As Hungary stumbles its way through a painful round of public-sector reforms, a host of newly- published data indicate a weakening of the country’s economic competitiveness.
According to the latest regional competitiveness study by national economic researcher GKI and Microsoft Magyarország Kft, Hungary’s competitiveness index (VEX) fell in the second quarter of 2007, writes FigyelőNet. Published quarterly, the GKI competitiveness report covers seven countries in the region (Hungary, the Czech Republic, Poland, Slovakia, Slovenia, Austria and Romania) and it is based on three main factors: macroeconomic performance, labor productivity and relative competitiveness in costs. While the country’s macroeconomic performance was unchanged during the survey period, labor productivity and cost competitiveness deteriorated, which a rise in exports was unable to offset.
A second index (ÜX), which assesses competitiveness on the basis of the economic environment, the predictability of state regulations, interest surcharges on government bonds and the development of business infrastructure, also fell, although it was still higher than in the same period last year.
This worsening trend is also reflected in a recent study of A.T. Kearney, an international management consulting firm, on global foreign direct investment, which shows international investors losing confidence in Hungary and the region. Although the region’s relatively low labor costs and proximity to Western Europe continue to draw in investors, a lack of reforms and persistent corruption are of increasing concern. Hungary and Romania, which ranked 11th and 25th last year, were knocked off A.T. Kearney’s TOP 25 list altogether, while Poland and the Czech Republic fell back to the bottom quarter of the field.
As a result of this erosion in investor interest, Hungary’s Economy Ministry recently slashed its forecast for this year’s increase in FDI from €4 billion to about €2.5 billion. This indicates a drop of around 50% compared to 2006, and a figure below the 10-year average of roughly €3.5 billion.
Additional confirmation of Hungary’s eroding competitiveness comes from the European Commission’s latest review of member states’ progress on implementing the “Lisbon” competitiveness targets, which described the country’s advancement between 2005 and 2007 as “limited.” According to an EC official interviewed by business daily Világgazdaság, Hungary must find ways to discourage early retirement, and should offer financial incentives, such as bonuses, for employees who work beyond their retirement age and mothers who return to the workforce after giving birth.
Hungarian officials have noted, however, that the government implemented a raft of legislation this summer aimed at improving the country’s business environment, whose effects will be seen starting next year. Thanks to an amendment to the company law in September, setting up a business now takes only two days – and as little as an hour, starting in January. In addition, the minimum capital required to start a new business has been reduced to Ft 500,000 (approximately €2,000) for limited liability companies (Kft) and Ft 5 million for privately held stock companies (Zrt).
Meanwhile, transparency has also increased. From January, 2008, anyone can access basic company information for free, and liquidation orders will promptly appear in the official company bulletin (Cégközlöny), which should help prevent the illegal manipulation of assets belonging to companies entering bankruptcy.