gorbachev’s role and the fall of the Berlin Wall

New political parties created ? Public sentiment toward transition A right-wing conservative and a left-wing

liberal trend in politics – what is “right-wing” in most of the CEE countries?

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The Political Transition to Multi-Party Democracy (2)

The new constitutions – and the old habits and attitudes

Who is the “agent” of the transformation? Local governments Weak representation of different interest

groups Weak civil society

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The New Legal System

“Velvet revolutions” in most countries: an open agreement between the major parties about the legal codes

New role for the police – the problem of secret files from the past

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The “Outliers”

Russia and other former republics Romania Member countries of former Yugoslavia

Violence, civil wars Vicious ethnic tensions Authoritarian regimes

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Creating a country

What was there to do?

New laws New institutions Old habits??

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The Legal Institutions of a Market Economy – the Hungarian Example

The Law on Corporations, 1987 The Law on Banking, 1988 The Law on FDI and Profit Repatriation, 1987

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New country cont…

The Law on Bankruptcy, 1991 Establishing a Privatization Agency and the

Law on Privatization, 1990 Accounting Law, 1992 The abolition of former institutions (National

Planning Office, National Office of Prices)

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Case study: Magyar Posta

Formerly: responsible for Postal services Money transfers Telecoms Newspaper distribution Tv/radio transmission Bedtime storytelling

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Magyar Posta – case

Now: Telecom (owned by DT) Public floating Post Office Antenna Hungaria Newspaper Distribution (Lapker)

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Case study 2: The Accounting Profession Before:

Nonexistent Part of tax authority – check tax returns

After: Chamber of Auditors Qualifications – bookkeper & auditor

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The Accounting Profession

Legacy…

Education system Standard-setting Reputation of profession

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And what happened to the economy? Major recession

Loss of former markets Structural problems

New issues: unemployment, new markets, competitiveness..

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The Transformation Recession

The cumulative loss was 25–30 percent of total GDP – larger than in 1929–33

A large part of corporate knowledge became obsolete

Total industries disappeared The disintegration of COMECON went beyond

rational limits The double deficits of the government budget

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GDP gap

Between Austria & Hungary (2010)

Per capita HU : USD 19.000

Austria: USD 40.000

Romania: USD 11.500

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Have a break!

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Hungary now

Perspectives:

How is the economy doing?

How about other fronts?

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Balanced Scorecard

CustomerCustomer Internal Internal

FinancialFinancialInnovation & Learning

Innovation & Learning

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Financial perspective

The economy:

Structural changes still needed Heavy debt burden

80% of GDP (no 18 in world) Unemployment at 10% Household indebtedness in foreign currency

Shares of Foreign-Currency Loans in EE Households

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Fiscal Distress

Government’s budget deficit reduced from 8-10 % to 4-5%

The sources of the financial imbalance Frequently changing tax system, low level of tax

collection Rigidity on the government spending side Pension and health care funds exhausted Huge debt service obligations

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GDP

GDP:

US 100%

HU: 42% Agricul-tureIndustryServicesOther

The Liquidity Crisis

Hungary was one of the worst hit: Persistent high budget deficits led to high public

debt/GDP ratios, a significant share foreign owned Irresponsible fiscal policies led to high real r,

which in turn led to relatively high foreign-currency indebtedness by HHs and businesses

Dramatic rise in r IMF (w/others) came to rescue with $25b

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The Internal Point of View

How is business?

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Doing business in Hungary

Corruption?

Global competitiveness in World Economic Forum Report:

No 58 overall from 52 Efficiency enhancers 45 Innovation factors 61

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Inflation and currency

Exchange rate to USD: 190 Euro: 270 Pound: 300

Widely in use: Euro Inflation: very high in early 90s, now better

tamed – 4-5 %

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Unemployment

New phenomenon after 1990: Currently: 10%+ Structural unemployment:

Many permanently unemployed Female unemployment Low % of total population employed

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The Financial Sector

Commercial banks formed in 1987–91 Former branches of the National Bank

Most bank: foreign investors General banks rather than specialized banks

– the German tradition

Foreign Banks Dominatein Eastern Europe

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Other Monetary Institutions

Insurance companies Specialized banks financing the purchase of durable

goods (car, white products) The credit card market

Over-protecting the right of the customers IT services in the banking sector – fast technical

progress and slow adaptation to the IT system of the headquarters

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Attitudes Toward Banks and Loans Money and trading as “dirty businesses” in the CEE

tradition The credibility of the government’s monetary and

fiscal policy Spontaneous “Euroization” in consumer credit Bank accounts abroad Banking and the black (or grey) markets Financial depth – slow progress in the household

sector

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Attitudes towards finance

Low levels of financial literacy

Major reluctance towards investment

Unsophisticated investment tools

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The Stock Exchange

Re-created in 1989/90

Few listings Few applications But: good returns

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Protecting the Environment (1)

Main sources of pollution Heavy industry – it shrank in size Road transport – it has increased in significance Agriculture – production has also shrunk Communal waste – critical issue in smaller

communities and in capital cities Water pollution: cross-border pollution is critical

issue

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Protecting the Environment (2)

Regulation – based on ex post fines charged on polluting firms before Hungary joined the EU

Emission rights trading Strict rules on importing vehicles “Westernized group” fully adopted the EU rules A recent problem: global warming and floods in

Central Europe A current example: clash between Austria and

Hungary

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Balanced scorecard: external perspective How do outsiders view us?

Privatisation FDI Competitiveness

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Privatization

Why is privatization so crucial? Privatization by sales or by free

distribution

Forms of privatization – do differences among countries really matter?

The success stories and the weakest link in the private sector

Domestic owners – foreign investors

The results: mixed blessing

Privatization by IPO or ESOP

Free Distribution

BulgariaBaltic countries

HungaryPoland

Slovak Rep.Slovenia

Czech Rep.RomaniaRussia

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Privatization – Hungary (1)

The number and asset value of the firms to be privatized in 1990: ~ 2000 firms, ~ 41 bn USD

Flagships and “scraps” The early plans for privatization Political objectives

To do justice for communist confiscations (reparation, restitution)

To create a Hungarian middle class To find loyal political supporters To keep the family silver in Hungarian hands

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Privatization – Hungary (2)

Economic objectives Improve efficiency Reduce Hungary’s foreign debt Learn from foreign experience (management

skills, know-how, advanced technology) Reorient foreign trade Find responsible owners to Hungarian firms Protect jobs

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Privatization (3)

Privatizing large corporations – IPO, mostly to foreign investors

Restitution in agriculture and small retail trading Privatizing the banking sector – only after 1995 Privatizing public utilities

Telecom sector first (1992–93) Energy generation and distribution, 1996–7 Public transport, 1996–7

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The Results of Privatization

Foreign-owned sector accounts for 60 percent of GDP production, exports and investment

Fast growth of exports Restructuring in industry and in services International competitiveness

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Break, again!

Determinants of National Competitive Advantage: Porter’s Diamond

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Factor conditions – basic

Geography – transit route

Transit transportation

Hot springs –spas Tourism Health industry

Agriculture – wine & greens

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Advanced factors

Low % population employed (42%, US 51%) Education levels – good Second language – very poor Human development index – no 35 (US no 10)

(adult literacy & life expectancy)

Workforce?

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Demand conditions

Sophisticated customers?

Prime consumers of goods and services….

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Related and supporting industries Education

Infrastructure

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Firm structure and rivalry

Internal competition

Many firms in same industry

No monopolies and oligopolies

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Good to know…

Olympic medals: Hungary no 8 in world

Rubik’s Cube

The Biro

Hollywood

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You are excused

WELCOME!!!!

Have a joyful visit in Hungary!