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Productivity and wages: challenges ahead

New winds blow worldwide and so unusual sailing techniques are needed. A conclusion of the Prosperity Forum 2016, jointly held by the German-Hungarian Chamber of Commerce and Industry (DUIHK) and the Hungarian Investment Promotion Agency (HIPA), was that while Germany adapts to the changes rather than welcoming them, Hungary is shedding no tears over the passing of past political and economic routines. Yet, both countries are ready to implement changes in order to increase productivity.

Róbert Ésik, president of HIPA, Péter Szijjártó, Minister of Foreign Affairs & Trade, Dr. Volker Treier, DUIHK

“Flying from Paraguay, I could make it to the conference in time only because I took Swissair instead of Lufthansa,” said Dr. Volker Treier, deputy managing director of DUIHK, giving a humorous upbeat opening to the Prosperity Forum 2016. 

The event was held on November 24, the second day of a strike at Lufthansa that grounded thousands of flights, but Treier’s initial words proved a good departure for an afternoon that was mainly dedicated to the issues of workforce, wages and economic growth in a perilously changing environment.

“I do not want to complain but the world economy does not work out as expected,” Treier said, pointing out that some global figures are even worse than before the crisis. Still, Germany is “remarkably stable”, but, “we cannot be overconfident”, he stressed.

The German economy currently relies on the construction sector and domestic consumption. Yet, there is little reason for optimism since, when it comes to export prospects, German companies’ expectations are below the EU average, and have never been so low, except in 2009.

As both are dependent on exports, Hungary and Germany walk in same shoes. According to Treier, a closer cooperation and better communication between Berlin and the Visegrad Four countries (Hungary, Czech Republic, Poland and Slovakia) is necessary. “We share the same values,” he said.

Cooperation is increasingly important especially in times of shocking changes. Brexit, described by Treier as a “heavy strike on the German economy”, or the victory of Donald J. Trump in the U.S. Presidential elections were both unexpected.

End of political correctness  

There seems to be no debate about whether we live in exceptional times or not. “The period of political correctness is over and the new style crumbles the previous,” said Minister of Foreign Affairs and Trade Péter Szijjártó in his short yet substantive speech, adding: “This change is not necessarily against our interests.”

According to him, new challenges should not frighten Hungary, as six years ago its economy had already managed to come back from the edge of a cliff, though it took solutions very far from the European political mainstream. Yet, the country successfully broke a previously undoubted dogma, namely that growth, budgetary discipline and a decrease in unemployment cannot happen at the same time. “We have proven that there is no need to choose, and by now we are part of the solution instead of being part of the problem.”

The country achieved all this success while surrounded by “skepticism, wailing and Brusselsʼ attacks”, Szijjártó said, stressing that finally everyone had to acknowledge the Hungarian results.

“This is all good and nice but now we face new challenges,” he stressed. The dogma Hungary is about to gloriously disprove this time says that salaries and productivity cannot increase simultaneously. Hungary would prove that both aims are achievable simultaneously, the minister insisted.

To do so, “the state investment-promotion will face fundamental changes from next year”, he said. When applying for non-refundable budget support, companies’ technological developments and added value will have even heavier weight than the number of new workplaces the investment would create. At the same time, the government is also ready to support technological developments in order to keep the existing workforce, he added. A new program to support R&D projects will be launched and will also cover Budapest.

Significant tax cuts must be among the major tools, too, since budget support and infrastructure are not the major factors anymore when deciding on investment locations but, according to Szijjártó, corporate tax and workforce play a bigger role. He believes that the newly announced 9% corporate tax will make Hungary the most attractive investment destination in the EU, while the lower tax burdens will also enable higher salaries.

Local chances 

Szijjártó is already happy with this year’s numbers provided by HIPA. By October, the agency has put across 64 agreements, amounting up to EUR 3.2 billion and creating 16,000 new workplaces, which means it has already exceeded its 2015 record performance of EUR 1.4 bln in investments and 13,000 new jobs.

Still, there is always room for improvement. “The more international companies settle in Hungary, the more international firms increase their capacity in Hungary, the more beneficial it becomes for the local SMEs,” Szijjártó pointed out. The government is determined to support small companies in becoming part of the supplier chain of the bigger players, he added.

To increase competitiveness while keeping the Hungarian workforce within the borders the government recently announced a rise in minimum wages, as well as that reduction in corporate tax. These steps allow “the period of the higher salary to come in Hungary”, Szijjártó said at the end of his speech.

Good background 

The National Bank of Hungary (MNB) shares the idea that increasing the country’s productivity has to be the next step. According to Barnabás Virág, executive director at MNB, a new approach could bring an opportunity not only for Hungary to catch up, but also the entire region.

“High-pressure economy” seems to be the new keyword, a concept that manages labor market issues through higher salaries and more significant IT developments.

Due to the high mobility of the labor market within the EU, increasing wages is a must – not to mention the possible political consequences of unsatisfied masses, Virág added, referring to Brexit and Trump. At the same time, automatization will close off a lot of workplaces, which makes a new labor market strategy even more necessary. As such, the education system also has to adapt. New competencies will be needed and creativity will become one of the most important skills.

Passion and prospects 

In the podium discussion, Péter Ákos Bod, an economist and professor at Corvinus University Budapest, hit a different tone to Szijjártó and Virág. “A politician and a central banker should be optimistic indeed, it is included in their salaries, but let an academic man be realistic,” he said adding that Hungary hasn’t got much to be proud of when it comes to productivity.

Dr. László Parragh, the president of the Hungarian Chamber of Commerce quickly replied that he is also optimistic, even though he is not paid to be so. Also, “it might be a better idea to avoid such statements at an event aiming to attract investments”, he added.

Parragh, while acknowledging the achievements of the past years, would rather emphasize the role of education. He pointed out that while approximately three million people work in the Hungarian public sector, even the most modest estimations mention at least 300,000 Hungarians working abroad. On top of everything, “these people are probably our smartest and most capable ones”. Knowledge and economy have to be connected, he said. “Hungary should not be a good investment destination because its workforce is cheap, but because it is good.”

Róbert Ésik, the president of HIPA also believes in the ongoing benefits of cooperation between Germany and Hungary: every third new job in Hungary is created by a German company, he said.