177 4.2.5 Dichotomy of Industry in Hungary The analysis of the economic results of the FDI-led development regime shows that the large levels of FDI inflows into the Hungarian economy supported the structural transformation of the previous socialist economy. The large inflows into the manufacturing sector of the country allowed the reorientation of the economy towards exports for EU markets. The success of the attraction policies is visible in the high levels of TNC penetration and illustrates the large capacity of the state to attract export-oriented FDI. However, this capacity is only partial, as the analysis of the indigenous sector shows. The industrial policy instruments are biased towards larger foreign-owned firms. State capacity is too low to either tackle the distortions to the productive structure or cater for an increased incorporation of TNCs into the Hungarian economy. Largely unable to benefit from industrial aid, Hungarian firms show distinct performance gaps in comparison to foreign-owned firms. They are concentrated in low technology sectors and their production is labourintensive. Their primary orientation towards the internal market and poor capital endowment act as a growth constraint, resulting in low profitability. They remain small in size and are, therefore, unable to develop scale economies. Under-funding also results in their inability to develop new technologies and products, which could enable them to access profitable markets. Furthermore, they are faced with product and factor market competition stemming from imports and TNCs. Their resulting underperformance contributes to their unattractiveness as potential co-operation partners to TNCs. The lack of co-operation is also the result of the quasi-oligopolistic firm-specific competitive advantages of TNC affiliates. The defence of these competitive advantages keeps local cooperation to a minimum. Consequently, the level of spillovers from investing TNCs to Hungarian firms is low. Hence, two distinctly different sectors have evolved creating a dualistic industrial structure, whereby the modern foreign-dominated export sectors vastly outperforms the indigenously dominated sector. As result, the foreign-owned sector dominates the Hungarian economy. Hence, the role of the TNC in Hungary as a harbinger of international competitiveness to the host economy and acting as a transfer agent for technological progress is questionable. Moreover, due to the export-oriented nature of the foreigndominated sector of the economy, economic growth and Hungarian development is dependent upon the impulses stemming from the TNC export markets, illustrating the continued peripheral nature of FDI-led growth in Hungary. 4.3 Hidden Inequality in Hungary Whilst not singularly responsible for the rise in income inequalities during the transition process, the inflows of capital-intensive FDI into Hungary since 1990 have been the drivers of structural change within the economy. As a result of the high 178 capital-intensity of TNC production, their technological, productive and competitive edge, TNCs have also contributed to the change in labour demand and to the revaluation of skills (Fazekas/Ozsvald 2004: 6-7). The revaluation of educational attainment has benefited skilled and younger employees to the detriment of older and unskilled staff. Direct market income inequality based on educational differentials and the nationality of employer are further amplified by the institutional deficiencies of the wage bargaining system. Furthermore, redistribution polices are strongly biased to towards middle and higher incomes resulting in growing inequality of disposable incomes and social mobility. 4.3.1 General Trends in Hungarian Income Inequality Transition unleashed a process of structural transformation and resulted in a steep increase in income inequalities in Hungary. However, the effects of structural transformation in the form of changes in skill demand in accordance with an alteration of workplace skill requirements is an issue equally affecting the dispersion of incomes in industrial countries (Nickell/Bell 1996). Nevertheless, in difference to the industrialised west, the structural readjustment in the former socialist countries was more pronounced and the impact on society was larger within in a shorter timeframe. Income Dispersion The analysis of developments in income distribution in transition economies in general has to be interpreted in view of the transitional effects on the economy.143 Transition produced a pronounced increase in income inequalities. Although comparisons are methodologically difficult, KöllQ/Lindner (2002: 47) note that the rise in earnings inequality per person between 1989 and 1998 was almost double the increases recorded between 1979 and 1990 in the UK - a comparable “period of deregulation” (KöllQ/Lindner 2002: ibid). A more common indicator is the development of the Gini coefficient, which measures the distribution of income.144 The table compares the inequality of incomes measured in per capita household income and portrays the Gini coefficient in per cent for individual years between 1987 to 2002 for the CEEC-5 economies and the EU-15. 143 In the case of Hungary, GDP returned to its 1989 level only in 1999, GDP per capita incomes reached their pre-transitional level in 2000, real wages corresponded with their 1989 levels in 2002, total employment was 26% lower in 2000 than in 1989 (Ferge/Juahász 2004: 235). 144 In the case of total equality, the coefficient is “0” (or 0%). Accordingly, total inequality is measured at “1” (or 100%). 179 Table 7 Distribution of Household per Capita Income, 1987-2002 (Gini, %) Pre-Transition 1987-1989 Mid-Transition 1996-1997 Post-Transition 2001-2002 % Change 1987-2002 H 22.5 25.4 26.7 19 CZ 19.8 23.9 23.4 18 PL 27.5 33.4 35.3 28 SK 19.4 24.9 26.7 38 SLO 21.0 24.0 24.4 16 EU-15 26.9 27.8 28.6 7 Sources: Kornai (2006: 229, Table 6). The table shows that Hungary had the third highest growth of income inequality in the region. Compared to EU-15 levels, Hungarian inequality was two to three times larger. If the Baltic states of Lithuania, Latvia and Estonia are included, then income inequality in the region grew by 29% between 1987 and 2002. The regional figures more than quadrupled EU-15 inequality growth and were one and a half times higher than the Hungarian average increase (Kornai 2006: 229). However, in comparison to OECD countries, Hungary takes up a middle position, displaying inequality growth rates on average within the OECD throughout the 1990s (Förster/Mira d’Ercole 2005: 10). Nevertheless, according to Förster/Mira d’Ercole (2005: 11), together with Italy and Portugal, Hungary displays one the largest discrepancies between perceived and “actual” (i.e. statistically measured) inequality. Aside from the demonstration effects of visible affluence, that influence the formation of subjective views, this discrepancy points to a possible weakness in the statistical measurement of inequality in Hungary throughout the 1990s. On the one hand this is related to the neutralising statistical effect of increased income mobility. The transition phase of the economy is characterised by a particularly intense fluidity of income positions. The recorded simultaneous increases and declines of income groups have a neutralising effect on the measurement of total income inequality. Hence, individual yearly calculations can display a larger Gini coefficient than measurements based on longer time periods (KöllQ/Lindner 2002: 47). In Hungary, the neutralising effect was the largest during the deepest phase of the transitional recession between 1992 and 1993 and far stronger than in any other OECD country (KöllQ/Lindner 2002: 47). 145 On the other hand, Hungarian income data is notoriously unreliable due to the widespread phenomena of tax evasion, leading to the underreporting of real income 145 As a consequence, the average Gini coefficient calculated between 1992 and 1997 was 8.2% lower than the average figure for inequality calculated for a single year within the observed period. Moreover, only 50% of the inequality observed in one year between 1992 and 1997 persisted, while the remaining 50% was only transitory phenomena (Rutkowski 2001a: 75,80). 180 levels (Molnár 2004: 2-3, 16). The high incidence of the informal and black market economy in Hungary indicates that illicit earnings supplemented market income. Illicit incomes are assumed to increase total income inequality due to the unequal access to the grey and black economies (Rosser et al. 2000: 168). Hence, the extent of hidden inequality may be higher than official figures suggest. Although still suffering from the same constraints, alternative measurements, such as the top to bottom ratio of the dispersion of median incomes, display a higher degree of income inequality for Hungary. Still lower than the comparative decile ratio in the US (5.5), Hungary is grouped together with those countries displaying the highest proportion of income inequality in the CEEC with a decile rate exceeding four points, a figure larger than the highest level in the EU-15 (UK: 3.5) (Rutkowski 2001b: 5). 146 Thus, the top decile of earners with an income of 214% of the median income earned 4 times more than the lowest ten percent in 1997 with an income of 51% of the median income (Rutkowski 2001b: 6). Moreover, the top ten percent of earners were able to increase their incomes from 183% of the median in 1988 to 214% in 1997. In contrast, the lowest 10% of earners experienced a loss in their earnings relative to the median income from 58% to 51% (Rutkowski 2001b: 9). 4.3.2 Transitional Winners and Losers Transitional income inequality in Hungary was, therefore, accompanied by strong wage mobility. The change in income positions is linked to the transformation of the organisational structure of the labour market. Occupational credentials replaced the internal labour market structure of the SOEs (Neumann 2002: 17). Internal labour markets reflected the central role of the SOE as the main socioeconomic unit and policy instrument under socialism (Wagener 2002: 155). The reorganisation of labour market remuneration principles resulted in a revaluation of educational attainment levels by labour demand. This is a result of structural change, whereby new technologies were introduced changing the level of skills required by the workplace. Accordingly, young and educated workers were able to greatly improve their income levels in comparison to less educated and older employees. Furthermore, investing TNCs were the driving force behind these changes. Their increased productivity in comparison to indigenous firms is linked to the higher proportions of young and skilled employees working for foreign-owned firms. Finally, the nature of Hungary’s decentralised micro-level collective bargaining system additionally amplifies skill-driven wage inequality. 146 The other CEEC members displaying high income inequality were Lithuania, Latvia, Bulgaria and Romania (Rutkowski 2001b: 6).