[...]Is The Condition of Hungary’s Economy Really As Bad As It Seems To Be? | afoe | A Fistful of Euros | European Opinion[...]…

But I have my doubts and questions to raise as well, regarding the necessary adjustment, more precisely the limits of change driven by macro economical means and the resulting social issues. The first one is the amount of real reserves in labor supply and the flexibility of labor market. As far as I comprehend the proposals supported by an argumentation from a macro perspective implies that there are many people willing to work and there are many entrepreneurs willing to give them a place, but because of high costs (especially around average wages) they are either used illegally or simply not. But we are speaking of an extraordinary number of people in the working age, more than one million, while only less than half of them are registered as unemployed. Although the present rate of unemployment is quite high, even reducing it to a 4-5% wouldn’t mean more than 150 000 – 200 000 new jobs and therefore the same number of new contributors to social systems. It would be better, but far from being a real relief for those systems.

There is an implicitly ongoing debate about the effectivity of the proposed measures (regulations aimed at increasing the flexibility of the labor market, tax-cuts etc.) but not among economists (only a few express their doubts about the reality of the perceived results) rather between sociologists and economists. (It is an implicit debate, because economists usually use very limited empirical data to assess the outcome of changes, while sociologists have data and their arguments are based on that, but economists simply do not care…Therefore everyone addresses its own professional audiences.) Sociologists argue, that as a result of the transformation process the majority of those who were laid off became detached from the world of labor, their skills are outdated and useless, their knowledge obsolete, they are practically illiterate, they haven’t got the means, the will and culture of moving out of their microcosms in order to work somewhere else because of the lack of examples of personal success based on such strategies and so on. To sum it up: where economists’ glance catch a huge workforce eager to find a job, only obstructed by the inflexibility caused by market regulations and tax-system, sociologists glare at a mass with inadequate skills and incapable to act according to the demands of contemporary economy.

Both camps have its proofs in the form of examples. The economists point at the cases of Slovakia, Romania, Poland, the Baltics, as countries where unemployment declined and employment figures rose sharply after similar measures, while sociologists argue, that the significant cut in social security contributions during the Fidesz governments term (10%) brought only 100-150 000 new jobs, far from the expectations then and now. (Obviously both sides are keen on omitting uncomfortable facts, economists simply overlook the mass migration and its effects on employment from every country especially after the EU accession they use as textbook example, sociologists rarely take into account that the above mentioned cuts were almost completely balanced by the raising of the minimal wage.)

Anyway, I belong to those, who are rather sceptical towards the assumptions that regulation and tax-cut will boost employment either through new jobs created by SME-s or by attracting FDI and providing investors with the necessary workforce. At least not sustainably in the long term. I admit that some reserves exist, either in the form of illegal work (although I’m not certain that the state is really able to pay the costs of the legalizing in the form of sufficient tax cuts in order to make legal work attractive enough for employers as state authorities do not seem to be very effective in revealing such practicies) or in the form of unemployed people eager to work. But I really wouldn’t been surprised if even in 4-5 years time serious labor shortages would occur if the problem would be addressed only through restructuring of the tax system and through relaxing regulations.

“Would this not be likely to provoke a currency crash?”

Well I don’t think so. Why would the currency crash after restructuring the household debt?

To some extent this game with the forint is only going on at the moment due to the perceived vulnerability with the CHF loans, and the inability to price the forint at a level which makes Hungarian exports competitive.

Once that issue is gone, what would people be speculating against with the currency?

Basically, it is a mute point whether or not the forint is now competitively valued. If it isn’t, and they don’t have the CHF loans to thing about, what happens if the currency drops another 20% – their rivals in industrial products would only be complaining about “unfair competition” that’s all.

The point here is that Hungary isn’t quite the “basket case” it is being treated as. My view is that if they can solve the loans problem they can reduce interest rates internally, and let the currency drop a bit more, no real problem.

They have real industrial capacity, and services to export, and they would be near to closing the current account gap by exports were we not in the middle of a massive economic depression, not like some economies I could mention.

This is very different from somewhere – eg – like Argentina, where they had only banks, financial services, telephone companies, and agriculture, with no known export industry to mention.

Obviously, eg, if they had a cheaper currency, all the potential investment for Slovakia would go straight to Hungary (since Slovaks can come over the border to work, and many of them are already going on weekend shopping expeditions) and even workers could cross the frontier to work in Hungary (this I imagine is going to happen if Hungary and the CR aren’t in the eurozone soon).

This is not the same thing as saying that Hungary is going to be a stellar growth economy again, it isn’t, but it isn’t going to starve either, and it is going to be an interesting place to invest, especially after all the reforms which will be introduced with an IMF gun at their head. Here, if we look at Turkey to, we have to admit that the IMF is often much more effective than Brussels in this sense.

If the Hungarian state announced that it was going to convert all Euro and Swiss Franc loans into Forints, surely this would be basically saying that it is going to massively devalue the forint.

Would this not be likely to provoke a currency crash?