The “resource curse” theory has been an exciting topic of modern economics. This theory examines the distortive effect of natural resources and the revenues they generate. This concept states that countries rich in certain resources tend to regard these revenues as the only means of development and the rigid focus on the exploitation of these resources as well as the lack of diversification lead to self-exploitation and this rather suppresses than assists the long-term social progress and material enrichment of the country’s citizens.
In the EU development period 2007-2013, a massive amount of funding was utilized in the domestic economy within the framework of the EU’s cohesion policy, which – due to its significant weight in comparison to the entire national economy -- has had a major impact on the development of Hungary’s economy and enterprises. The following presentation of various effects is based on the conclusions of Hétfa Research Institute and those of a related study1. The impacts assessed by the paper are positive as a whole: direct demand-side effects in the macro-economy temporarily boosted economic growth, while supply-side effects led to the medium-term improvement of the return on investments and the long-term increase of production efficiency across the entire economy.
Thanks to the favourable external economic environment -- factors such as the low prices of fuels on world markets -- and the improvement of the domestic economic environment -- factors such as the rebound of domestic consumption, industrial output and export growth --, major Hungarian labour market indicators improved in 2015. Wage data from January 2016 also signal a positive wage growth trend, although there is huge diversity between the wages for different jobs. There were massive wage hikes in most sectors, driven among others by acute or protracted labour shortages. Net wage growth has also gained from the 1 percentage point reduction of the personal income tax as of 1 January 2016, as well as the increase of family tax allowance for parents with two children.
Improving vulnerability, domestic consumption and investment indicators are all pointing to further GDP growth and diminishing vulnerability in 2016.
The general government budget accumulated a surplus of HUF 15bn in the initial two months of the year, despite the fact that it closed the month of February with a deficit of HUF 77.4bn. In February, revenues of the central budget were up by 7.2 percent compared to February last year. This figure has been mainly attributable to the massive growth of corporate tax revenues in February and the lower-than-anticipated amount of expenditures due to a drop in EU funding.
The Hungarian Government has recently drafted and adopted several industrial development strategies. The food industry has been identified as a priority area of development policy, being a major employer and a sector posting massive surpluses in foreign trade volume. This study overviews food industry value chains and the sector’s growth potential as cornerstones of a sector-specific development strategy.
The term “middle income trap” has been coined by Nobel-prize winning economist Robert Fogel. He states that the majority of countries find it easier to advance from the group of low-income states to that of middle-income ones than making the passage to the high-income category through further GNI growth. Reaching the middle-income status is relatively quickly achievable, provided – in most cases -- that the market is liberalized, labour is cheap and raw materials are available. These factors, however, prove insufficient after a while, as improving living conditions lead to rising wage costs and raw material reserves are depleted. Thus, other steps are required to maintain competitive edge and make further progress.
The Commission’s Country Report on Hungary draws mainly upbeat conclusions on macro-economic developments in the country. The institution highlights several positive changes observed in the country, placing special emphasis on the overall improvement of the economy. The Hungarian economy has been on a stable growth path; household consumption has grown, the labour market has recovered, the government budget deficit has declined and the amount of general government debt has also been edging down, while the country’s net external position has improved. The report of the European Commission also notes that Hungary has made progress in the implementation of country-specific recommendations issued in 2015.
As of 2016, the rate of personal income tax has been reduced from 16 percent to 15 percent in Hungary. This measure is expected to be another step towards improving the competitiveness of the Hungarian taxation system. According to projections of the Ministry for National Economy, in comparison to 2010 taxpayers will keep more than HUF 850bn extra in the year 2016. The Government endeavours to cut the rate of personal income tax further in this parliamentary term and reach a single-digit figure by 2018.
According to the latest analysis of financial services giant Morgan Stanley, the vulnerability of the Hungarian economy to external shocks declined the most since 2008 among the CEEMEA (Central and Eastern Europe, Middle-East and Africa) countries. Analysts of the research unit of Morgan Stanley conclude that this improvement was large not only in relation to the other countries: Hungary’s position may make further gains despite deteriorating growth prospects.