In order to promote Hungary’s sustainable growth, we constantly analyze successful trends throughout the world economy. We are paying special attention to South Korea, Israel, Dubai, Singapore, successful Chinese cities, Poland, and the Baltic countries. We have recognized the fact that the post-World War II economic marvels (Bavaria, Baden-Württemberg, France, northern Italy, Austria, Switzerland, the Scandinavian countries, Catalonia) are no longer examples for our region to follow. One of the reasons for this, is that these areas – with certain exceptions – cannot keep up anymore with the achievements of the USA and East Asia.
However, there is an outstanding example nearby that we spotted long ago, and have not lost sight of since: the Czech Republic. At the heart of the winning 2010 domestic economic program was the goal of creating one million new jobs. This goal was set based on the employment rates of the Czech economy, nearly 1.2 million higher than ours.
Yet the Czech economic model offers a lot more to learn, making it worthwhile to compare the Czech-Hungarian conditions in depth. We focus on three aspects:
- What are the advantages of the Czech model and how can we resolve the disadvantages?
- What are the advantages of the Hungarian model in comparison that could strengthen our position even further?
- What are the possibilities for the future? How can the Hungarian model be even faster and more effective than the Czech?
The past has quite a strong effect on our opportunities today and in the future. This we cannot change – but the future we can, and we must take the necessary steps now. More importantly however, the past has a unique function: it can often operate in the present much like “compound interest”.
The current demographic conditions are an example of this. In 1990, the populations of the two countries were nearly the same, both around 10.4 million. Today, the Czech population has a demographic advantage of around 900,000 more people. This is due to two main factors (accompanied by comparable immigration rates): a higher Czech birthrate and a much higher Hungarian mortality rate. In the last three decades, there were about 200,000 more births and 700,000 less deaths in the Czech Republic than in Hungary. The concept of “compound interest” works here for the Czech fertility rate as the number of women of childbearing age was higher, resulting in higher birth rates; their fertility rate of 1.71 is tied for third place in the EU. Despite the significant growth achieved in Hungary, our rate is still only 1.55 percent (which is slightly higher than the EU-27 average of 1.53), thus the population gap between the two countries is widening. The Czech Republic has already reached 110,000 newborns per year while we are more than 15,000 newborns behind.
The two countries’ inheritance functions along the laws of “compound interest” in a number of areas, and this is the basis of the significant advantage that the Czech Republic has come to have. The most important benefits of that inheritance are:
1. Before World War II, industry’s share in the Czech economy was one and a half times larger than in Hungary.
In addition to the 53 percent versus 36 percent domestic share of industry in the Czech and Hungarian economies respectively, agriculture played a smaller role in the former: 37 percent for Hungary and 23 percent for the Czech Republic. This was a solid foundation for subsequent Czech industrialization programs because they had something to build on instead of experimenting like in our “iron and steel” country.
2. The Czech Republic managed to avoid severe macroeconomic imbalances between the two world wars.
This helped to maintain sustained development because they did not experience the “balance or growth” cycles that characterize us, which involved serious growth sacrifices.
3. Czechoslovakia avoided hyperinflation.
Therefore, external debts remained low, and as the share of industrial exports was high, the Czech economy, before World War II, was able to reach 91 percent of Austria’s levels of development. Hyperinflation caused the reverse here in Hungary.
4. In the Czech Republic, the regime change was carried out with shock treatment communications, but in practice, it was a gradual transition.
Our strategy was essentially the exact opposite: though we spoke of a gradual transition, the Hungarian economy experienced shock therapy in the first half of the 1990s. Thus, while the Czech system lost 400,000 jobs, the Hungarian lost 1.2 million during the market transition. The Hungarian shock treatment was a huge mistake because it took place during the European recession of 1989-1992, which greatly devalued the Hungarian national assets.
5. The Czech Republic was the most competitive country in Central Eastern Europe in the century following 1920.
They avoided shock treatment during the regime change and the European recession, sticking instead with a gradual market transition. Thanks to this, the Czech economy is closest to the EU-27 average.
6. In terms of per capita development, the Czech Republic has reached 94.1 percent of the EU-27 average, while we are at 74 percent.
In 2000, the Czech relative development levels were similar to the current Hungarian ones. In the past twenty years however, they have managed to break out of average development, which did not act as a trap for them. Thus, by last year, they were already ahead of Italy in terms of development.
7. The Czech economy is characterized by a consistently high investment rate and efficient capital accumulation.
Among investments, the Czech economy has the highest rate of intangible assets in the region. This indicates that investments do not typically go towards “iron and concrete” but rather “brains and institutions”.
8. The domestic value added of the manufacturing industry is higher than in Hungary.
In our age, the export-producing manufacturing industry is one of the most important factors to improve. The Czech economy has a higher share of domestic ownership in this field and lower import rates compared to Hungary.
9. The share of Czech value added in total exports is higher than in Hungary.
While Czech exports account for 62.3 percent, the Hungarian counterpart comes in at 55.9 percent. This also functions along the lines of “compound interest” as the current higher domestic value lays the foundation for the future value added.
10. Investments in innovation are higher than in Hungary as well as the rate of digitization.
Czech companies rank 8th in the EU for digitization, and Hungary is at only 25th. This means higher productivity, more income, and thus more sources of investment in the business sector.
11. The labor market has shown shorter cycles than those in Hungary within the past thirty years.
The Czech employment rate in 2019 was the 4th highest among the 27 EU member states and stands at 75.1 percent in the 15-64 age group compared to the Hungarian 70.1 percent.
12. The territorial structure of the Czech Republic is more balanced than ours.
The three largest Czech cities, aside from the capital, represent almost twice as much of their GDP as the three largest cities aside from Budapest in Hungary. This signifies a healthier, more spread out economic spatial structure.
13. After 1990, they managed to develop without external debts or imbalances.
The main reason for this is that the majority of Czechs relied on internal financial resources. This is how they managed to have a negative net external debt for decades.
14. The Czech economy is not as vulnerable.
The Czech economy has the most favorable credit rating in the region, which is reflected in the lower price of financial resources.
15. Czech fiscal policy has been very countercyclical.
On average, the Czech budget was in surplus over the years from 2015 to 2019.
These inherited advantages stem from the more predictable, gradual Czech model, which retains its previous values and avoids shocks.
But here is the interesting part!
In the last 30 years, mainly as the result of the positive development post 2010, the Hungarian model – typically ridden with huge cycles and losses– rose from the 1990s 51 percent of the EU average to 74 percent. Meanwhile, the Czech model has advanced from 81 percent of the EU average to 94.1 percent. In the last three decades, we have neared the EU-27 average by 23 percent while the Czechs by 13 (and the Poles by 34 percent).
Therefore, it is worthwhile to explore the advantages of the Hungarian model in future analysis, so that we can play on our strengths in the future while keeping an eye out on our disadvantages.
“Strong men believe in cause and effect” – Ralph Waldo Emerson
Matolcsy György, Governor of the Hungarian National Bank
Photo: Michal Cizek/AFP