Trouble ahead?
VOSZ president Sándor Demján highly critical of Hungarian economy
written by Sean Condon

The Hungarian economy is in an “emergency situation” stressed Sándor Demján, chairman of the National Association of Entrepreneurs and Employers (VOSZ), at a meeting with some of Hungary’s most influential foreign and domestic investors. Speaking at a business luncheon Oct. 31, organized by the Canadian, American, British and Dutch chambers of commerce, in cooperation with the Hungarian Business Leaders’ Forum and the Joint Venture Association, Demján offered a blunt assessment of Hungary’s economy as it prepares for European Union (EU) accession.

Demján’s straightforward and critical presentation touched on what he said were the three biggest issues that the Hungarian economy must tackle if it wants to regain its competitive edge: high taxes, underpaid labor and the planned early adoption of the euro. Hungary has “lost its position” as an economic leader in Central and Eastern Europe (CEE) and must make some serious changes in order to survive within the EU, Demján told the luncheon.
Demján, chairman of the TriGranit group, is one of the country’s most influential businessmen. His first luncheon speech in almost four years took place at the Hilton Budapest Westend, inside the massive retail and business complex that was built by Demján’s TriGranit Development Corporation.
Demján’s speech brought together a large number of international associations, who agreed with many of his positions, and signified increasing cooperation between Hungary’s foreign chambers’ of commerce as they try to unify their lobbying activities.
Hungary’s first priority should be reforming its bloated and inefficient state bureaucracy, he said. With tye current number of employees, the system is unable to properly distribute tasks. Using the slimmed down Slovakian public sector as an example, Demján said one Slovak does the work of two Hungarians. “In Hungary there is an overgrown public civil service system. One thing is for certain … taking into consideration the environment of acceding countries, [Hungary’s civil service sector] is the single highest in the region,” he said. “No country in the world can be competitive where state infrastructure is expensive.”

“Hungary’s first priority should be reforming its bloated and inefficient state bureaucracy“

While the government did announce in its 2004 budget proposal that 8,000 jobs will be cut from ministries and other government agencies, Demján said he blamed the bloated public service sector for Hungary’s high taxes, with 60% of tax revenues being spent on paying wages. He stressed that one of the main reasons why Foreign Direct Investment (FDI) is slow to flow into Hungary has to do with personal decisions by Western managers discouraged by high personal income taxes. Again, using Slovakia as an example, Demján said it would take six years in Budapest for a manager to earn what would take just four years in Bratislava.
“I think [Demján] is absolutely right. The tax burden is much too high and this is very worrying. In fact, the reason for this is the enormous number of civil servants,” says Pieter de Haes, chairman of the Netherlands/Hungarian Chamber of Commerce. “You see a tendency that the government wants to reduce its corporate tax, but the increase in the VAT affects the tax burden overall. If you do the calculation, there is a much higher tax burden in Hungary than in other countries. The government is just window dressing.” Hungary’s 2004 draft budget plans to increase and decrease taxes at the same time, shifting tax burdens from one source to another. Corporate and personal income taxes will be lowered, but sales taxes will increase.
However, according to a recent survey conducted by KPMG, Hungary’s proposed 38% personal income tax for the highest income bracket will be one of the lowest among EU accession countries except for Slovakia, which introduced a flat 19% tax on personal income to start next year. The new flat rate replaces a progressive system of rates ranging from 10% to 38%. Poland stands at 40% and Slovenia levies 50% on its highest income earners. However, Hungary’s highest income bracket includes anyone earning more than HUF 1.5 million, one of the lowest figures in the region and six times less than Slovenia.
Demján blamed Hungary’s politicians for being unable to find a solution to the problem. Echoing a common complaint from both foreign and domestic economic analysts, he said the lack of consensus among Hungary’s political parties is slowing growth. “We need to have practical politicians,” said Demján. “Hungary’s politicians have no cohesion and are run by their own position and preferences rather than for a love of the country.”
Valéria Petes Abelovszky, executive director at the British Chamber of Commerce, agreed with Demján. “People in power don’t concentrate enough on solutions, there is too much policy involved in decisions. This is the real problem in my opinion,” she said. “This is why we don’t have a direct way and why we don’t go forward.”
Taking a brash stance on the EU, Demján warned that the EU was “selfish” and that Western Europe’s embracing of Eastern Europe was not because of Christian goodwill, but to exploit its markets and take advantage of cheap labor. Demján warned that Hungarians will have to look after their own interests and that both blue-and white-collar workers will be lured away if Hungary does not create its own strong and balanced labor market. The fact that there is only one skilled worker for every five university educated workers represents a “very dark future” for Hungary. “Proportions must be redressed,” the speaker stressed. He also said he is “ashamed” how low Hungary’s minimum wage is and that there will be a massive exodus of workers if wages do not increase. On top of this, he claimed that for every six people with a university degree, four would leave and find work in the EU. “Hungary is not rich enough to educate workers for the union,” said Demján. While Demján said he has no problem with Hungary’s intention to adopt the euro, it is rather a question of when. He said that before Hungary could make the currency change, it needs to develop into a truly export-led economy, extend its markets outside Hungary and reach 80% of the Union’s output level or else the single currency would be detrimental. “AmCham certainly shares that view,” says Péter Hegedus, president of the American Chamber of Commerce. “Going toward the euro is a positive step and is a high desirability, but only at the right time. Rushing in and affecting our economy is not sensible. It is unfortunate that the date of 2008 seems to be fixed at any rate.”