Nationalized v Cronyfied – Which Is Worse?

According to OECD statistics, the share of the state in the economy in Hungary is large but largely in line with other countries. But when it comes to the number of companies owned by the state, Hungary is leading the pack by a gigantic margin.

But state-owned enterprises (SOEs) are just part of the story. PM Orbán has an explicit goal to cement himself and his cronies in economic power as well as to increase the influence of the governing Fidesz party in the economy.

What the statistics – and consequently macroeconomists – cannot measure  is how much of the economy is run not be the state – but by cronies. SOEs have a massive problem not having to respond to the forces of supply and demand and becoming vehicles of rent-seeking. But crony-owned enterprises (COEs) aren’t driven not by market logic either.

Crony-owned enterprises (COE) and other curiosities may legally look like private market players but are detached from the logic of the markets, and attempt to defy the forces of supply and demand by relying on political connections, laws written for them, and other legal but unfair means. When misbehaving or failing in their core business, these entities are sheltered by the same political connections – both legally and financially.

These are not just the old state-mandated monopolies – new forms of COEs also include licensed industries. But everything is always perfectly legal – to silence watchdogs and critics who are yearning for an excuse to avoid confrontation.

Where in the statistics goes the cronyfication of the economy?

And is it a positive force?

The question reminds to another one about SOEs and state capitalism. Is state capitalism a way-station to a more fully private economy? The best SOEs have demonstrated that they can thrive without the instructions of the state—and the worst have proved that, however many market disciplines you impose upon them, they will still find a way of turning state capitalism into its ugly sister, crony capitalism.

So is cronyfication a step towards privatisation, the eventual introduction of market logic in service of the customer – who also gains the option to walk away from the service if it gets bad? Or is it merely rent-seeking by politically well-connected private individuals? Given that many of these companies started off as genuine businesses before they were legally bankrupted, then sold to cash-rich cronies who just happen to have a great idea how to make the law that broke the business go away – the answer seems obvious.

Feel helpless? Just roll with it!

When people feel helpless against something, they can choose to become angry and frustrated about it – or change their minds about it. And every well-executed theft of freedom and control makes sure the victims have a way to feel they can get on the right side of the ripoff and get on board with the theft.

There is a new craze on the Budapest Stock Exchange (BUX). People who never took an interest in playing the stock market are now rushing to buy stocks – because they feel they can predict what is going to happen. (Similarly to the retail investors in Budapest rental property funds.) The reason for this craze is the world’s best performing stock that just happens to be Hungarian and listed on BUX.

“Kids, state funding is about to pour in and the stock price will go skyward!” wrote an anonymous investor the day Mészáros bought his stake in Konzum.

Now Konzum is neither innovative nor productive. It doesn’t hold valuable patents, didn’t invent anything, doesn’t make any profit right now. It had 2016 sales of just $91,000. It is not serving anyone, and it has no flashy plans to ever do so. It is just amassing assets right now. Its selling point? That it belongs to the Hungary’s new oligarch-in-chief, Lőrinc Mészáros, and he is a good pal of the prime minister Orbán.

“Sales at Hungarian conglomerate Konzum Nyrt. dropped 99 percent last year, its short-term debt ballooned sevenfold, and it cut its staff by 86 percent. This year? Konzum has the world’s best-performing stock, its shares soaring more than fiftyfold on the Budapest exchange at one point. The company has a market value of about $142 million. “Maybe I’m smarter” than Mark Zuckerberg, said Lorinc Meszaros, a former gas fitter who in February sparked the rally when he bought a 20 percent stake in Konzum”

–Bloomberg, July 2017

Some say Mészáros is Orbán’s straw man or front. Since 2014, when Mészáros replaced Lajos Simicska as Orbán’s chief oligarch, his wealth has increased fifteenfold, making him Hungary’s fifth-richest citizen, according to, with an estimated net worth of $460 million.

“Founded as a retailer a year before the fall of the Iron Curtain, Konzum listed on the resurrected Budapest Stock Exchange in 1990. Trying its hand at businesses such as selling building materials and manufacturing kitchenware, it bounced along in penny stock territory.

That changed in February when Meszaros announced he’d bought into Konzum”

–Bloomberg, July 2017

That’s enough attract the trust and speculative hopes of investors.

According to RTL Klub, the country’s last remaining major commercial TV channel not run by the government, companies linked with Mészáros and his family won 225 billion forint ($858 million) in public procurement contracts in 2016 alone. In a 2014 interview with Mészáros was asked how he did it, and he said

“God, luck, and Viktor Orban”

Daily quotas for Konzum’s shares are oversubscribed, its trade suspended for the day every time it jumps another 20%, only to continue the next day. People’s savings are going into the chief oligarch’s company, specializing exclusively in winning public procurement tenders. People are investing in cronyism, rather than a new startup, their children’s education or even buying into the property bubble of Budapest.

As another sign of market un-health, the stock that seems to move BUX by sheer volume is deemed too opaque and analysts refuse to discuss it. “Despite the popularity of Konzum’s shares—its trading volume sometimes exceeds that of the Budapest Stock Exchange’s four blue-chip companies combined—most brokerages have chosen not to publish regular reports and analyses about the company. Three analysts declined to discuss Konzum on the record, citing its opacity and saying they couldn’t see any justification for its share price,” wrote Bloomberg.

SOEs are not a sign of economic wealth – even if people tend to focus on the lame, make-believe, and eternally unfulfilled promises and excuses states give when they take control of something that could be done by civilians. They are a legal gray zone, their activities sheltered from publicity as well as legal obstacles that shackle ordinary market players. The profit motive is not miraculously replaced by selfless, burning concern for the (captive) customers – but a blatant disregard for its actual core activity in favor of attracting easier-to-get public money in subsidies and then bailouts. Abuse of market position is the norm –  even when they don’t get a legal monopoly.

COEs are – if possible, even worse on all these counts.

National antitrust law can in principle be used to deal with the abuse of dominant position by state-owned enterprises and that should apply to crony-owned empires as well, but not when the empire in question is so diverse. Since February 2017, Konzum has acquired stakes in at least five companies with assets ranging from campgrounds to banks to newspapers, adding to the portfolio of hotels it bought in 2016. Mészáros also controls considerable amount of land, energy companies and is rumored to get a few crumbs from the Russian mega-investment in the nuclear power station in Paks.

So why is the public complacent – apart from the obvious legal sense of helplessness? Because not only do the cronies hope to benefit from their political pull – but so do the men of the street. (And only one of these will prove to be right.) What no one is concerned about is creating any economic value to anyone.

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Featured image: Lőrinc Mészáros, Orbán’s former gas repairman turned chief tender winner judging a local goulash competition Photo:  Bankó Gábor

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