The Initial Negative Effects
Of Joining the Free Frontier
The Hungarian Example
February 27, 2004
Alex Thorn
Entering the
European Union (EU) can prove a daunting task for any nation. In order to be
eligible for consideration, prospective EU nations must adhere to or, in some
cases, achieve EU standards that are often difficult and/or costly to
implement. And, during the transition period, the EU requires that certain
problems be dealt with much more rapidly, such as attacking poverty, ending discrimination
(whether malicious or simply inherent), and either repaying or achieving
cancellations on much of the sovereign debt. In addition to dealing with the
difficulties of meeting EU standards, the initial admissions into the EU will
likely have notable negative economic impacts on new member nations. The
upcoming addition of the Republic of Hungary
(colloquially called Hungary)
to the EU is a fine example. Nevertheless, these possible negative burdens are probably
only relevant in the short term. If there weren’t overwhelming beneficial
reasons to join the EU, plain and simple: countries, like the Republic
of Hungary, wouldn’t be bidding for
membership.
In making the transition
from a state formerly controlled by communist culture, as is Hungary,
to a member-nation of the fully free and unprotected market of the European
Union, it should be noted that there will
be domestic economic disadvantages for the entering nation. When Hungary
joins the EU, the nation’s generous worker benefits and low unemployment may
facilitate a surge of foreign workers willing to work for less will offer stiff
competition for the Hungarians’ jobs. Low tariffs and barrier-free trade could
flood Hungary
with western imports while home grown products are left with no way to compete
with the cheaper market. Both of these scenarios are realistic possibilities
and may already have begun.
This May, Hungary
is scheduled to join the European Union along with nine other nations, an event
that will mark the culmination of a movement long waited by Hungarians. However,
unlike most EU hopefuls, Hungary’s
chief excitement about joining the European Union was not to receive access to
the self described “frontier-free single market.” In
fact, many Hungarians, especially farmers, small business owners, and light
industrial companies are vehemently against such an unprotected free market for
the fear of being inevitably invaded by the more capitalized and better
established firms from western or more advanced European countries and the undercutting
of domestic Hungarian businesses that would ensue. Instead, Hungarians feel
that they always belonged to Europe, at least
culturally, but that communism cut them off from the West and made them part of
a totally eastern, orthodox culture dominated by the Russians. Essentially,
there is a general desire among the Hungarian public to try to regain prestige
and, regardless of how childish it may sound, fit in with in Europe.
For a relatively
undeveloped, fledgling economy, Hungary
boasts one of the lowest unemployment rates in the entire world (5.8%). Hungary’s
unemployment rate is significantly lower than nearly all of the other nations
scheduled to enter the EU in May, such as those of Slovakia
(17.2%), Lithuania
(12.5%), Estonia
(12.4%), Slovenia
(11%), and the Czech Republic
(9.8%). Yet, while low unemployment rates are normally a great thing in an
economy, Hungary’s
low rate amongst nations with much higher unemployment rates will serve as a
disadvantage for its initial economic success as it becomes a member of the EU.
The logical
question then, becomes, why will Hungary’s
low unemployment rate actually hurt the
economic success of the nation? Isn’t low unemployment always a good thing? In
order to address these questions in the context of Hungary’s complex unemployment situation, one must
first take a look at why Hungary’s
unemployment rate is actually so low. In reality, the low unemployment rate is
the offspring of an amalgam of some societal realities and some policies
implemented since Hungary
became free from the Soviet Union.
One major reason
that Hungarian unemployment rate is so low is that since regaining its
independence with the collapse of the Soviet Union,
there has been an immense cultural focus on improving public education through
reforms. During
the early 1990s, a time of economic recession that limited financial resources,
one of the most influential reforms was passed when the government endorsed the
idea that students and parents could have a choice as to what type of school
the student would study in after fulfilling the required 8 years of primary
educations. Upon
completing the primary education, many students enrolled in either full
vocational (work program focused) or dual vocational (mix between academic and
work program study). It is to this conviction to improve the educational
system, especially in providing plenty of properly funded standard and vocational high schools,
that the low unemployment rate of 5.8% can be partially attributed. The
Hungarian system, and specifically its focus on providing and promoting a vocational education path, through which
nearly 65% of Hungarian students passed in 2000,
allows more citizens to be educated by public schools (and therefore, for less
money) in fields that have realistic and obtainable occupational goals, such as
in industrial work and in service-based labor. Basically, the vocational high
schools create reliable, educated citizens for the working class.
As stated by
Laszlo Papp, former President of the Western region of the World Hungarian
Federation (WFO), “Hungarian population growth has slowed in recent years to have
one of the lowest population growth rates in Europe and so there are not a lot
of workers to compete in the job market.” This
phenomenon is the second major cause of low unemployment rates in Hungary.
Literally, the population growth rate isn’t just slowing, it’s already declined
all the way into negative percentages (-0.29%),
whereas the productivity of the economy has not. More
simply stated, where once the population growth rate and productivity/jobs
fluctuated in proportion to one another (as they normally do in the basic
supply vs. demand relationship), it is no longer. The
population growth rate has slowed to the point where the population is actually
declining. Yet, at
the same time, Hungarian productivity has held on to its previous course, with
the Gross Domestic Product (GDP) growth rate at 2.5% in 1977
and rising to its current 3.3%.
The final cause of
low unemployment in Hungary
is essentially the same as the major cause of France’s
high unemployment rates: Government programs encourage each. In France,
a nation with nearly a 10% unemployment rate, the government provides such
comprehensive and generous welfare programs for the jobless that there isn’t
enough incentive to work instead of living off of government funded welfare
programs. In Hungary,
in a sort of oxymoronic “contrasting similarity,”
as Mr. Papp referred to it, there are nearly as comprehensive and generous social security programs for the
working. Mr. Papp illustrated an example, “for instance, people above 65 are
traveling free on railroads, streetcars and buses. Most nations that are much
more developed than Hungary
– the United States,
Great Britain, Germany
– don’t even have such generous programs.”
Unfortunately, these programs put a large burden on the government and economy
to deliver the capital necessary for such generosity. In order to gain support,
the current government, led by Prime Minister Peter Medgyessy, raised wages and
social security beyond the rate of productivity – however, by spending more
money than Hungary
country can pay creates a bigger deficit and it is contrary to the needs of a
growing economy. Compensation should be set by productivity – not the other way
around or independent of one another – because when compensation goes ahead of
productivity it creates a shortage of capital and “the increased deficit will
put a brake on the economy.”
This mismanagement of funds will prove costly in the future when Hungary’s
entrance into the EU requires economic stability and government protection for
domestic products.
Why will the low
unemployment rate initially leave Hungary’s
economy at a disadvantage as it joins the EU? At least in its current form, the
partnerships formed by the EU are manifested through economic open market and
“free-frontier” agreements and policies. It is this simple fact that makes low
unemployment disadvantageous for Hungary’s
domestic economy. A great example of this disadvantage that the unrestricted
opening of the domestic economy to the European Union is what will happen to Hungary’s
agricultural sector (4.1% of GDP).
During the communist
era, Hungary
established large and state owned industries, agricultural ones among them.
These large, state owned industries offered protection and stability to the
economy, for the government was directly involved in raising its own funds. When
communist system was abolished, however, these large agricultural entities were
cut up and the land was subdivided into small farms. While socially and
culturally de-communizing the economy in post-Soviet Hungary
was both wanted and necessary, economically it is starting to prove
ineffective. Even before Hungary
joins the EU, globalization is making it hard enough for Hungary’s
agricultural sector to compete internationally. In fact, Hungarian farmers have
found it nearly impossible to sell their products outside of their own nation.
And so when Hungary
enters into the European Union and the boarders are completely opened, the
small, domestic, Hungarian farms will not be able to compete with large, more
capitalized and more widely established firms from western more advanced
countries.
The United
States, to some extent, found itself in a
similar predicament leading up to and culminating with the Great Depression.
After high profits during the World War I production years, a steep drop-off in
international need for American farm products coupled with the universally felt
difficulties during the Great Depression, the prices of American farmers’
products were at an all time low. At the worst point, in 1932, American farmers
were only making 58 cents back for every dollar spent on production.
In response to the farmers’ inabilities to turn profits at the market price,
President Roosevelt initiated the policy of farm
subsidies, forms of which exist in the US
today.
In the simplest
terms, farm subsidies are essentially federal funds given to farmers as
financial support to allow farmers to sell their crops at the lower market
level who wouldn’t otherwise be able to do so without the supplementary
subsidies to make up for their profit loss.
This very instant,
there is a farmers’ revolt in Hungary.
Farmers are worried that the opening of the Hungarian economic frontiers that
will come with EU membership in May will put them out of business and, as the
only option they believe they have, are blocking all the major roads with
trucks and people in a demand for farming subsidies to be instituted to protect
the domestic agricultural sector. And they are right. The unrestricted, free
market economy that membership of the EU will bring without duties or tariffs
will leave Hungarian farmers exposed to what American’s have come to know as
the Wal-Mart Effect: a huge established
corporation comes into a struggling market and displaces domestic businesses by
effortlessly undercutting any competition. Mr. Papp conceded on this point that
even though “[he is] against subsidizing in general – in Hungary, the US, in
general – during this limited period of time [as Hungary enters the EU], the
Hungarian farmers will require some economic protection until they can get
upgraded and have enough capital investment to be competitive [without
subsidies provided by the government].”
The problem, however, is that farming subsidies are expensive. It is when
addressing this issue of farming subsidies that the curse of Hungary’s
social services expenditures (and, therefore, the low unemployment rates that it
creates) becomes so apparent. As a direct result of approving expenditures for
social security that exceed the productivity in Hungary has caused the national
budget deficit to rise significantly higher than planned: the budget deficit
for 2003 was 4.5%, in an effort to gradually get the deficit down underneath
the European Union’s 3% of GDP deficit limit, but instead the budget deficit
grew to 5.6% of GDP, thus rendering impossible any consideration of the large
scale government spending that would be necessary to effectively initiate a
farming subsidy program. Thus, the farmers will likely get left out in the dark
come May as a direct result of the low unemployment and the government’s poor policies
towards it.
However,
corporations won’t be the only invaders of Hungary
when “free-frontiers” are adopted. This is where the difference in unemployment
rates really kicks in. The Citizens from EU member nations, especially those
entering with Hungary
in May with much higher unemployment rates, such as Slovakia
(17.2% unemployed) or Lithuania
(12.5% unemployed), will flood Hungary
in search of acquiring a “sweet deal.” Because of the abundance of jobs – as
evident from the nation’s low unemployment rate – and generous wages and social
security benefits, Hungary will be itself overrun by foreigners who not only will
server as competition for Hungarian jobs by crowding the worker force, but will
likely be willing to work for lower wages and less social security benefits
than the Hungarians, who have grown accustomed to their government’s generous
spending.
This
possible downside to entering the EU has gained much more prominence since the
beginning of the farmers’ protests. Now, the glamorous notion of Hungary’s
entrance into the European Union has for some citizens lost some of its shine. In
his last statement of the interview, Mr. Papp agreed that “where there was once
a great anxious excitement about a mutually sacred bond between nations now exists
a somewhat subdued enthusiasm in the Hungarian citizens for their EU membership.”
The disadvantage Hungary
may be at upon entering the European Union in May of this year is seen as an
acceptable loss given the European prestige Hungary
will regain. In the spirit of compromising, the formation of the European Union
bears quite a few similarities to the shaping of the United
States of America, most notably that joining
states usually must compromise some of their A) own sovereignty and B)
interests in order to be part of the greater whole.
Bibliography
Bernstein, Richard. “Europe's Vision
of Unity Meets Headwinds.” New York Times, December 4, 2003.
Central Intelligence Agency. The World Fact Book 2003.
Brasseys, Inc: New York, 2003.
Available online at http://www.cia.gov/cia/publications/factbook/.
Feher, Margit. “Wanted: An Economic Visionary.” Hungarian
Online Resources January 22, 2004.
Halász, Gábor, et al. “The Development of the Hungarian
Educational System.” Budapest:
National Institute for Public Eduction, 2001.
International
Monetary Fund (1995). World Economic Outlook. May, Washington, D. C.,
Landler, Mark. “Just East of the West, Unity Has Its Costs.”
New York Times, September 2, 2003.
Miller, David. Agriculture in the United
States. http://www.socialstudieshelp.com/Eco_agriculture.htm.
9/22/02
Neal, Larry and Barbezat, Daniel. The Economics of the European Union and the Economies of Europe. Oxford: Oxford University Press, 1998.
Official website of the European Union.
http://europa.eu.int/abc/index2_en.htm - Synopsis of European Union’s stance on
free market trade between member nations.
Telephone interview
with Laszlo Papp, former President of the Western region of the World Hungarian
Federation (WFO) on February 25, 2004,
conducted by Alex Thorn.