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Hungary’s Authoritarian Capitalism

a harbinger of the EU’s future?

27. August 2014
by Mihaly Koltai

Speech delivered by Mihaly Koltai at the European Forum "Beyond the Euro - there is an alternative", 20-24 August 2014, Assisi, Italy.


’our starting point is the fact that until now we have known three forms of state organisation: the nation state, the liberal state and the welfare state. And the question is, what’s next? The Hungarian answer to this question is that the era of the work-based state is approaching. We want to organise a work-based society that, as I have just mentioned, undertakes the odium of stating that it is not liberal in character. […] societies that are built on the state organisation principle of liberal democracy will probably be incapable of maintaining their global competitiveness in the upcoming decades and will instead probably be scaled down unless they are capable of changing themselves significantly. […] It is better to acknowledge, even if it is difficult, that the concept of welfare state is over. Instead of that, we should try to build up workfare states and replace entitlements with a merit-based society.’

‘It is better to acknowledge: we cannot live as we have lived so far. To put it very simply and very straight: we cannot live beyond our means. […] Europe’s share of the world’s population is 8%, while we account for 25% of the world’s production, but 50% of social expenditures. This list of numbers raises a serious dilemma itself, but here comes the yet darker other side of the coin: the total state debt of the EU28 reaches 11 thousand billion Euros […]. Who would be crazy enough to finance a system like this?’

Taking Orbán’s words seriously

The vision outlined in these (and countless many) quotes by the prime minister proposes:

– dismantling the ‘liberal’ features of the state, such as political pluralism, separation of powers, independent sources of information, independent NGOs

– dismantling the welfare state and replacing it with one where no help is provided, putting an end to the concept of social rights

If we go through the measures of Orbán’s government, we see a quite systematic implementation of these ideas. Before turning to these and considering the potential consequences – which go beyond the borders of the country making the case worthy of discussion – I would like to put the emergence of the Orbán regime within its socio-economic and historical context.

The Orban regime as the ’terminal phase’ of capitalist restoration: the transition crisis and its consequences

It is impossible to have any understanding of the political dynamics of Hungary (or of other East European states) without reminding ourselves of the transition process that occurred in the nineties that defined and still defines the basic parameters of these societies. An analysis that begins with the Orbán government and then denounces its anti-democratic and anti-liberal policies as an unexpected turn in an otherwise promising political culture is completely false and misleading. It also ends up inescapably with quasi-racist conclusions, where Hungarians (Eastern Europeans) are portrayed as backward, irrational and ungrateful creatures that refused the marvels of European democracy and instead opted for living under an authoritarian regime, due to their age-old cultural limitations.

Instead of going down this road let me cite some of the basic facts of the reestablishment of capitalism in Hungary:

– as commonly known Hungary was a forerunner in the introduction of market reforms and in its initiative to expand trade with the world market. Faced with an economic slowdown planners sought to spur the growth/accumulation by importing advanced technology from the West. As Hungary was not able to export an equivalent amount of goods to Western markets, ’hard currencies’ were needed, and obtained by the government signing for a number of secret loans with the IMF from the late seventies on. With the explosion of interest rates in the 80s, Hungary found itself more and more in a debt trap, with its external debt stock amounting to 20 billion US dollars (70% of GDP).

– From the seventies on, neoliberal economics gradually started to dominate the economics profession in Hungary (as elsewhere), and throughout the eighties with the help of generous Western scholarships a substantial number of ’pro-Western’ economic and political experts were ‘bred’ within the country, eager to implement the economic policies recommended by Washington, Western European powers and international financial organizations once the Soviet Union fell. The stranglehold of debt made it virtually impossible for the country to disobey its Western creditors, although no such attempts were made anyhow, as the political élite and its economic experts fully embraced the programme of rapid, ‘shock therapy’ privatization on their own, without substantial external coercion or threats.

– The policy mix known as ‘shock therapy’, combining restrictive monetary and fiscal policy, opening of the domestic market, abolishing price controls and, most importantly, rapid privatization of all industries at rock bottom prices without any developmental strategy resulted in an unprecedented fall in economic output, employment and living standards.

– To quote some key numbers:

o Between 1989 and 1997 the number of people at work fell by 1.5 million, from 5 million to 3.5 million, a drop of 30%. This number has never recovered; it stands at 4 million today.

o A roughly similar fall in GDP and the value of real wages.

o GDP recovered to its 1989 level only by 1999, wages and pensions in the mid-2000s, whereas employment never did. (The employment rate in Hungary is around 50-55%, whereas it is around 70% in the US.)

– Following the recession, a period of growth followed from the mid-nineties on. This was almost exclusively based on the inflow of foreign capital into manufacturing, real estate and finance, making foreign ownership and the export-to-GDP ratio one of the highest in the world, and hence the country very vulnerable to fluctuations in Western European markets, currency exchange rates and the willingness of foreign creditors to buy government bonds.

– While shock therapy was advocated as a solution to the country’s high indebtedness, after a transitional drop in the debt level due to privatization revenues, public and private debt started to grow again in the 2000s due to chronic current account deficits and government deficits, standing at 85% of GDP today. I would argue these 2 reflect the fundamental dysfunctionality of the new economic structure created in the 90s. Foreign investments were mainly in the form of real estate/financial speculation and high-technology export facilities in the manufacturing sector, and these could only replace a small fraction of the jobs annihilated by ‘shock therapy’. Massive permanent underemployment means that while millions are made ‘superfluous’ by the logic of capital, not enough value is produced to fund the government budget, which is heavily burdened by these ‘superfluous’ millions having to rely on welfare to survive. These structural problems led to what we might call a spiral of austerity and social regression, where deficits lead to cutbacks, which depress domestic demand and damage the society (in terms of its health, educational attainment, and mobility) even further, leading to renewed deficits and so on.

To give a flavour of the kind of society that emerged after things have – so to speak – stabilized following the transition recession (or rather depression), we could cite the following numbers:

– Hungarian average wages, at around 30% of EU average, provide a standard of living that is comparable in purchasing power parity to the lowest fifth of Western European society, but two thirds of Hungarians live below this average income level.

– Some four million have an income (or survive on welfare) that do not meet the subsistence minimum of basic physical needs according to the Central Statistical Office. Roughly another three million survive without being able to save at all.

– Food and energy prices are at 83% of EU average, cloths 85%, shoes 95%, transport 71%, communication at 109%.

– Emigration remained stagnant following the first 4-6 years of EU accession, but started to take off around 2010 big time. An estimated 5% of the population has left the country since then, mostly young graduates and skilled labourers.

– The livelihood of the Roma (some 8-10% of the population) was devastated, the industries where they used to work (construction, metallurgy) wiped out by capitalist ‘efficiency’. Estimates suggest unemployment among them is (at least) around 70%, and 80% of them belong to the bottom one-fifth of society in terms of their income. They often live in spatially segregated areas concentrated in certain regions of the country, and go to segregated schools, where Roma and ‘non-Roma’ children attend separate classes, Roma children often classified as ‘handicapped’.

– Young people: 30 per cent, 47 per cent of 18-35 year olds are forced to live with their parents, 75 per cent of them are unable to save, and those who can save, save about €32 per month.

How did all this lead to the emergence of an authoritarian state? It takes no genius to make the prediction that a society such as the one described above is likely to experience political upheavals. If we want to be schematic, we could say the political evolution of the last 5 years is another case of Walter Benjamin’s old adage that the rise of the Right is a failure of the Left, or rather, in this case a near total complete absence of the Left.

As mentioned above, the gradual opening and marketisation of the state socialist economic system and its ensuing transformation into a capitalist private economy was initiated and later on largely managed by sections of the state socialist nomenklatura, and its descendant organization, the Hungarian Socialist Party. The economic experts and political leaders spearheading this group have developed a radically pro-capitalist, neoliberal economic vision by the end of the 80s and managed the transition accordingly, implementing shock therapy. Many among them have become owners or managers in the new capitalist regime they themselves created. NATO and EU accession happened during so-called ‘Socialist’ governments. Up until 2006 – the last election victory of the Socialists and their liberal coalition partner – the political support came from a paradoxical coalition of relatively wealthy pro-Western urban strata culturally opposed to the paranoid and ethnicist worldview of the traditional Hungarian Right and a much larger group of those who did not fare that well from the transition process – pensioners, unemployed, urban workers. The latter group staked their hopes on the Socialist Party as it was the descendant of the ruling party of the state socialist system, associated with relative welfare and stability. Therefore the Socialists usually ran at elections on a platform of improvised and usually one-off welfare measures, implemented a fraction of these in the first few months of their reign, only to be overwhelmed very soon by deficit hysteria of the liberal-technocratic wing of the coalition and the media (both domestic and international) and then switch back to pursue neoliberal policies. The discourse of these governments and their supporters in the media was always almost completely devoid of left-wing elements, being a version of provincial Westernizing triumphalism, where a bright future of ‘convergence to Europe’ was promised, after an ill-defined, and in practice never ending, period of self-imposed economic ‘discipline’, meaning privatization and cuts.

What sealed the fate of this unstable coalition and enabled the rise of the Fidesz régime was the global economic crisis and its political consequences. Following the 2006 elections where the Socialists ran (and were re-elected) again on a platform of vague promises of better living standards etc., the government took a sharp turn directly after its inauguration and announced that a huge bill of austerity measures (hike in energy prices, VAT, fees in the health care system and higher education, redundancies in the public sector, wage freezes and so on) is to be implemented, to save the country from bankruptcy. While this was not the first time the Socialists betrayed their voters’ hopes and took a U-turn, compounded by a leaked talk of the prime minister bragging in obscene language about how he lied through the election campaign, support for the Socialist Party collapsed, never to recover again. Riots spearheaded by the far-right broke out in the capital (probably to some extent orchestrated by Fidesz), something not witnessed since long decades. As political support for the government crumbled, they ceased to defend themselves politically, but still carried on with the austerity agenda in a more and more technocratic fashion, while political life became completely dominated by Fidesz and the rising neo-fascist party Jobbik. Soon thereafter the global economic crisis hit and the Forint swiftly became the target of a major wave of currency speculation, pushing the country to the brink of insolvency. Finding itself in a corner, the government turned to the IMF for a loan to pay its external creditors, with the usual conditions of savage spending cuts in return for the loan. These were duly implemented by a newly appointed ‘technocratic’ government, much to the applause of the business community, domestic liberal intellectuals, while at the same time resulting in the complete political annihilation of the parties (Socialists and liberals) supporting the government. The terrain was therefore ready for a complete takeover by the nationalist Right.

The nature of the Hungarian Right and its new régime

As sketched out above it seems no exaggeration to say that the transition process and the reign of nominally ‘Socialist’, but in practice neoliberal governments in the 2000s resulted in a social disaster and it’s no surprise that the political order under which all this could happen lost the support of the electorate and no one rose to its defence when it was essentially wiped out by Fidesz after its election in 2010.

A comparative survey in 2009 by the Pew Research Center shows the level of public disillusion and anger amongst Hungarians before the takeover by Fidesz. A stunning 94 percent of those asked regarded the economic situation in the country as ‘bad’, while 72 percent said they were ‘worse off now than under Communism’, and 77 percent of Hungarians were ‘dissatisfied’ with the way democracy was working in their country.

Unlike the Hungarian Liberal mainstream (which is now nearing extinction, as government subsidies to their journals etc. were cut off and the intelligentsia that used to be their market either emigrates or is impoverished) I therefore see the rise of Orbán’s new authoritarian regime not as an antithesis of the preceding twenty years (so the period between 1990-2010), but its logical final outcome, its ‘terminal phase’ so to speak.

One clearly has to see however what sort of forces overthrew the dysfunctional liberal-democratic order that failed to remedy or control the social chaos it created itself. The discourse of the Right that gradually became dominant following 2006 attacked the governing pseudo-Left as ‘alien’, ‘foreign’, a traitor to the nation, serving obscure foreign interests – in the discourse of the fascist party Jobbik explicitly identified as Jewish, whereas in that of Fidesz this was usually only implied, but not spelled out. Fidesz never made it clear if it would put an end to the austerity agenda of the ‘traitors’ and it ran without an election platform in 2010, its main slogan being ‘The time has come’ (never specifying for what). While the bulk of support for Fidesz came from all strata of society, as people simply hoped that ridding themselves from the pseudo-left would stop the spiral of austerity, the more ‘class conscious’ core support from Fidesz came from domestic capitalists and sections of the young upper middle-class who had very different expectations from the victorious Right.

Their problem with pseudo-left neoliberal governments was that following neoliberal orthodoxy these governments favoured foreign capital too much, making it for domestic capitalists difficult to compete and consequently ending up with limited market share. They wished for a more interventionist government that would use the government’s fiscal firepower to promote the domestic bourgeoisie, through subsidies, tax cuts, flexible labour laws, cutting down on social costs and so on. At the same time, although neoliberal governments of the pseudo-left in fact destroyed much of the – anyway rather meagre – Hungarian welfare state, in the eyes of much of the young middle/upper-middle strata they still cared too much for the underclass, especially the Roma, who are usually portrayed as an undeserving and parasitic underclass, and for ‘unproductive’ pensioners who are ‘infected’ with ideas from the Soviet past. The tax wedge on the ‘active’ population, especially young professionals etc. were perceived as too high, and as a transfer mechanism with which the ‘parasitic’ voters of the ‘alien’ liberal élite were sustained and their loyalty guaranteed. In the paranoid world view of the ideologues of Fidesz and Jobbik (such as the PM’s advisor Gyula Tellér) cultural liberalism was the other weapon in the arsenal of the ‘traitors’, as homosexuality, promiscuous pop culture, modern arts etc. were also ‘promoted’ by the treacherous liberal élite with the aim of sapping the vitality of the nation.
In short the expectations of the core supporters of Fidesz were exactly those two points I highlighted from the speeches of Prime Minister Orbán at the beginning of my talk:

1) Dismantling the welfare state: Intervention of the state to promote the interests of sections of the domestic bourgeoisie on friendly terms with Fidesz. A partial break from orthodox neoliberalism, but not to promote social equality, but on the contrary, to further the interests of the domestic rich. Ease the tax wedge on the rich and the upper middle class, by cutting or eliminating welfare provisions for the poorest sections of society. Cut down on social costs and make the labour market more flexible to provide domestic capitalists with cheaper labour.

2) Dismantling the liberal state: Restructure the state to eliminate its pluralistic, ‘liberal’ aspects, such as dissent to traditional Hungarian chauvinism, promotion of ‘degenerate’ modern arts etc. In general centralise and homogenise the state to make its functioning smoother by eliminating independent power centres (in the judiciary for instance) and making it very difficult (near-to-impossible) for non-nationalistic political forces to retake power through elections. To this aim, independent media and cultural activities should be weakened and cultural hegemony secured by the takeover of cultural institutions and reshaping the educational system.

These expectations were then consistently implemented by the incoming government.

Authoritarian neoliberalism and dismantling the welfare state

Although I believe the above characterisation of the government’s policies is correct, it is easy to be misled about its economic policies if one listens to its own rhetoric. Orbán was intelligent enough to realize that the only way to impose neoliberal policies and maintain electoral support is to embed it in a discourse of nationalism, where the government claims to fight a war of independence against international finance, Brussels bureaucrats and IMF officials. It is true that the government broke off the stand-by loan agreement with the IMF, much to the horror of the Western mainstream and Hungarian liberals, for whom the ‘wisdom’ of the EU/IMF etc. is sacrosanct. This latter event was followed by a huge rhetorical battle where the government claimed to represent national sovereignty, whereas the opposition with its usual self-colonizing attitude demanded more submission to the Great White Gods of Washington and Brussels. This ‘battle’ was predictably won by the government, as the electorate had enough of the Westernizing neoliberals. More interesting though are the measures implemented following the hullabaloo with the IMF, which are arguably even more savagely anti-social than EU-IMF orthodoxy:

– a flat tax system of 16%, meaning a tax hike for the lower 2/3 of income earners, as tax exemptions they had previously enjoyed were eliminated

– a complete freeze on all benefits and public sector wages for 4-years, while inflation for food and energy is substantial

– the duration of the wage-indexed unemployment benefit was cut from 9 to 3 months (a measure criticized even by the IMF as too brutal), one of the shortest in Europe

– the monthly amount of the long term unemployment benefit was cut from around 95 to 70 Euros

– new labour laws, making it easier to fire employees, use precarious employment forms and stamp out union activity at workplaces

– public work programmes, where the unemployed are forced to accept work for half the minimum wage (which is BTW constitutionally questionable) or all further help (benefits) are cut off

– funding for higher education were cut by around 30% during the government’s first term, many programmes made tuition-only, especially in the social sciences

– so-called ‘strategic agreements’ with various MNCs in the manufacturing sector, where these latter are granted generous tax breaks and other perks (state-owned land for free, in one case a former nature reserve)

– a hike in VAT, increasing it to 27%, the highest in Europe, general shift to taxes on consumption, ie. regressive taxation

– deficits below 3%, with the prime minister vowing to make the budget completely balanced on the longer term

– the new constitution passed by the 2/3 Fides supermajority made the flat-tax system and a lower than 3% deficit part of the constitution, and dismisses the idea that the state has to guarantee certain basic social rights and instead talks about ‘obligations’ that citizens have to fulfil, to expect any help from the state.

It is also true that besides these perfectly orthodox neoliberal measures, a few steps deviated from the canon of the Washington Consensus: a large levy was imposed on foreign-owned banks and corporations in the retail and telecommunications sector, much bemoaned by the international business press and liberals in Hungary. However, as we saw above, the revenues raised from these measures were largely used for tax cuts for the domestic wealthy and subsidies to the ‘national’ bourgeoisie and even foreign corporations in the manufacturing sector, in other words represent a redistribution of resources from one capitalist group to another. Meanwhile the lower 2/3 of wage workers and especially the poorest one-third of society (mainly unemployed) fared even worse than under ‘standard’ IMF/EU-style neoliberalism.

In short, I would argue that these policies do not represent an alternative to the neoliberal policies imposed on the Southern European periphery by the troika, but actually a version of neoliberalism that favours domestic capitalists somewhat more, whilst making the situation of the poorest strata of society even worse, putting them more and more under the control of the repressive arm of the state in the form of (sometimes quite abusive) mandatory public work programmes and cracking down on petty crime with increased rigour, criminalizing the permanently unemployed underclass (mainly Roma in Hungary).

Dismantling the liberal state, building a centralised nationalist state

Meanwhile the shape of the Hungarian state machinery has also changed dramatically, indicated among other things by the frantic pace of law-making, passing almost 400 laws in a matter of one and a half years (between May 2010 and December 2011) and then a new constitution in early 2012.

We see a coherent agenda that removed almost every counterbalance to the power of the parliamentary majority and the government by a combination of curtailing the jurisdiction of previously independent institutions and/or appointing party loyalists to them.

The main examples are:

– the formerly powerful Constitutional Court was scrapped of its right to reject budgetary laws, and then packed with judges sympathetic to the government party, making the court disappear from political life, having played a prominent role previously.

– a new position of a sort of judicial czar created (elected for 9-years by Parliament), with the right to appoint judges and assign cases to specific judges. Over a hundred new judges were immediately appointed, most of them with no previous record. The retirement age for judges was unexpectedly lowered, opening up hundreds of positions to be filled up by the head of the ‘Kúria’.

– a new media council was set up and filled by Fidesz politicians, having the right to impose fines up to 1 million euros and deny media outlets of their licences if they publish ‘improper content’, a term left largely undefined by the new media law. Almost the entire staff of the government run media system was fired and refilled by newcomers, and the new media law makes private media outlets obliged to carry news from the government-controlled news service (MTI agency).

– a new ‘anti-terrorist’ agency (TEK) created by decree, headed by the former personal bodyguard of the prime minister, with unlimited surveillance licenses established by modifying the law on police, and a staff of a thousand. The agency can make audio and video recordings of individuals without their knowledge, secretly search mail and packages, and surreptitiously confiscate electronic data, without the searches having to be disclosed to the person who was targeted. TEK now has the legal authority to collect personal data about anyone by making requests to financial companies, communications companies (like cell phone and internet service providers) – as well as state agencies. Data held by state agencies include not only criminal and tax records but also educational and medical records. No private company or state agency may refuse to provide data to TEK.

– The electoral system was also reshaped: districts were carefully gerrymandered to maximize the number of seats of Fidesz, and the system adjusted to disproportionally favour the largest party, and making it possible for over-the-border Hungarians to vote (without serious identity checks etc.), who overwhelmingly favoured Fidesz as they were also granted citizenship by the government. As a consequence Fidesz gained a two-third majority again this Spring with 43% of the support of voters. Fidesz largely ran its campaign through the state media and state funds, with publicly funded advertisements boasting the successes of the government flooding streets, radio and TV channels. State media channels are propaganda outlets for the government, and much of the oppositional press is only available in Budapest and a few other large cities. Corruption scandals concerning a leading socialist politician strategically revealed by the Fidesz-loyalist public prosecutor dominated the last weeks of the campaign, endlessly repeated by government media. Publicly funded fake NGOs running a smear campaign against opposition politicians and fake opposition parties on the ballot with almost identical names to the main liberal opposition alliance also helped. The elections were described by the OSCE as ‘legal, but not fair, as […] [t]he main governing party enjoyed an undue advantage because of restrictive campaign regulations, biased media coverage and campaign activities that blurred the separation between political party and the State’, something unprecedented within the EU.

One could go on endlessly. The general ideological transformation of the state that now considers itself as a successor of the interwar Horthy regime (1920-1944), has been hardwired into the constitution which declares the Hungarian state between March 1944 (the German occupation) and May 1990 as illegitimate, making the pre-occupation Horthy regime – a reliable ally of Hitler, passing race laws on its own soil and committing war crimes against Serbs, Russians and Jews on the front – apparently legitimate. Mass redundancies at the Academy of Sciences, removing liberal and left-leaning social scientists, cutting funding for the social sciences in general, as well as for film, theatre and the arts, that is, the elimination of all potential ‘loci’ of subversive activity seems to guarantee the long-desired cultural hegemony of the nationalist Right.

It is hard to imagine under these circumstances of almost total media and ideological control, mass emigration of the young and qualified and a highly lopsided electoral system designed by the government party for itself how it would be possible for Hungary to rid itself of Orbán’s regime through parliamentary means. Especially with the current mainstream liberal opposition that, instead of attacking the viciously anti-poor class agenda, still considers the government’s greatest crime not to have followed the injunctions of the EU and the IMF and spends its time bemoaning the fact that the government is not ‘European’ enough. It is no surprise that – and this is maybe the most frightening of all – the largest opposition party has by now become the fascist Jobbik which has its paramilitary wing and openly advocates biological racism. Jobbik is the most popular party among university students, its murderous ideology spreading among the desperate youth scared of its future, as a class-based Left alternative is absent from public life.

Recent OECD statistics showed that over 47% of children in Hungary live in a household that regularly has problems securing enough food for its members, a number higher than in Mexico and surpassed among OECD members only by Turkey. This number is probably close to a 100% amongst the Roma. Using the EU’s definition of poverty, 47% of Hungarian households are poor, 75% would be unable to meet any unexpected expenses and it is a mere ‘élite’ 15% of households that has any liquid savings. While no political solution is visible on the horizon to stop the vicious circle of immiseration and authoritarianism, it is also hard to imagine that people would tolerate such circumstances indefinitely. With the channels of political change largely closed, this suggests a potentially frightful future for the country.

A harbinger of the EU’s future?

I believe the Hungarian case is important beyond the country itself, as it should serve as a cautionary tale – if it’s not too late already – for all of Europe. In my view the Hungarian disaster could be described as a ‘toxic mix’ of a liberal establishment obsessively pushing forward its austerity agenda promising an eventual economic upturn that never arrives, the marginalization of Left forces and an ascendant hard Right that interprets the growing social disruptions in ethnic or bio-political terms, seeking to solve the crisis at the expense of the poorest and most vulnerable, and to build a hegemonic state that further marginalizes any alternatives to capitalism. If we think about these factors, to me they sound eerily reminiscent of the political life of quite a few Western European countries as well. As contemporary capitalism makes ever larger strata of the population ‘superfluous’ from the point of view of profit making (that is, unemployed), the panic of the middle classes slipping into poverty and especially the young who are most affected by unemployment can prove a fertile terrain for an authoritarian turn such as the one witnessed in Hungary. Once people realise they’ve made the wrong choice, it might already be difficult to reverse the course of events.

It is the task of the Left to offer an alternative before we ever get to this point.