Analysis

Top Managers Talk About Doing Business in the Mafia State

“Today, there is a fear from central authority in people’s blood; a fear that they can take away anything, do anything.”

Under condition of anonymity, dozens of top managers discussed the Hungarian business climate with British researchers. 

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) interviewed 60 top managers in Hungary (2009-2017). They were afraid of the state.

Here are some quotes from them.

On the takeover of public institutions and the uncertainty that makes it impossible to function. 

“‘[P]ublic administrators are very much threatened – today they can be fired without a reason. It is not necessary [for Fidesz politicians] to even give them a mandate to do this or that, because they are so scared that they want to please politicians.”

“I know somebody, who used to work for a ministry two years ago, and since then he cannot find a job. Just because he worked there at the time of the other government.

I believe that today the power is in one hand – Orbán’s. Not even his ministers know which way to go. So, this adds to the uncertainty. People do not know what they can or cannot do. People cannot operate.”

And a taste of how companies were handled by the bureaucrats – who themselves were on a short leash and uncertain about what they are supposed to execute.

“A representative of a subsidiary of a foreign MNC was present at a meeting with a ministry involved in the introduction of so-called ‘crisis taxes’ in certain industries. The so called ’crisis taxes’ were introduced in 2010 by the Orbán government on the energy, retail, and telecoms sectors in an attempt to control the budget deficit without imposing spending cuts on the population. However, they were also used by the Orbán government to put pressure on companies. During the meeting it became clear that even the Secretary of State needed higher level approval to meet with industry representatives:

“When the crisis tax was introduced a Secretary of State met us – in our role as representatives of the trade association – in the Ministry of Economy and he said to us that he had been ‘authorised’ to meet us.”

On the takeover of companies – by nationalization or forced buyouts – often preceded by legal maneuvers to make the target companies unprofitable. 

“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)” explains the paper before bringing us the interviews.

“[T]hey are killing the economy with indirect tools, like tobacco legislation. They turn the retail trade of tobacco products into a state monopoly; and then they turn the retail of alcohol and lotto sales into a state monopoly as well. So, all private tobacco firms, alcohol firms, and Toto-lotto firms go bankrupt. This is how they create a market for their own economic empire.”

“As a result of this economic policy, a new oligarch circle has been created who took over a few sectors, like retail, media and construction.”

Sectoral taxes, financial crisis tax, legislation on Sunday opening times, they all served the goal to bring into position Hungarian chains and force the change of ownership in the sector. This has not happened yet. We feel that this goal is still there and we constantly have to pay attention to see how the government will try to force this change of ownership with legislative changes or other ways, so in this respect the role of the state is absolute dominant.”

As the paper notes, “where tensions arise between public authorities and a company, managers are often threatened with financial assessments (mostly by the tax authorities) or other types of state investigations in order to keep them in line. Thus, our interviewee from a large Hungarian company described the situation where the company was owed money by a SOE and the state authorities intervened to settle the conflict:

I was ordered to go to the Ministry to see the Secretary of State […]. He was very rude and told me that whatever will happen he will sit in his chair for the next eight years and therefore he advises me not to go ahead [with the lawsuit against the debtor SOE], because obviously he will make me feel the weight of my decision […]. There were five people there […]”

This type of arbitrary state intervention has created a more general fear among the business elite of the state authorities:

“Today, there is a fear from central authority in people’s blood; a fear that they can take away anything, do anything.”

You make decisions that you would not make in a stable environment. I give work to this person,…money to that person… Just leave me alone!…People get easily threatened or blackmailed. Look at the news; how many times were people taken away in handcuffs? The news never say whether they were innocent or guilty. So, CEOs are kept in fear.”

“They have made life so difficult and so expensive for the foreign-owned utilities companies that they forced them to sell out. Regulating gas and electricity retail prices down to loss making levels, instituting utility tax […]. You did not see a wave of Venezuela style nationalisation but measures were taken to seriously reduce value of these companies and then they [could buy them up]. That’s what happened in the utilities and bank industries. “

And how it will play out in the future? Someone has a guess.

“The government nationalised gas utility companies. […] So politically the message is very good: we have chased out profit-hungry foreign multinationals. They [the state] take over these utility services, then technological standards will erode and the government will say we need to improve the technological quality, they will improve it from taxpayers’ money…oh no, before they start to improve, they will assign who will be the future buyers… their mates. Then they will sign the contract with them and afterwards the state will improve the technological quality of the companies for several billion HUFs and then these firms will be transferred into private hands close to the government. And then sooner or later they will try to sell them again to foreign multinationals.”

“They buy up a lot of companies…They use mafia tools. They use the power of the state. […] For example, I know of a media company, which made lamppost posters for parties during elections. They were always very careful to have 50-50 percent of Fidesz and MSZP on their posters. It is a private company. Some people went there and said ‘we would like to have 50 percent of your company for free’. As the company did not want to ‘sell’, after two months the same people went back and said ‘we want 80 percent of the company’. Then – when the owners still did not sell – after two weeks they introduced a law that forbids political posters on city lampposts. As a consequence the market value of the firm went down to 10 percent [of its previous value].”

“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.”

As the paper concludes, “the situation when the economic and political life is separated from each other and have a corrupt relationship – is over.

“The government puts itself on top of the economy. Simply put: where there is a large investment, political deals rule. Firms have to win the favours of politicians… [But] behind politics there is always private business.”

The paper interpreted the phenomenon and economic backsliding in Hungary from developmental state into a clan-state. That’s one way to put it. “We selected Hungary as a critical- or revelatory case, because it is arguably one of the most extreme cases of ‘backsliding.’ In 2005, the EBRD (2005) designated Hungary the most advanced country in its transition to a western-style liberal capitalism. Ten years later, despite some recent setbacks for the Fidesz party, Hungary is essentially controlled by a single party.”

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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4 thoughts on “Top Managers Talk About Doing Business in the Mafia State

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