Helping Hungary Move From a Labor- to Technology-intensive Country

BBJ: According to a study by McKinsey from last year, the potential economic and developmental benefits of digitization for Hungary could reach up to EUR 9 billion in additional GDP by 2025. Where do we stand right now?

Tamás Laufer: Four years ago, IVSZ assessed the digital economy and its contribution to GDP and gross value added. Unlike Hungary’s Central Statistical Office (KSH) and also the EU’s Eurostat, which collect data from the fields of ICT and communication separately, we used a new methodology, taking a more holistic approach. When trying to gauge the size and significance of the digital economy, not only should we look at ICT firms but companies that use such tools and technology and the profits they make. Also, what opportunities they create indirectly in other areas, and there is no data available for that.

Then we said that the size of the digital economy was 20%, far bigger than McKinsey stated in its study (7%) through a different methodology that did not take into account the spill-over effects. This year, we have conducted a new study called “Digital Economy Footprint” with updated methodology. Though the results will be revealed only later this month, it is obvious that the significance of digital economy has constantly been growing ever since.  

BBJ: How does the level of digitization affect the country’s global market position?

TL: There is, indeed, a connection between the dynamics of a certain field and a country’s level of robotization. In this ranking, South Korea is by far the world’s leader with 600-700 robots/10,000 people. Looking at the what companies (Samsung, Hyundai etc.) reside in South Korea, this connection is obvious. In Europe, Germany takes the lead with 150, while in Hungary, this figure stood at 50 a few years ago. Since this data is projected on 10,000 people, the ratio of automation within a large company in the country is much better.

Today, Hungary is still a workforce-intensive country, not technology intensive, but we are headed to that direction. One reason is the wage increase of nearly 40% that has taken place in the past two years. Some firms responded by cutting labor, others have opted for technology-intensive investments. To give you an idea, in a factory where they employed 100 people they now need ten, while the need for support staff has increased.  

BBJ: Yet this support staff needs digital skills as well. How digitally savvy is the active workforce in Hungary?

TL: With wages increasing and companies continuing demand for labor, a new trend has emerged: people become less motivated to learn new skills seeing the purchase power of their salaries rising. The wage rise was the result of the labor shortage, not of newly acquired skills. Large companies have also started to digitalize their operations because, compared to their peers abroad, productivity and efficiency in some Hungarian daughter companies is lower. This is challenging as well, as qualified support staff are also in short supply. A further dilemma is that they cannot send their employees for a year-long training, and if they take on qualified workforce that would further increase wages. The solution is to create the ideal blend of classroom activities and e-learning that would help time-efficient training of the existing staff. Professional education is being reformed right now, but even so it is unable to retrain a sufficient number of professionals to fill all vacancies. Together with chambers of commerce and the government, IVSZ created a training program called the Digital Workforce Program that aimed to reduce the labor shortage two years ago, but it never really took off. Part of the reason why it didn’t is that there is not really a culture of lifelong learning in Hungary. In Europe, we are at the bottom in terms of professional learning with less than 10%, while in some Western European countries this ratio can reach up to 20%.

BBJ: How has IVSZ aligned its structure to address these new challenges?

TL: Digitization has opened the world and the way we have restructured operations reflects that. We haven’t changed our scope, rather the “platform” affected has changed. Our members can be divided into two categories: ICT firms themselves, and companies for which digitization is key to operations; these include banks, insurance, fintech companies, etc.

What we are trying to achieve is that all fields have their own digital strategy, such as the agriculture, which has been approved recently. The solutions comprised in the program will help farmers strengthen their position against integrators. We are part of the Industry 4.0 strategy and work with domestic SMEs to support their digital transition. To fully support these programs, IVSZ has reorganized its boards. Unlike earlier, now every board member has a field assigned to them that they are responsible for. These include strategies for startups, education, innovation, export, etc. Our management has become more departmentalized; we hope we can operate much more efficiently as a result. We are also the founders and a member of the Artificial Intelligence Coalition, a very active working group with several members that aims to address and have legislation created for problems such as access to data of public interest. This information, usually “owned” by an institution, can be a solid foundation for AI-based developments.