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The Step-by-Step Erosion of Democratic Institutions and the Market Economy

In their paper The Transformation of Post-socialist Capitalism – From Developmental State to Clan State? Dorottya Sallai (University of Greenwich) and Gerhard Schnyder (Loughborough University London) described the step by step castration of democratic institutions – every step (mostly) legal and yet, their cumulative effect put all power into one hand.

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“Since 2010, Fidesz has used its control over parliament to ‘create a system based on the monopolization of the most important elements of political power’. The government introduced legal changes that centralised decision-making at various levels of the state bureaucracy.

The increasing centralisation of the state structure was accompanied by the appointed of people close to Fidesz to key state positions. … Some of the institutions affected by party-related appointments were the State Audit Office, the Prosecutor’s Office, the Hungarian Financial Supervisory Authority, and the Budgetary Council.”

“More generally, the government ‘colonised’ the state bureaucracy through political appointments to key public positions. Thus, a former Fidesz member of the parliament has become President of the Media Authority, while the spouse of a prominent Fidesz Member of European Parliament (MEP) became Head of the National Judicial Office. The Constitutional Court’s jurisdiction has been reduced substantially when the justices appointed by Fidesz–KDNP obtained a majority in the court in 2013.”

“Newly introduced legislation made it possible to dismiss public officials without cause, which in turn made ‘the cleansing of the entire government apparatus’ possible. These changes violate if not the letter, so at least the spirit of the Civil Service Act of 1992…”

That’s a sophisticated way of saying “all public servants have been fired, down to the receptionists at ministries, to make sure all hires are politically loyal and know who feeds them”. But that was back in 2010, so who remembers?

“Indeed, one key element of the rise of the Orbán clan in Hungary is the undermining of the previously – for post-socialist standards – exemplary technocratic and meritocratic bureaucracy. Indeed the elimination of a meritocratic civil service and the worsening employment/retirement conditions of public servants have created an atmosphere in which public administrators became servile to the governing elite rather than wedded to professional standards.”

On the economy

“Besides the colonisation of the state bureaucracy and its use for the benefit of clan members, the second set of mechanisms used by the Orbán clan to extend its control over the economy was more direct and involved the transfer of corporate ownership to clan members. Our empirical material shows three ways in which this was achieved, namely through legal reforms, the re-nationalisation of companies, and forced buy-outs (FBOs).”

1. Legal and tax reforms

“Legal and tax reforms allow the government to change the ‘playing field’ via legal reforms in ways that existing companies cannot cope with. Thus, various legal changes forced existing companies in different sectors out of business and paved the way for entry of new, politically connected companies. Targeted sectors were mainly those focused on the domestic market in particular in the services sector, because foreign investment in these areas were considered ‘bad FDI’ by the government.”

“One of the most notable instances of the government driving out foreign investment was the 2013 re-regulation of the tobacco market. The cabinet introduced a law that guaranteed state monopoly for retail sales of tobacco products, withdrew all previously existing retail licenses, and handed out a more limited number, mostly to people close to prominent Fidesz members. This step drastically disadvantaged major multinational tobacco companies and small family-owned retail shops.

In December 2014, the government further restricted the market at the wholesale level, stipulating that the newly licensed retailers will only be permitted to purchase from state-owned wholesale corporations or those that the state contracted. Due to the monopolisation of tobacco products, the number of retail outlets dropped sharply from the previous 42,000 to 5,415.”

“The tobacco case also showcases how regulatory decisions were enforced in an authoritarian fashion regardless of appeals to courts. When the government introduced the monopolisation of tobacco retail sales, amendments were introduced after the closing date for applications for retail licences and the concession was awarded without an open tender process. Furthermore the 2015 Freedom of Information Act abolished the government obligation to share information and data used in the decision-making process.

While petty corruption has been a longstanding problem in Hungary, it is a new phenomenon that the ruling clan – through the party and the state – directly influences companies’ position in the market, restructures industries, and appoints or eliminates the dominant players in the Hungarian economy.”

“A similar reshaping of an industry in favour of the new elite at the expense of foreign companies took place in the retail sector. A ’special tax’ was introduced in 2010 with a retroactive effect. The tax required all retailers operating in Hungary with annual revenue over 500 million HUF ($2.2 million) to pay the tax on their consolidated revenues.

“In February 2014 the European Court of Justice ruled that the special retail tax puts companies from other EU member states at a competitive disadvantage as many of the largest retail groups were exposed to the highest rate of 2.5 percent of the progressive tax system, while domestic, smaller retailers pay the tax at a rate of maximal 0.4 percent.

“Yet, in December 2015, the parliament passed a series of laws that directly targeted international retail chains operating supermarkets in Hungary. The new legislation required non-family-owned retailers of a certain size to remain closed on Sundays, and the other forces stores to close if they reported losses for two consecutive years. The combination of these laws was considered to put multinational corporations such as Tesco, Auchan, Spar, Lidl, and Aldi in an even more disadvantageous position, while benefiting Hungarian competitors, including the CBA supermarket chain, which was established in 1992 and has since grown to become Hungary’s largest supermarket chain.”

“These examples illustrate how the government has been using its legislative power to try and change the playing field in different sectors to reallocate property to members of the clan. The role of legal reform in this process is important. The use of legal reform constitutes a qualitatively new string to the ruling party’s bow. Indeed, while re-allocation of property took place through informal networks and opaque clientelism in the early years of post-socialism, it is now done quite openly – albeit indirectly – through legislation. This open, top-down rent-seeking together with the centralisation and politicization of state action constitutes a new phenomenon in Hungary, which has consequences beyond the specific cases.”

“Indeed, the instrumental use of legal reform as strategy of control by the government has led to the managerial elite fearing the exposure to the arbitrariness of the legal system, which – in turn – makes the legal strategy even more effective from the government’s point of view. Thus, a Transparency International report found that ‘if the authority makes a mistake, there are required legal procedures in place to resolve the issue. [However,] the fear of exposure [to the arbitrariness of the legal system] is so high that firms would rather choose other means than to file a lawsuit against the authorities’.”

2. (Re-)nationalisations

“The second mechanism the state uses to ‘take back control’ concerns more direct forms of re-nationalisations of firms. After the initial wave of privatisations in the 1990s, re-nationalisations started in 2010 when the government nationalised the private pillar of the mandatory pension system.

“The first company targeted by re-nationalisation was MAL Zrt., one of the largest aluminium manufacturers in Hungary. When a red sludge reservoir burst and caused serious environmental damage as well as deaths, the government used the accident as a pretext and made the Parliament nationalise MAL a few days after the disaster. A year later in 2011 the government suspended state control over MAL, but the regional environmental agency declared a HUF135 billion fine for the company.”

“While the export orientated sectors and industries relying on complex technology were largely unaffected by these changes, companies in domestically orientated sectors were targeted even when the owners were foreign MNCs.

Besides energy, the state-ownership expanded significantly in sectors such as banking, public works, transportation, the media, and advertising. Indeed, the Orbán government has regularly used re-nationalisation even when it affected foreign owners. Thus, in 2012 the government declared its plans to re-nationalise the gas sector by buying back E-On’s Hungarian gas business and bought back 21.2 percent of the previously privatized national oil and gas corporation MOL from the Russian oil company Surgutneftegas.

By 2016 energy retailing has become a government-owned monopoly as the state has bought private electricity and gas retailers through the state-owned Hungarian Development Bank (MFB) and the Hungarian Electricity Company (MVM). Through these transactions the state has bought subsidiaries of the German E.On and RWE and the French GDF and EDF.”

“Nonetheless, the re-nationalisations in Hungary are – despite the rhetoric – not part of a national developmental strategy, but rather serve the governing elite to extend their power over the economy and enrich its members. Therefore, they can be considered as part of ‘economic backsliding’.”

3. Forced buy-outs (FBOs)

“A final mechanism through which the Orbán government has wrestled back control over the economy from the business elite was through ‘forced buy-outs’ (FBOs). FBOs resemble what is known in the Russian case as illegal corporate raiding (reyderstvo), but is used in Hungary more actively by elites close to the government. Our respondents referred to many concrete cases of FBOs. Indeed, since 2010 ‘private property has become the target of frequent legal, economic and ideological attacks’.”

“Interviews suggest that FBOs generally consist of Fidesz-related individuals approaching the owners of private companies and ‘persuading’ them to ‘sell’ their ownership rights, often without payment. Our respondents claimed that in case the owners refused to cooperate and sell part or the whole company, the ‘buyer’ threatened the targeted firms with tax office investigations, no access to public contracts, or other negative consequences.”

“Several other interviewees confirm that threat of government retaliation can be enough to make company owners give up there company.”

“Contrary to re-nationalisations through legal means, FBOs do not transfer ownership to the state, but directly to private individuals close to the governing elite.”

State and cronies are all the same

“Indeed, one respondent stressed the wide-spread view among business leaders in Hungary, that the current situation is characterised by a blurring of the distinction between the interests of the state and that of a clan:

‘In my view, it is not the state that competes with firms, but rather individuals who compete through the use of the state’s infrastructure. Today there is a more developed system [of politicians controlling the economy] in Hungary; they do not need moneyboxes [i.e. cardboard boxes filled with money for bribes] any more. They simply do not give public jobs to anybody, but their own firms. As a result, you cannot trace corruption any more. You only observe that there are privileged and not privileged firms. It is hard to get jobs for anybody else in the market.’

“Several respondents confirm this view of private interests of groups close to the governing clan prevailing over public goals and interests, such as socio-economic development.”

‘It is economic profit seeking, not political. Certain elites think they have to put their hands on particular sectors, because they are profitable. […] Behind the state there are personal interests and companies.’

(Emphasis our own.)

Read more:

Sallai (Egerszegi), Dorottya and Schnyder, Gerhard, The Transformation of Post-Socialist Capitalism – From Developmental State to Clan State? (January 12, 2018). Greenwich Paper in Political Economy No. GPERC57. Available at SSRN: https://ssrn.com/abstract=3100775 or http://dx.doi.org/10.2139/ssrn.3100775
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One thought on “The Step-by-Step Erosion of Democratic Institutions and the Market Economy

  1. Pingback: “Men wearing dark glasses ask for your company” | Meanwhile in Budapest

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