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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
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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%).
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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).
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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).
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References
Zusammenfassung
Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.