Hungary

Launch of the 2016 Economic Survey of Hungary

 

Remarks by Angel Gurría,

Secretary-General, OECD

6 May 2016

Budapest, Hungary

(As prepared for delivery)

 

 

Dear Ministers, Excellencies, representatives from the press,

 

It is a great pleasure for me to be in Budapest on a doubly important occasion. We are presenting the 2016 Economic Survey of Hungary, but also celebrating the 20th anniversary of Hungary’s accession to the OECD. 

 

I would particularly like to thank Minister Varga for his invitation and for the Ministry of Economy’s fruitful collaboration with our experts during the preparation of this report.

 

Significant progress has been achieved

 

This Economic Survey comes at an opportune moment. Hungary has recovered from the crisis experienced in recent years. GDP has picked up since 2012 and we expect it to reach 2.5% in 2016 and 3% in 2017. Many of the economic imbalances have been corrected.  For example, public debt has been put on a downward track – it peaked at over 80% of GDP in 2011, by 2015 it had decreased to a level of  75.7% in 2015 and the trend is expected to continue. Also, the large current account deficit has been turned into a substantial surplus: it now hovers around 4% of GDP in 2015 compared to a deficit of 6% in 2008.  The unemployment rate is also falling, reaching single digit levels for both men and women as of 2014, even though female labour market participation remains relatively low.  Progress has also been achieved in reducing financial vulnerabilities, including the conversion of loans in foreign currencies to loans in forints.

 

The current favourable macroeconomic background allows for ambitious reforms to strengthen the medium- term growth and to boost efforts for more economic inclusiveness - which is key to raising living standards and well-being in a sustainable way.

 

But numerous challenges persist

 

In this regard, Hungary still has some way to go to catch up with other OECD countries.

 

Hungarian income per capita, although it has risen over the past twenty years, remains the lowest among the European OECD members; gross national income represented 61% of the OECD average as of 2014 (compared to 46% in 2000). It is thus particularly important to ensure that the benefits from growth are shared by the society as a whole.

 

Another concern is that Hungarian labour productivity has fallen by an average of 0.6% since 2008, one of the worst performers in the OECD. In the meantime, two countries of the region– Poland and Slovakia – have become leaders in productivity growth, recording average increases of 2.4% and 1.4%, respectively, over the same period.

 

In addition, despite the country’s high participation in global value chains, Hungarian firms are not fully benefitting from this integration. Relatively few firms have managed to establish themselves as subcontractors to multinational firms operating in Hungary.

 

Another significant challenge is the persistent skills gap. Skills requirements are changing rapidly as the economy becomes increasingly knowledge-based. Unfortunately, the education system has reacted slowly, leaving many graduates without much needed skills demanded by employers. In addition, women’s skills are not fully utilised as many do not participate in the labour market: only 60% participate in the labour market compared with 73% of men.

 

Key recommendations

 

The 2016 Economic Survey identifies three key areas which are paramount for tackling these challenges.

 

First, more can be done to improve macroeconomic performance build upon existing achievements. For example, debt reduction should be accelerated through lower spending in order to secure a prudent debt level. The current high reliance on labour taxation should also be reduced by fighting VAT fraud and relying more on less distortive consumption taxes.

 

Hungary also needs to further strengthen its financial stability. In this respect, it will be key to implement a strategy for the asset management company focused on offloading of non-performing loans. 

 

Second, raising business sector investment, particularly among domestic small and medium-sized enterprises, will lead to higher productivity, higher incomes and well-being. To achieve this, Hungary must focus upon removing barriers to domestic business investment such as frequently changing regulations and entry barriers for network industries.  Efforts are needed to ensure that regulations are transparent and stable, to cut red tape and make better use of regulatory impact assessments.

 

It also remains imperative to ensure that the modern competition policy framework is applied as widely as possible. Thus, no sector should be exempt and mergers that might reduce competition should be systematically reviewed and only be allowed on clear public interest grounds.

 

At the same time, network sectors need to be supportive of business investment, so that competition improves within the sector. This can be achieved by securing non-discriminatory third party access in network sectors to bolster price competition and introduce new technologies. Fostering competition is particularly important given that, for example, telecommunication costs for intensive users are five times higher than in France!

 

These measures would go a long way towards creating more competitive domestic firms with higher productivity and innovative capabilities, thereby helping them to move up global value chains.

 

Third, Hungary must double its efforts toimprove skills and match them to job requirements. This can be done by focusing on various policy actions. It is crucial, for example, to place greater emphasis on training programmes that get workers into the primary labour market. The creation of a tool set – including individual learning accounts – to promote lifelong learning, is also important to keep the skills acquired up to speed with the changing  labour market. Further integration of vocational training programmes into secondary vocational schools will go a long way towards countering the high risk of unemployment among graduates.

 

Last but not least, it is important to expand early childhood care to bolster the low labour market participation of young mothers. For example, there are 10 times more places in kindergartens than in nurseries. In addition, the very long parental leave period of 2 ½ years should be reduced and there should be incentives for paternity leave.

 

Ministers, Ladies and gentlemen:

 

The Hungarian novelist Sándor Márai once wrote that friendship is where we find virtue, loyalty and constancy. The same can apply to the longstanding collaboration between Hungary and the OECD, which is now turning 20.

 

Hungary’s recent impressive reform implementation has placed the country on a solid path to exit the crisis. There is now a unique window of opportunity to capitalise on these reforms and focus on building more inclusive, sustainable and resilient Hungarian economy.

 

The OECD stands ready to help you in these efforts and to promote better policies for better lives in Hungary. Thank you for your attention.