- From Dual Economy to Parallel Universes: Attitudes and Coping Strategies of Businesses vis-à-vis Crony State Capitalism – the Case of Hungary
Research Report on State-Business Relations in a Hybrid Regime
by József Péter Martin, PhD
Although a member of nominally high-standard international organizations of Western alliance (European Union, NATO), and a foreign capital (FDI) dependent economy, Hungary under the Orbán government, in power since 2010, has been a prime case of worldwide democratic and rule-of-law retreat coupled with state capture and systemic corruption. In Hungary’s hybrid regime, the Western model of market economy and the dominance of private enterprise have been at stake. It implies blurring the boundaries between state and market, and between public and private interests for the sake of resource reallocation and elite change.
In the current research report, we have uncovered some new aspects of state-business relations in the context of the crony state capitalism based on desk research, descriptive data analyses and semi-structured interviews with business players and experts.
As regards the business environment, both the facts and the perceptions show its ambiguous nature. On the positive side we find the country’s membership in the EU, the macroeconomic stability perceived by most business players between 2013 and 2019, efforts and achievements for whitening the economy and some features of the tax system. On the negative side, however, we can observe, first and foremost, the systemic distortion of level playing field. Moreover, long term structural problems such as relatively low productivity and poor performance of human infrastructure and state institutions still persist. This ambivalence has led to the “investment paradox” revealed in this paper, namely that despite serious and systematic breaches of the rule of law and the systemic and centralized nature of corruption, the investment rate between 2016 and 2020 was one of the highest in the EU.
Our extensive analysis of all currently existing Strategic Partnership Agreements, a special though selective lobbying tool between the Hungarian government and some companies revealed that industrial companies, in particular German automotive firms, have been overrepresented amongst SPAs. The distribution of SPAs over time shows a steep decline in the number of new SPAs. This instrument might have reached the end of its natural lifecycle and is by now used as a complementary tool to attract new FDI projects rather than to please actors that already have an established presence in the Hungarian market.
The current study revealed some mechanisms and limits of state intervention in the context of Hungary’s crony state capitalism. Since 2010, the long-standing “dual” (i.e., foreign companies vs SMEs) nature of the economy with a huge efficiency gap between the two segments has been distorted by another dimension, i.e., “crony companies” vs “free market players”. The former part of the economy has specific rules and functions based on connections and loyalty to the regime (rather than merit and competences) to such an extent that some interviewees labeled it as a “parallel universe”. Market mechanisms have been seriously eroded by this crony segment, accounting for approximately 20-30% of the economy. Therefore, the accessible market has shrunk significantly in many sectors as it is blocked by players close to the government.
Since 2010, the establishment and recapitalization of a new elite has been ongoing through several methods, such as the distribution of domestic public and EU funds to crony companies; nationalization of companies followed by re-privatization; friendly or hostile takeover of firms; and manipulation of the market in several sectors by rigged state regulation.
The crony segment of the economy has been dominant in those sectors mostly, though not exclusively, which are prone to public procurement (e.g., construction) and other state subsidies (e.g., tourism), state regulation (e.g., energy) and imminent profit creation (e.g., IT). This crony realm is heavily dependent on state subsidies, preferential treatment and, therefore, at least some parts of it seem to be unsustainable under a fairer, market-oriented system.
Evidence shows that, despite rhetorical bashing by the government, foreign companies, first and foremost German automotive companies, have been heavily subsidized under the Orbán regime which is not reflected in higher R&D and value added. In order to turn a profit, most multinationals have made deals with the government (in and beyond SPAs), and most of them have turned a blind eye to the erosion of rule of law and systemic corruption.
We have identified very few and sector-specific “pro-market” reform initiatives. For most business actors, these initiatives may have been useless in the context of the state crony capitalism. Most business chambers and associations have been hollowed out, and echo the government’s endeavors, or have been marginalized. The remaining market players, however, do not necessarily want “more” but rather a fairer market, which is reflected in the endeavors of some business associations to promote business ethics education. Pledge of survival and prosperity for those firms who do not want to kowtow to the regime, is to minimize business relations with the government, and to expand export orientation.
The analysis of government-business relations under the Orbán regime has confronted us with important empirical contradictions which might lead to theoretical implications. Namely, neither the fact that Hungary is linked to and bound by a set of important external organizations and institutions, nor the very high share of foreign ownership, have mattered much so far, when it comes to rule of law backsliding and the erosion of market mechanisms.
This paper was produced with the generous support of the Center for International Private Enterprise (CIPE).