As Hungary lauds its ‘Eastern Opening’ policy, statistics fail to show benefits

Chinese Foreign Minister Wang Yi (L) is guided by Hungarian Minister of Foreign Affairs and Trade Peter Szijjarto during their meeting in the latter's office in Budapest, Hungary, 12 July 2019. [EPA-EFE/Lajos Soos]

The Hungarian government has been boasting of its trade policy’s Eastern success, but data shows that the country’s economic reliance on the EU has not changed since 2010, and the promised Eastern opportunities have never materialised. EURACTIV’s media partner Telex reports.

“We are entering a new era (in the history) of the world economy. The government’s Eastern Opening policy, launched eleven years ago, has contributed significantly to Hungary being among the winners,” Hungarian foreign minister Péter Szijjártó said in late March during a visit to Uzbekistan.

This sort of rhetoric has been a mainstay of Hungarian foreign policy since Fidesz came to power in 2010.

This idea is far from radical: from Germany to Serbia, many European countries are pursuing trade and investment opportunities in rapidly growing East Asian economies.

But while the Orbán government has invested considerable political capital into cosying up with Eastern regimes – going so far as to veto European Union statements condemning human rights abuses in China and elsewhere – the promised Eastern opportunities have never materialised.

Emerging Asian economies absorbed only 2.4% of Hungarian exports in 2020 – the exact same amount as in 2010. The Chinese export share shows a similar story: it went from 1.6% in 2010 to only 1.7% in 2020.

In contrast, Hungary’s reliance on exports to the EU grew in the same period, from 73% in 2010 to 77.3% in 2020.

Due to the combination of lacklustre exports and modestly rising imports, Hungary’s trade balance with East Asia has actually been worsening in recent years. And while Hungarian exporters are in the red with the East, they are running a growing surplus with the EU.

In light of the abysmal trade data, Szijjártó has recently been focusing on rising Eastern investment in Hungary. In a Facebook post last December, the foreign minister wrote that “we have never had such a successful year in terms of investment.”

In another post, he said China was the primary source of new direct investment in Hungary in 2020, while South Korea was the leading foreign investor in 2019.

The national accounts appear to suggest otherwise, however.

According to data from the National Bank of Hungary, the majority of the foreign direct investment (FDI) stock in Hungary is held by companies located in the EU; and their share in the total FDI stock had actually grown between 2014 and 2018, the latest year for which data based on the location of the ultimate investor is available.

When it comes to FDI inflows, the relative importance of Asian investment has been on the rise since 2018, but the absolute value of investment remained constant at around one billion euros yearly between 2018 and 2020.

At the same time, inflows from Europe and the Americas shrank considerably. In 2020 alone, German investors repatriated (or wrote off) 1.9 billion euros worth of FDI, while in the previous year, Hungary registered an outflow of 1 billion euros towards the Americas.

In other words, investment has been drying up.

The Ministry of Foreign Affairs and Trade has not replied to Telex’s inquiries about the disparities between the national accounts and Szijjártó’s Facebook posts.

Eastern winds – blowing from the West

However, investment from Asia does not necessarily reduce Hungary’s reliance on Western markets; and Western investment often contributes to raising Hungarian exports to Asian economies.

Asian investors usually choose to invest in Hungary either to produce goods for Western European markets or to serve as a supplier for European production networks in the electronics and the auto industry.

Hence, goods produced by Eastern companies in Hungary end up being exported to the EU, deepening the reliance of the Hungarian economy on Western demand.

On the other hand, Western investors are more likely to export their Hungarian production to East Asia. The best example is the German auto industry, which has considerable production bases in Hungary through Audi and Daimler, and accounts for a large share of Hungarian exports to Asian economies.

Another important flaw in the government’s rhetoric is that Eastern investment does not appear to be more productive than the Western one.

According to a recent study by the Hungarian Academy of Sciences, most of Eastern FDI is concentrated in lower value-added manufacturing, and research and development activities by emerging investors are scarce. They are also unlikely to use local suppliers and tend to work with their global partners, reducing the likelihood of positive spill-overs for Hungarian firms.

Race to the bottom

Hungary’s allure as an investment destination is further elevated by low taxes and low wages.

The Hungarian corporate tax rate, at 9%, is the lowest in the EU and among the lowest in the world, while larger foreign investors routinely receive further tax breaks. Unit labour costs are the third-lowest in the EU; while the Hungarian currency, the forint, lost over one-fifth of its value to the euro since 2010, further lowering the cost of doing business there.

This sort of development strategy, when a country tries to lure investment by keeping taxes and wages low, is often referred to as the ‘race to the bottom’.

According to its critics, such a strategy is ill-suited for a middle income country aspiring to catch up to developed economies, such as Hungary.

[Edited by Zoran Radosavljevic and Vlagyiszlav Makszimov]

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