Monday, 9 January 2012

The Eastern approach

I stumbled upon a great blog post today from a Hungarian business owner on the prospects of starting a business in Hungary. He entitles it pretty clearly "This is why I don't give you a job". He points out to the devastating effects of the Hungarian system where business start ups are almost impossible, if you don't have political support that is. He describes the anti-capitalist mentality and systemic problems with corruption as the highest obstacles to creating and maintaining a stable business. From the variety of comments the text got I understand that many businessmen in Hungary share his concerns as some of them were forced to simply close down.

I recommend you read the full text to get the clear picture. The text itself contains some rough language, but while reading it I understand why the author decided to use it. There are simply no better words to describe the awful situation in the Hungarian private sector. The administrative, regulatory and tax burdens with which the text starts seem light compared to the system of political corruption, anti-capitalist propaganda and downright cronyism. Hungary is becoming the poster child of crony capitalism. 

To avoid being biased by reading only one text I looked into the situation in Hungary in order to find out whether all these facts are true. They certainly appear to be. Hungary is in some views crossed the Greek scenario and could suffer even worse consequences. Here’s a text form the New York Times right after the new government took office a year ago and here’s what they say now. And here and here is more on the Hungarian economic woes from bloggers. 

Furthermore, the IMF and the EU have pulled out of negotiations over a new line of credit due to the rise of what is believed to be authoritarianism. The talks have been restored however, but there are still issues to be covered. The constitutional reforms have outraged many Hungarians while the international organizations are mostly angry because of Hungary's PM Mr Orban's undermining of central bank independence. Talks have  even been on suspending Hungary's voting rights in the EU Council. Besides that, all three rating agencies downgraded its credit rating to 'junk status'. No wonder the country isn't attracting any foreign investments and is sliding into radicalism. Something is terribly wrong in Hungary. 

The situation is turning to bad to worse and in some cases even paradoxical. The Economist reports in the latest issue (Jan 7th – 13th) on the country’s war against the IMF when they desperately seek international help and even secret services ordered to investigate currency attacks. The country is driving towards dictatorship. All the preconditions are here (shattered private sector, high corruption, authoritative prime minister, banning the media, nationalization, anti-capitalist and anti-business mentality), but the people still won’t let go. They’ve beaten communism once before, but this is another tough fight they will have to endure. 

Even though I'm not an expert on the situation in Hungary I do know a thing or two about the issues in other South Eastern European countries, where a similar situation is arising. They suffer from the same misbalances, and the same hostile environment towards capitalism and businesses. The only difference between Hungary and some of the Balkan countries is that at least Hungary didn't undergo a devastating war 15 year ago. The relative underdevelopment of the banking and financial system in the Balkans prevented them from experiencing the same financial blow during the 2009 credit squeeze as Greece and Hungary did. Crony capitalism has been a dominant system in the Balkans for over two decades. It’s only a matter of time before it starts producing the same malign consequences as it did in Hungary and Greece. The only problem is, Balkan radicalism is far more dangerous.

From the Eastern point of view, the situation in Western Europe isn’t half that bad. Just a reminder that it can always get worse if we’re not careful. 

17 comments:

  1. This whole system, so it is, the trash .. Is fundamentally wrong.

    ReplyDelete
  2. Good point, we should be careful. I had no idea that things were so messed up in Hungary..I mean, I could have guessed from the protests and thw whole changing the constitution thing, but still..looks like the EU didn't help much, did it?

    ReplyDelete
  3. Great text but I didn’t quite catch the nationalism reference

    ReplyDelete
    Replies
    1. Perhaps I can help, in the Balkans almost everyone hates each other: hungarians hate romanians and slovaks, romanians and slovaks hate hungarians,
      albans hate serbs, serbs hate albans, to name a few.

      The only thing that most balkans agree on is that everyone hates gipsys (roma people?!? a new word for gipsys) since they are the main cause of thefts, rapes, selling girls for prostitution, ...
      (60% of our convicts come from the 2% gipsy minority).

      This hate problem is caused by territories with minorities of neighbor countries. Both neighbors think they are entitled to that piece of land (You should see how different our history books are, it's totally different depending on who you ask). Till now it doesn't sound like a big deal, but the thing is that there are nationalist groups sworn to recuperate the "stolen" territories and/or punish the gipsies. This kind of groups exist in most countries, and some of them even have training camps for their recruits. Also they start to grow in popularity since most of the governments are very corrupt, they don't deal with organized crime, they are involved in it, and whenever there is a real problem they distract the attention by using the minorities problem as a scape goat.

      Delete
  4. Thank you. The nationalism reference is to serve as a warning to what will happen if political cronyism isn't dealt with. Its consequences are widely seen in Greece, Italy, Portugal, Ireland, Hungary, and they are exaggerated thanks to the financial crisis, particularly thanks to the credit squeeze. In the Balkans this wasn’t the immediate case, rather the real problems are arising now as the dependency on the European recovery has ceased and the politically corrupt systems won’t be able to bear the situation any longer. The unfortunate consequence might be a rise of nationalism. It may all turn out for the best, but this is nonetheless a warning.

    ReplyDelete
    Replies
    1. You forgot Romania from the list, our politicians have lied just like the greek politicians, salaries have been payed from loans in the last years, and now it's pay back time (just wait a few months).

      The rise of nationalism is also a consequence of the politicians and the media.

      A case of corruption or economic problems have far less coverage in the media then some guy with a flag of a neighbor country. Also the fact that cops are involved in most crimes has far less coverage then x gipsy stole/rape.

      So the rise of nationalism happens because people are very gullible, easily distracted from real problems.

      Also I would like to share your optimism, but the shit is hidden deep, we didn't dig enough to feel it's real stench.

      Delete
    2. That's a very good point. History has seen this too often and that's what's worrying me. My focus was on Hungary when saw many issues arising with Orban's authoritarianism and radicalism (pointed out to me when I read the aforementioned blog post from a Hungarian business owner). We can claim a similar thing for Argentina's President Kirchner or Bolivia's Morales in their recent nationalization of foreign own companies.

      Protectionism is the first form of nationalism, and when you have a 'fruitful' area such as Eastern Europe (as you described in your earlier comment) or Latin America, bad things tend to develop much easily and rapidly.

      Delete
  5. The problem is that no1 cares about Hungary's future.To be a politician in Hungary is not a legacy,it's only self interested business.

    ReplyDelete
  6. I am from Serbia and our situation is even worse

    ReplyDelete
    Replies
    1. I am romanian and our situation is even worse then yours

      Delete
  7. I thought the Hungarian guy's post was great, too. Obviously, though, he isn't really a Hungarian writing about Hungary. He's a Californian writing about California.

    ReplyDelete
    Replies
    1. lol, nice one!

      Delete
    2. Or a french writing about France...

      Delete
  8. To add to your article:
    In Romania it is the same or even worse.

    We have lower taxes, but our equivalent of the IRS can fine or close down any business. Also they have the practice of telling a business owner: the fine is X, but i am on your side and fine you with only x/10 and not even register it, this is without a check from the inspector. He knows he can find or invent something for a reason.

    Some of those money go directly to corrupt politicians, and this is why the inspectors are never punished.

    There have even been cases where the business owner resisted the practice (since they actually manged to respect all laws), but usually they get their accounts blocked, and the lawsuit starts afterwards.

    In the case of a friend the lawsuits against our IRS was over after 2 years, he won the lawsuit, but nothing happened to the inspector. Of course his company went broke since he had all his accounts blocked for 2 years, he even had to borrow money to live after a while.

    Another practice is a corrupt company eliminates the concurrence with the help of politicians and their inspectors.

    I can't tell if it's worse then Hungary, but I know people who moved their businesses in Hungary or Bulgaria because of the corruption and laws from Romania. They are all much happier now (none complained about inspectors anymore). The only problem is not everyone can move his business.

    ReplyDelete
    Replies
    1. Thank you for those valuable insights on the Romanian situation. I had no idea things were that bad there as well. However, all these problems sound all too familiar.

      It's these kind of things - corruption, anti-business climate, rent-extracting society - that drive nations into poverty and misery. For example, every single problem that you recognize is the worst possible constraint to any kind of innovation and dynamism in the economy (call it creative destruction). And without those kind of incentives, no wonder businesses are escaping. Again, those lucky enough to do so, as you've mentioned.

      I do hope things get better in Romania, Hungary, the Balkans and all countries facing these kind of fundamental institutional issues, but I sincerely doubt it. As long as there is no political change implementing what Mancur Olson would call a 'market-augmenting government', there will be no progress in any of these countries. Unfortunately..

      Delete
  9. One of the most important factors in developing a strong economy is the ability or lack of ability to start a business without having to go through the burden of lots of red tap. Excess and in some cases unnecessary regulations can prevent most busineses from ever getting the chance to open their doors let alone the chance to operate. In the united states not only do many businesses have to contend with federal regulations but state and local regulations as well. And as the laws and regulations keep expanding the business owner must devote more and more time attention and resources to staying in compliance with all the new laws and regulations and amended regulations. The need to hire or pay consultants to inform the business owner of new regulations and how to stay in compliance may cost tens of thousands of dollars.

    ReplyDelete
    Replies
    1. I strongly agree, particularly on the indirect costs these regulations entail (like the need to hire lawyers, tax experts and consultants to help a business-owner cope with the burden)
      I actually wrote a research paper about that for the Adam Smith Institute, a couple of months back. You might be interested in some of its findings.

      Delete