Economic policy mix: a simplifying trilemma
ÁDÁM CZELLENG
The aim of this paper is to analyse the changing set of objectives of monetary and fiscal policies and to show the short-term and long-term effects of tools used according to these changing objectives in the face of different economic shocks. The paper empirically examines the changes in economic policies over the past 23 years using data from European Union member countries and presents simulation results associated with economic policy objectives. The simulation shows that, when taking into account the global financial shock, the energy price shock and the two shocks together, the highest level of social welfare over a ten-year horizon is achieved when central banks reintroduce the economic stabilization objective into their reaction function. The scientifically novel results demonstrate that the triple objective system, which is also identified for monetary policy and fiscal policy, is simplified into a dilemma of growth and stability, influenced by the state of the economy, the international environment, economic policy credibility and debt perceptions.
Journal of Economic Literature (JEL) codes: C15, E47, E61, F6.
Dragon fire: China’s natural gas relations with Russia
TAMÁS DUDLÁK
The article analyses the evolution, circumstances, geopolitical drivers and prospects of the natural gas policy negotiations and cooperation between China and Russia over the past decade. The energy policy relations between the two countries are an excellent example of the non-market challenges that major energy policy cooperation faces. Natural barriers (lack of infrastructure, long distances) and competition from other gas suppliers (Turkmenistan, Qatar, Australia, USA), which Russia has to overcome to supply the Chinese market, are significant obstacles to developing and deepening cooperation. The development of a direct natural gas connection between the two countries results from a long negotiation and bargaining process, during which political considerations have often overwritten purely economic considerations. The breakthrough could be linked to the 2014 Power of Siberia 1 gas pipeline agreement. China’s preference in its dealings with Russia is to expand LNG supplies, while at present, it is not in its interest to expand piped gas supplies by building the Power of Siberia 2. Although Russia would export more gas to China following Western sanctions against Russia in 2022, the rapid switch from Western to Eastern supplies is impossible due to insufficient infrastructure and production capacity in the Russian Far East. Due to the changing geopolitical landscape in the West and the slow development of natural gas relations in the Russian Far East, Russia has found itself in an increasingly weak bargaining position vis-à-vis China. As a result, there now is a paradoxical situation in which China, as a consumer, can influence the terms of natural gas supplies more than Russia, as a producer.
Journal of Economic Literature (JEL) codes: F51, F52, Q340.

Review on the book of Éva Várhegyi: The occupation of the banking system – How the political power is putting the banks at the service of the political power
(Magyar Narancs books, Tea Publishing House, 2023, 254 pages)
KATALIN MÉRŐ
Éva Várhegyi’s book guides the reader through the process aimed at giving the Orbán governments that came to power after 2010 as much influence as possible over the Hungarian banking system. The book is easy to read for the public yet written with great expertise. The book analyses in detail the steps in this process, broken down by segments of the banking sector. Following an analysis of the political “occupation” of Magyar Nemzeti Bank, Hungarian Development Bank (MFB) and Eximbank, it shows how political influence gained over private banks was consistently built up: How did the government first liquidate the cooperative banking sector in order to create MBH Bank, a large bank intended to compete with OTP, on the basis of cooperative banks, the Hungarian Foreign Trade Bank (MKB) and the Budapest Bank (BB). How it rewarded and punished foreign-owned banks to “tame them”, and what its controversial relationship with OTP was. The final chapter of the book, and the concluding reflections, take stock of the peculiarities and risks of the crony system set up by the ownership structure and operating system described earlier.
Journal of Economic Literature (JEL) codes: G21, G28, P14.

Toward new crises
Reflections on the book of Guillaume Pitron: The rare metals war – The dark side of clean energy and digital technologies
(Pallas Athéné Publishing House Ltd., Budapest, 2023, 288 pages)
GERGELY SALÁT
Rare metals and rare earth elements, a subset of rare metals, are often called the oil of the future, as they are essential in the technologies that will underpin the economy of the years to come. These special materials are particularly needed for the digital and green transition. However, there are two problems with rare (earth) metals: first, their extraction is highly polluting and second, some countries, notably China, have monopolized their production. This can lead to serious disruptions, conflicts, and even wars. French journalist and documentary filmmaker Guillaume Pitron’s book, which paints a rather worrying picture of the future, explores the dangers of rare (earth) metals.
Journal of Economic Literature (JEL) codes: F18, F51, F52, F64, O13, Q34, Q53.

Perception of the startup entrepreneurial function and regulation
TAMÁS ISTVÁN STIPKOVITS
The present study reflects on the definitions of startups in the business world, in the relevant economic literature and in statistics, and assesses the appropriateness of the startup concepts in the Hungarian legal regulation and provides comments on their development. To meet these objectives, it first takes stock of the relevant definitions (from the fields of business, literature, law and statistics) and then draws conclusions from the analysis of the individual definitional elements. For the conceptual elements, the parameters of high growth potential, small size and early life stage and their relationships with other definitional elements are explained. In the field of legal definitions, the absence of the criterion of high growth potential is noted. In the area of legal definitions, the concept of innovation needs to be rethought in terms of content and its relationship with startups. The article makes proposals for more precise regulation in these areas.
Journal of Economic Literature (JEL) codes: K20, K33, K34, K40.

The fate of battery waste: regulation and technology
DÓRA GYŐRFFY
The paper examines what happens at the end of the battery value chain, i.e. what happens to waste, in the context of the development of the battery industry in Hungary. To answer this question, it first analyses the new European battery legislation, adopted in the summer of 2023, which imposes very strict quality and recycling obligations on producers. The second half of the paper will present the recycling process from collection to processing, based on international literature, with a focus on the issue of profitability. It then argues that the establishment of the battery value chain in Hungary makes it almost inevitable that waste processing will also be in Hungary, which is an overall unprofitable activity given the currently available technologies. The question is who pays the losses. This leads to the conclusion that, in stark contrast to European objectives, the state-subsidised Hungarian battery industry is increasingly dependent on China, damaging the environment, and undermining the country’s development potential.
Journal of Economic Literature (JEL) codes K32, L52, L62, O14, O25.
Wage inequalities in global value chains: the case of the Hungarian battery industry
MÁRTON CZIRFUSZ
The battery industry, which serves the electric vehicle industry, is currently expanding in Hungary. Nearly 40 companies in Hungary will employ more than 30,000 people by the mid- 2020s. Drawing on the global value chain literature and the analysis of corporate finance data, the paper explores the share of labour in the value creation of companies involved in the battery industry. The cell manufacturing industry is the smallest contributor, but the pre-tax profits are significant elsewhere in the value chain. Wages differ between the direct core workers, domestic and third country agency workers. Direct workers can have the most significant impact on increasing the wage share, while third-country agency workers are the most vulnerable. In the context of the analysis of battery value chains, the study also points to methodological limitations of analysing corporate finance data.
Journal of Economic Literature (JEL) codes: E24, F23, L62, O15, P12.

Ownership and market structure changes in the Hungarian banking sector
ÉVA VÁRHEGYI
The Orbán government that came to power in 2010 envisaged significant changes in the banking sector as well as in other sectors qualified strategic by announcing that the proportion of national ownership should be enhanced to at least 50 percent; and the National Bank of Hungary, which supports the government’s banking policy, considered it desirable to reduce the number of credit institutions and intensify market concentration. The achievement of these goals was facilitated by the fact that after the global credit crisis of 2008, state interventions in competitive markets strengthened all over the world, especially in the financial sector. The article analyses the most important characteristics of the changes in ownership and market structure that took place in the Hungarian banking sector between 2010 and 2023, and then formulates hypotheses about the expected consequences in the operation of the sector and the inherent risks. Government actions transforming the sector raised the risk for society primarily by transferring a quarter of banking assets to private owners influenced by political power, which is unprecedented in the developed world.
Journal of Economic Literature (JEL) codes: G21, G28, P14.
A review of Markus K. Brunnermeier – Ricardo Reis: A Crash Course On Crises. Macroeconomic Concepts For Run-Ups, Collapses, and Recoveries
(Princeton University Press, 2023, 123 pages)
KÁROLY ATTILA SOÓS
The book aims at interpreting and presenting the logics and mechanisms of economic crises. These logics and mechanisms are being discussed by the authors as manifestations of relationships between macroeconomics and finances. After the analysis of processes and phenomena paving the way towards crises, we can read separately about triggers of crises on the one hand and about those factors – according to the concepts of general control theory, positive feedbacks –, which aggravate crises on the other. Finally, an important subject discussed in the book is governments’ reaction to the crises, both with its monetary and fiscal components.
Journal of Economic Literature (JEL) codes: D53, E30, E44, E52, E62.

review and reflections
Judit Karsai: From the Incubator to the Stock Exchange – The Functioning of Institutions Financing Start-ups in East-Central Europe
(Centre for Economic and Regional Studies, Institute of Economics, Budapest, 2023, 226 pages)
PÉTER BUCSKY
The countries of Central and Eastern Europe have embarked on the public funding of start-ups with great vigour in the 21st century. The emergence of new technologies is creating opportunities for transition countries to create companies that can capture a larger international market share. It is no coincidence that there is a strong demand to build local companies that can sell high value-added technologies in the global market. Following the transition to the market economy, the emergence of transnational corporations has succeeded in replacing the socialist planned economy with market-based systems integrated into the world economy, but there has been little role for locally owned and/or managed enterprises, or in a broader sense, local capital. Focusing on the role of the state and EU funds, this book demonstrates to what extent venture capital in Central and Eastern Europe is similar and different from that in developed countries.
Journal of Economic Literature (JEL) codes: M13, G24.

Inquiry of the editors of Külgazdaság:
Should we rethink economic policy after the Great Pandemic and the Great Inflation?
Recession or inflation? Or is there another choice? – this was the question asked a year ago by the editors of Külgazdaság. The question is still relevant today. In the days when we had sent out our survey question to our authors, the major central banks (US Federal Reserve, the Euro¬pean Central Bank, the Bank of England, and the People’s Bank of China) were trying to restore price stability by positive real reference rates exceeding the inflation rate. Global organisations and most countries are settling into a period of persistently high interest rates, whereas barely a decade ago, researchers still wondered how economies could function in a deflationary, negative interest rate environment.
After the dramatic turnarounds of the past decade, we approached our authors with a question inspired by the subtitle of a volume of essays edited by Olivier Blanchard and Lawrence H. Summers (Evolution or Revolution? Rethinking Macroeconomic Policy after the Great Recession): Should we rethink economic policy after the Great Pandemic and the Great Inflation?
This ironic question applies to economic policy pursued in Hungary as well. Whereas the National Bank of Hungary insists on maintaining a positive real interest reference rate, the government would expect sharp cuts and revert to the high-pressure economy model applied before 2022. However, the risks to economic growth are also specific for Hungary, such as the stall of the inflow of EU funds, the desire to accelerate the inflow of foreign direct investments and the import of labour force, and the reduction of energy dependence, which is not in line with the additional energy need of huge ongoing and planned investment projects. Risks also include the level of government indebtedness, which is well above the peer average, the opening of the income gap, and the slow but steady decline of budgetary expenditures for human services.
Our authors have been invited to discuss one of the segments of the exposed dilemmas at the global or national level, to analyse them thoroughly or to add new perspectives. Responses were submitted to the editorial office of Külgazdaság between 17 December 2023 and 16 February 2024.
Is electric vehicle battery production a bad idea? (An old debate in a new guise)
PÉTER MIHÁLYI
Throughout 2023, there has been a growing public response to the investments in Hungary – nearly 40 in number – that are already producing or will produce batteries in the foreseeable future or are serving industrial development related to their production. Highly respected academics have much discussed the subject. Most of the opinions published in the media are critical. On the one hand, they point to the risks of an immature technology that affects all countries. On the other hand, they consider that a further increasing commitment to the automotive sector would be a mistake in economic policy for Hungary. This short paper highlights four of these risks. It examines particularly the criticisms based on a quantitative analysis of value chains.
Journal of Economic Literature (JEL) codes: O14, O25, O32.

Central and Eastern Europe’s dependency on Russian gas: What changed between 2004 and 2019?
CSABA WEINER – PÉTER KOTEK – BORBÁLA TAKÁCSNÉ TÓTH

The Eastern enlargements of the EU increased the bloc’s dependency on Russian gas and contributed to a more cautious attitude towards these supplies. This paper assesses the Russian gas dependency of the 11 Central and East European new member states according to the ambition and execution of their national energy strategies. Two composite indicators of gas dependency – one for supply and one for demand – were used for this evaluation, beginning with the 2004 EU enlargement and ending in 2019, the last available full year before two large crises: the Covid-19 pandemic and Russia’s war against Ukraine. The main conclusions are that the new member states mostly reduced their gas dependency through supply-side measures, while the old member states increased dependency through some combination of worsening supply- or demand-side situation. New gas infrastructure capacity has contributed to the supply and route diversification of new member states from Russia, but reducing gas demand did not receive much attention until Russia’s invasion of Ukraine in February 2022.
Journal of Economic Literature (JEL) codes: O13, P28, Q41.

The catching-up of the Hungarian economy and its loss of position in the European Union
GÁBOR GULÁCSI – ÁDÁM KERÉNYI

Hungary has been a member of the European Union for 20 years, since 2004. Over the last 20 years, Hungary’s economic development has come significantly closer to the EU27 average, yet its position has deteriorated compared to most of the peer countries that joined the EU during the Eastern enlargement, falling from 3rd to 7th place. This paper discusses first the EU drivers of Hungary’s economic development, the impact of the single market and the transfers received from the EU. Second, it seeks the explanation for Hungary’s position loss relative to most of its peer countries. As the main causes of the position loss, it identifies the coalition governance leading to the dual (government and household) currency debt trap in the pre-2010 period and the market stifling effect of the authoritarian political regime established in the post-2010 period.
Journal of Economic Literature (JEL) codes: F15, F36, O47, O52, P20, P27.

BULLETIN

Silk roads in the Global South: “connectivity” and “bloc-formation”
Silk roads in the Global South: “connectivity” and “bloc-formation”
LÁSZLÓ LÁNG

According to Foroohar (2022), “[g]lobalisation as the dominant economic order will soon be replaced by regionalisation”. If this is true, then regionalisation, the process whereby countries in a geographical area seek to advance their national interests through multilateral dialogue and joint action, is set to revive in the developing world, or as it is called today, the Global South. The development of intra-regional transport, energy and communication networks is a prerequisite for existing regional cooperation groups to emerge from their moribund state. This very infrastructure development is offered by China’s ambitious BRI programme, under the banner of “connectivity”. This paper will examine at several levels whether this rare constellation exists, in which structural shifts in the world system and the self-interested grand project of China, the second most powerful global power, can reinforce each other to lift cooperating groups of countries and regions, large and small, out of the vicious circle of backwardness and underdevelopment. The answer in short: this constellation (again) does not exist. The sub-regions of the Global South are unlikely to re-unite on China’s “new silk roads” and boost their joint development with win-win solutions. Further evidence worth exploring is that the self-interests of the BRI may coincide with some of the languid transcontinental networking efforts, especially in Africa and Central Asia.
Journal of Economic Literature (JEL) codes: F02, F21, F55.

DISCUSSION PAPER

The publication strategy of the Hungarian academic community in business and economics: Differences and contradictions in the fields of economics and business and management
ZOLTÁN KRAJCSÁK – PÉTER SASVÁRI – GYULA BAKACSI

This scientometrics-focused study analyzes the publication performance of Hungarian researchers in the fields of Business, Management and Accounting (BMA) and Economics, Econometric and Finance (EEF) based on SciVal data and found that publication strategies are often mixed by merging these fields. This is partly due to the “common” journal list of the Hungarian Academy of Sciences (HAS), and partly to the continuation of past practices (traditions). Publication patterns do not perfectly reflect the affiliation to the two largest scientific committees of Section IX (Economic and Legal Sciences) of HAS. This concerns those who are members of the Public Body of HAS, since about one third of the best researchers involved in these two disciplines have not joined this academic network yet. Based on the results, a clearer separation between the subject areas at the level of doctoral committees of HAS would be welcome, as would clearer publication strategies for academics. The recognition of the value of being members in the public body of HAS would also be useful for the young colleagues. Using the framework of the forum provided by Külgazdaság, this report could also help to promote professional and strategic dialogue among domestic social scientists.
Journal of Economic Literature (JEL) codes: A10, M0.

Economic analysis in spring 2024

Külgazdaság has been publishing forecasts and analyses by economic researchers, including the outlook of the Magyar Nemzeti Bank, since 2001. Last year, the government’s goal was to avoid recession and bring inflation down to single digits by the end of the year. In this context, our authors were asked to compare these hopes with reality. Their forecasts varied widely. Magyar Nemzeti Bank predicted GDP growth of between 0 and 1.5 percent in 2023, the Makronóm Institute 0.8 percent and the Corvinus University of Budapest 0.2 percent, while GKI Economic research Co. and Kopint-Tárki Ltd. forecast a 0.5 percent decline. Contradicting the most pessimistic forecasts, the Hungarian economy shrank by only 0.9 percent in 2023. The annual inflation rate was anticipated by economic researchers to be fairly accurate, in the range of 17.5-19.5 percent, but they did not expect the average level of consumer prices in December to be only 5.5 percent higher than the previous year. In the current account balance relative to GDP, the researchers projected a deficit of 3.6-4.8 percent, but the actual figure was a slight surplus. The general government deficit, on the other hand, was unsustainable at 6.7 percent of GDP, far exceeding analysts’ expectations. These facts raised key questions for this year: will the fall in inflation be sustained? How fast will the economy grow after a period of very high inflation and corresponding monetary tightening? After last year’s fiscal looseness, how much fiscal tightening is expected this year?
The forecasts were sent to Külgazdaság between 8 April and 27 April 2024.

Upgrading behind the scenes – The role of foreign productions in the Hungarian film industry
TAMÁS VASVÁRI – DÓRA LONGAUER

Over the past decade, the Hungarian film industry has undergone remarkable expansion, primarily propelled by the surge in service productions, where filmmaking is outsourced to Hungary. The substantial growth can be attributed to lower production costs, complemented by state subsidies, and a cadre of well-trained film professionals. Notably, there is not only quantitative but also qualitative progress, evidenced by a milestone achievement in 2022: a Hungarian professional earned an Oscar for outstanding performance in an international production filmed in Hungary. This underscores how collaboration between foreign and domestic crews fosters developmental strides for Hungarian professionals, potentially influencing the overall quality of domestic films. This research delves into the vertical and horizontal impacts of international productions on the film industry, utilizing a pioneering database sourced from IMDb (International Movie Database). Our research unveils a noticeable improvement in the quality of foreign productions. Moreover, these productions are increasingly leveraging the expertise of domestic professionals, while the proportion of Hungarians in key roles has also risen. Despite the inherent duality within the film industry, akin to the manufacturing sector in Hungary, a meaningful interconnection persists between domestic and foreign productions. This interplay results in the transfer of experiential knowledge gained from international productions to Hungarian films. Our findings reiterate the pivotal role of relevant domestic actors, competitors, and skilled labour as conduits for knowledge transfer, affirming that the presence of foreign players can be beneficial to the host economy only when such domestic elements are in place.
Journal of Economic Literature (JEL) codes: L23, L52, L82, Z11.

Populism models in Central and Eastern Europe: a demand-supply approach of contemporary populist economic policies
A review of István Benczes (Ed.): Populism models in Central and Eastern Europe: a demand-supply approach of contemporary populist economic policies
(Routledge, London–New York, 2024, 279 pages)
FERENC KOLLÁRIK

Following the Great Recession of 2008, the proliferation of populism could have been witnessed in several regions of the world. Nevertheless, contemporary populism has become a more complex phenomenon and can be characterized as an adaptive system compatible with almost all kinds of economic and political institutional structures. Whereas political science plays the leading role in researching populism, an economic approach might also contribute to the better understanding of this phenomenon. However, it requires going beyond the framework of classical macroeconomic populism and including broadly understood institutions in the analysis. Moreover, in addition to the factors that determine the demand for populism, greater emphasis should be put on the supply side as well. Central and Eastern Europe, where populism displays a very diverse pattern, offers an excellent field for this type of investigation.
Journal of Economic Literature (JEL) codes: F52, E02, P16, P27.
Keywords: populism, economic populism, economic policy, institutions, Central and Eastern Europe.

Analysis of the Hungarian SME structure by circular statistics tools

PÉTER VAKHAL

Domestic SMEs give much more weight to local factors in their location choices than large companies. The study investigated whether the structure of the domestic SME space can be captured by a geographical distribution according to compass points. Hungarian studies on this topic mainly use a gravity model, which most often can only represent a single force vector, although the number of vectors is infinite, only the magnitude of the force varies. To represent all directions, a circular statistical tool was used that is less well-known in the Hungarian economic literature and financial data of Hungarian SMEs were analysed. This method allows to capture a new dimension of the domestic economic spatial structure that is not possible with other methods, thus opening new analytical perspectives. The results show that, starting from the centre of Hungary, the spatial structure of SMEs is dominated by a north-south counter-pole rather than an east-west one, as several Hungarian spatial structure researchers have suggested. This can be explained by the fact that the capital city, when viewed from the centre of the country, results in a north-west concentration, which is prevalent in most SME segments. The northern dominance of circular distributions is also prevalent when Budapest is removed from the sample, which further reinforces the north-south polarisation phenomenon. This configuration is modified only in a few sectors, such as accommodation services, where specific geographical considerations determine the choice of location.

De-globalisation and changing value chains? An interpretative experiment in the context of technological cycles

MIKLÓS SZANYI

Global value chains are estimated to account for 30-50 percent of world trade. These networks have become a prominent organisational model in the context of globalisation. The speed of their expansion has been marked not only by the growth of world trade but also by the growth of foreign direct investment flows. Both processes came to a halt after 2008. Some argue that this indicates a reversal in the process of value chains and globalisation. Others see only a slowdown. This paper argues that the transformation of global value chains has remained limited despite the economic shocks and policy shifts after 2008. The change in the trend of the data series has been at least as much influenced by the emergence of a new internet-based economic paradigm. The main business model of the new paradigm is no longer the traditional global value chain, but the platform economy. Its expansion is not linked to an increase in world trade or foreign direct investments. This argument is also supported by the fact that the decline in value chain indicators is mainly observed in the US economy. This is where the new technical-economic paradigm is developing fastest, with most platform-based firms being American.

State-driven electromobility: the role of the state in the development of the EV industry in China

ÁGNES SZUNOMÁR – TAMÁS PERAGOVICS – AGNIESZKA MCCALEB – WENXUAN SONG

The study examines the role of the Chinese state in shaping the competitiveness of the electric car industry. Recognising the unsustainability of resource-intensive growth and the domestic economic growth based on it, the Chinese state is actively supporting emerging industries to promote the green transition. The electric car industry is a good example of these efforts. Drawing on theories of ecological modernisation and state industrial policy, this paper presents China’s policies and plans to promote the development of this industry. The cooperation between state and industry in the field of electric automobiles (EA) will allow economic prosperity to remain the cornerstone of the Chinese Communist Party’s performance and legitimacy, while reducing the environmental burden of China’s economic rise and contributing to the country’s global competitiveness, all in a technology-intensive industry. The study provides data on several companies, but also uses the example of one company – BYD – to demonstrate the functioning of the Chinese support system and the wider situation of the Chinese EA industry. It suggests that the Chinese state is seeking global leadership and dominance of the entire value chain by seeking out the strongest players in the domestic market, regardless of their ownership structure, then selecting and subsidising the strongest ones, but phasing out these subsidies over time to avoid rent-seeking behaviour.

Adjustment with lags: the Hungarian economy in 2020 through 2023 and

beyond

PÉTER ÁKOS BOD

The performance of the Hungarian economy has widely fluctuated since 2019 due to external components but mainly for policy-related reasons, and factors related to structural rigidities. The analysis covers the potential evolution of relevant external conditions and the inner drivers of the hungarian economic trends. Politicking and regulatory interventions have delayed the economy’s reactions to major changes, thus imbalances have grown large, compared to the region, in recent turbulent years. The increasing share of capital- and material-intensive businesses has resulted in a structure that compromises the speed and timeliness of adjustment processes. A highly critical issue of the post-2023 period will be the capability of Hungary, with its evolving economic structure, to adjust to the new normal in European macroeconomics as well as to face emerging technological, geopolitical, climatic, and social challenges.

Review on the book of

Péter Ákos Bod: Economic development and knowledge. Essay on the links between business culture, values, and education (Gondolat Publishing House, Budapest, 2023, 200 pages)

LÁSZLÓ FIKÓ

In the book, relying on his previously published articles on the subject, the author explores the factors of economic catching-up with the developed Western countries. Even the articles, published several decades ago, are strikingly timely. The key finding of the volume is that the success of a country’s catching-up efforts is determined by the social embeddedness of civic values and the development of human capital.

The investment and export promotion strategy of East Central Europe, with regard to its changing legal environment

ILDIKÓ SZALAI

As a result of the increased EU competence under the Lisbon Treaty and the Court of Justice of the European Union’s decision in the Achmea case, which has a Slovak dimension, on 6 March 2018, international investment protection law is undergoing a significant change in the EU context, with implications for economic policy in all member states. This paper analyses the EU regulatory environment affecting the investment promotion and protection strategies of Hungary, Poland, the Czech Republic and Slovakia from a legal perspective. These Central and Eastern European countries are also members of the Visegrad Group, and the extent to which the interests of this sub-regional group of countries have been and can be pursued under EU regulation is examined.

The European integration of the Western Balkans: business opportunity or economic challenge?

OLEG TANKOVSKY – VIKTÓRIA ENDRŐDI-KOVÁCS

The aim of the study, based on a complex indicator developed by the authors, is to examine the evolution of the economic integration maturity of the Western Balkan countries between 2006 and 2020. The main conclusion is that, although the candidate countries have improved their economic integration maturity over the period, their performance is below that of Croatia, the benchmark for the former accession. This calls for further reforms in the candidate countries. The study is a valuable contribution to the relevant body of the knowledge of the subject, as no similar analysis has yet been carried out in the domestic or international literature. The introduction of a composite indicator is a new academic element, which allows the economic preparedness of the countries under scrutiny for EU accession, including the business environment, to be measured in a quantitative and comparative way. Despite its widespread application, a composite indicator has not been used in this form to measure economic integration readiness by introducing a benchmark country. The research results support and complement the current enlargement strategy of the European Union in a quantitative approach. The results can also provide an objective basis for developing and supporting business and economic policy decisions.

Transforming objectives – changing implementation frameworks.
Dilemmas of support for environmental public goods and the move towards renationalisation in the EU’s Common Agricultural Policy

ÁKOS KENGYEL – MIKLÓS SOMAI

The European Union’s Common Agricultural Policy must constantly adapt to changing economic, social and environmental needs. Due to this phenomenon, the objectives and conditionalities of the subsidies have undergone several major transformations over the past decades. The article seeks an answer to the dilemma of how far the EU-level support system, which pursues increasingly complex goals, and especially the focus on the provision of environmental public goods, would justify the return of agricultural policy planning and financing tasks to a certain extent to the level of the member states. Due to the more efficient achievement and financing of the objectives, the possibility of renationalisation may arise as a feasible reform direction. At the same time, concerns can be expressed regarding renationalisation, especially in the field of environmental and climate measures, where the support and implementation of common strategic goals is necessary. In the article, the authors analyse in detail the political economy of the transformation of agricultural policy objectives and the current operating framework of the support system. Desirable further changes are evaluated in the light of the new approaches appearing in the regulatory framework introduced from 2023 and the considerations supporting more efficient financing.

App economy: exploring the mobile app ecosystem

ENIKŐ JUDIT CZIGLER – ADRIÁN GAÁL

The mobile app market has been evolving since its birth in 2008. This study focuses on the microeconomic factors of the mobile app ecosystem through international research results. The paper can be considered a gap-filling study in the Hungarian literature. It provides an overview of the players in the app economy (users, developers, and app stores) and the relationships between them. It identifies the characteristics and success factors of the goods produced in the ecosystem. Mobile applications can be grouped according to several aspects (technological, motivational, purpose of use, business model) depending on the socio-economic benefits to be achieved. The market is typically flexible and responsive to rapidly emerging and abruptly changing trends. This characteristic makes it easier to enter the market than to compete effectively. The study highlights the potential of the app economy and shows why other, larger business sectors find it profitable to invest in app development.

The world’s most valuable education technology companies

ANDRÁS BETHLENDI – ÁRPÁD SZŐCS

The years of the global coronavirus epidemic have created an exceptionally favourable environment for educational technology (edtech) startups. For educational institutions and companies, the importance of the online tools they can use to transfer knowledge has increased. In the last two years, the number of private start-ups providing education-related services has nearly doubled, with a market value of more than one billion dollars (unicorn start-ups). This paper looks at three areas. The first is the distribution of edtech unicorns in the world’s top startup ecosystems. Although the US has traditionally had a strong innovation environment, China has more unicorn startups in the field of education technology. India is the third most powerful actor in the international ranking. The second is the role of business model innovation in the growth of edtech unicorns: how they have been able to adapt to a rapidly changing environment. The third is the emergence of technology giants (Big Tech) as new participants in the edtech market. The exceptional growth opportunities of recent years have been accompanied by strong development pressures, increased competition, and the emergence of new competitors.

Breaking the bank-guarantee independence

KATALIN CSEKŐ

Guarantees, in terms of bank-guarantees rendered by financial institutions are deemed efficient and independent personal securities in international transactions. The usage of bank-guarantees created by the International Chamber of Commerce is a relatively recent, no more than 50-year-old customary law. Due to its relative immature nature, it frequently conflicts with the 2000-year-old the guaranty (bond) and the 150-year-old documentary credit whose rules are applied for its hiatus. The bank-guarantee is the guarantor’s own independent payment or performance obligation that is completely separated from the secured transaction. The guarantee is favoured by trading companies because it can efficiently protect their interests, provided that the text of guarantee-letter does not contain any contradiction or hidden connection with the underlying contract. The new usage of ICC on International Standard Demand Guarantee Practice (ISDGP) published in 2022 has strengthened the safety of guarantee, therefore its knowledge is indispensable for a successful “demand.” The lawmaking power of usages has been acknowledged and underscored by two judgments that were recently made and widely interpreted. The article pays attention to the examination, checking and interpretation standards which the ISDGP – after having uniformized the international banking practices – lays down. Since the independence of guarantees is warranted by the lack of secondary nature, the most critical point in its application is the text of guarantee obligation. By analysing the two lawsuits, this article points to the importance of the accurate wordings of independent personal securities and to the fact that autonomy principle of documentary credit is also not in harmony with the abstract nature of guarantees.

Abstract

Economic analyses in Spring 2023

Külgazdaság has been publishing forecasts and analyses by economic research institutions, including the outlook of the National Bank of Hungary, since 2001. This year, we asked our regular contributors to reconsider, whether the tools used to curb inflation, including central bank rate hikes, are driving economies recovering from the shock of the coronavirus epidemic into recession – globally and locally. The official forecast of the European Commission struck a cautious but optimistic note: 1“Despite exceptional adverse shocks, the EU economy avoided the fourth-quarter contraction projected in the Autumn Forecast”, predicting GDP growth rates of 0.8 percent in 2023 and 0.9 percent in the euro area, with the inflation rate easing from 9.2 percent last year to 6.4 percent in the member states and 5.6 percent in the euro area. Hungary, however, has not avoided a technical recession, but is facing exceptionally high inflation in the European Union, which the National Bank of Hungary is also trying to contain with record high interest rates. The government’s aim is to avoid recession, while bringing inflation down to single digits by the end of the year. Our authors have undertaken to compare hopes with reality. Their analyses were submitted between 9 April and 20 April 2023

Budapesti Corvinus University:

The Hungarian economy amid recessionary worries, with gradually improving indicators of imbalances

PÉTER ÁKOS BOD – ILONA CSERHÁTI – TIBOR KERESZTÉLY – TIBOR TAKÁCS

The Hungarian business cycle slipped from an overheated phase to a slight recession after mid-2022 with the economy experiencing a change from a large positive GDP-gap into a similarly significant negative GDP-gap, as turns in the political business cycle allowed a restrictive economic policy stance. Clear indicators of deteriorating inner and external imbalances, such as inflation rate and twin deficit, still call consistent stabilisations stance throughout 2023. Assuming away from further shocks in external economic conditions and in geopolitics, flat Hungarian economic growth as well as material improvement in trade balance is forecast, with the headline inflation to be gradually reduced from its early 2023 peak, still staying above CEE average. Such near-recessionary economic path with negative real wages, a certain increase in unemployment rate, and growth performance falling behind those of regional peers, may trigger further policy debates between fiscal and monetary policy makers, particularly if a segment of Hungarian policymakers wanted to counter stagflation risks by administering growth promoting measures under the political slogan of reindustrialisation of Hungary. In the latter case, GDP growth would slightly surpass our main scenario in 2023, at a cost of deepening imbalances, with dire consequences for later years.

GKI Economic Research Co.

0.5 percent decline and 19 percent inflation expected this year

GÁBOR KARSAI

In 2022, Hungary was in a technical recession, facing severe imbalances and being isolated internationally. There are significant global political and economic uncertainties with the Russian-Ukrainian war, the adjacent energy crisis (in terms of security of supply and prices) and the impact of the international banking crisis this year on financial and real economic developments. The extent and timing of Hungary’s access to EU transfers could be better. The GKI’s forecast differs from the current majority view in its assumption of a downturn this year and a slower decline in inflation, as well as in the extent of the likely delay in access to EU transfers. Underlying these considerations is the assumption that the government’s political and economic policy thinking is changing at the tactical rather than the strategic level.

Kopint-Tárki Institute for Economic Research Co.:

Slight downturn, slowly receding inflationary pressure

ZOLTÁN MATHEIKA – KATALIN NAGY – ÉVA PALÓCZ

Most likely the feared recession can be avoided this year, but at the cost of inflation remaining relatively high. The global growth rate will fall short of three per cent this year, and foreign trade in goods and services is also growing only modestly. Price increases are easing somewhat, but higher interest rates curb inflation only slowly. Core inflation rates are still increasing, suggesting that it will take time until the declining trend of energy prices becomes manifest in goods prices. Meanwhile, the pace of central banks’ interest rate adjustments could slow or even stop. EU GDP may expand by 0.9 percent this year, with some pick-up next year, but we do not expect the growth rate to surpass 1.7 percent in 2024. The rate of inflation in the euro area could slow down from 8.4 per cent last year to 5.4 per cent on average this year, and next year’s 2.9 per cent rate is already close to the European Central Bank’s target. The outlook for the Hungarian economy in 2023 will be shaped primarily by the impact of record high inflation reducing household’s purchasing power and the adverse financing environment resulting from monetary tightening, which will constrain demand for both households and firms. Most of the year will be characterised by a contraction in consumption and investments. On the other hand, despite a turbulent and risk-laden international environment, the contraction in domestic demand is likely to be largely, if not fully, offset by a contribution from net export growth. Overall, GDP is currently expected to decline by around 0.5 percent, followed by modest growth next year.

Magyar Nemzeti Bank:

Inflation on a declining path

NORBERT CSORBA

The Hungarian economy expanded dynamically last year. With the 4.6 percent annual GDP growth Hungary placed in the middle of the growth ranking of European countries. The time profile of growth was characterised by a duality: the dynamic growth in the first half of the year slowed down in the second half. Most sectors contributed to growth, while agriculture hampered GDP due to the extraordinary drought. As a reflection of last year, Hungary’s growth in 2023 will also be characterised by duality in terms of its time profile and structure. Economic growth will accelerate in the second half of the year and is expected to average between 0.0–1.5 percent for 2023 as a whole. Structurally, it is entirely based on net export growth, while inflation holding back consumption and the uncertain global economic environment restraining investments. Domestic inflation peaked in January 2023. In February, the year-on-year headline inflation was 25.4 percent, while core inflation was 25.2 percent. Inflation slowed down by 0.3 percentage points compared to the previous month, the price dynamics of processed food, alongside with fuel prices contributed the most to the disinflation. From the second quarter onwards, the CPI is expected to decline at an accelerating pace. Both external and internal factors point towards disinflation. Inflation will return to the central bank’s tolerance band in 2024. Labour demand has so far not reacted significantly to the economic slowdown and remains robust. Stable labour market developments are helping to re-launch economic activity. The current account balance reached its low in 2022, with the deficit rose to 8.1 percent of GDP. In line with the improvement in the external trade balance, including the energy balance, the current account balance is on an improving trend, the deficit will be halved in 2023.

Macronóm Institute:

Economic growth amid increasing risks

DIÁNA HORVÁTH – DÁNIEL MOLNÁR – GÁBOR REGŐS

The Russian-Ukraine war’s outbreak has rewritten all previous economic expectations, and although last year’s economic growth was still favourable, the dynamic slowed down by the end of the year. The exploding inflation constrained consumption, while the tightening of the monetary policy pushed back investments, at the same time, employment appeared to be crisis resistant. The economic processes of the second half of the last year will stay with us at the beginning of the year, however, even with this, we expect growth throughout the year, the rate of which – with strong downside risks – may reach 0,8 percent, and then accelerate to 3,2 percent next year. The driving force of the growth this year will be net export, which will be supported by external demand, and the investment of the previous years turning into production. By the second half of this year, due to the slowdown of the inflation, through the growth of the real wages, the contribution of the consumption can become positive, and from 2024, investment can rise again. At the same time, there are significant risks surrounding our forecast: the external environment can dampen growth either through shocks in the energy markets, financial markets or supply chains, but the 8slippage of EU funds can also set back economic prospects.

Non-monetary management of inflation in the EU countries

Short-term fiscal and regulatory measures in the EU countries to the increase

in inflationary pressure in 2022.

VIVIEN CZECZELI – PÁL PÉTER KOLOZSI – KINGA VIRÁG KOVÁCS – GÁBOR KUTASI – SZTELLA TORDA

A rapid rise in inflation has become a key economic policy challenge at the global level in 2022. The rise in consumer prices was driven by supply as well as demand factors. This paper reviews the anti-inflationary measures taken by non-central bank government institutions in ,European Union (EU) member countries to counter primarily the socio-economic effects of price shocks. Short-term measures are summarised in the analysis. The database consists of articles published in the online media between January 2022 and February 2023. The measures enacted are classified into sub-groups. According to them, their most common type was tax regulation, with Hungary introducing the most numerous and diversified measures of all EU countries.

Inflation or recession? Or is there any other option?

Inquiry of the editors of Külgazdaság about the main dilemmas of 2023

Having passed the years of deflation, followed by closures in 2020–2021 during the Covid–19 pandemic and the efforts of national governments and central banks to counterbalance them by fiscal and monetary manoeuvres, inflation has arisen in the European economies and even globally. Since the Russian forces attacked Ukraine in February 2022 the prices of food, natural gas, electricity, and some raw materials skyrocketed, adding an extra cost-push to the already existing inflation pressures. First, the US Fed started to loft the federal funds rate in March 2022 to cope with it, and the ECB followed suit only in September. Both in the EU and the US a new dilemma has arisen: would the interest rate hike cause recession, at least in a technical sense or should central banks be more cautious with tightening?

Külgazdaság asked several questions to its authors: what are the main reasons for the present inflation, including the role of the war and the EU sanctions? Increasing interest rates would be an adequate technique to curb it when external shocks play a major role. Is there any optimum solution to the inflation versus recession dilemma? If governments intervene in the local markets to diminish the households’ burden through price caps, subsidies, and social benefits, do they do more good or harm? Should they try to diversify the energy imports and/or make huge efforts to use the local resources for electricity and gas production etc?

We asked our authors to adjust this set of questions to Hungarian policies as well. We re­ceived the answers in the period ranging from January 4th and February 12th, 2023.

Economic policy options to address energy shocks in small-sized and open countries

ÁDÁM CZELLENG

Following the coronavirus outbreak and Russia’s aggression against Ukraine, double-digit inflation has resurfaced in Europe, mainly due to the rise in energy prices. Economic policy makers face information constraints because the persistence of the processes is unknown, while central bank intervention has no impact on the origin of the processes, although transmission is usually delayed. This paper examines the economic policy options for a small-sized and open country in the presence of a non-permanent energy price shock using a simplified semi-structural model based on New Keynesian principles. The paper assesses the short- and long-term per­formance of monetary and fiscal policy, complementing the relevant international literature. It concludes, in a scientifically novel way, that the qualification of a number of applied monetary policy rules suggests that passive monetary policy is preferable in the short run, while active policy is more beneficial in the long run. At the same time, the disadvantage of passive policy can be overcome in the long run by choosing the right interest rate rule. Even in the case of non-permanent shocks, fiscal policy can make a significant contribution to a return to the initial situation. The source of investment financing determines the economic path to a considerable extent. The paper shows that economic policy options are strongly influenced by the shock to foreign agents and the response to it.

Journal of Economic Literature (JEL) codes: E17, E47, E58, H30, H54.

The potential of macroeconomic crisis forecasting with text-mining specified random panel regression models

ÁKOS FELLNER

There are two classical views on economic crisis forecasting: one is that time series models are the most appropriate for projections of crises, and the other is that the strongest crisis signal is the change in the consumer price index and the various investor confidence indices. This paperpresents a Hungarian example of a random effects panel model (REPR) specified by text mining methods, arguing that the values of the error terms of the model allow for a much more accurate correlation using panel regression than using time series models, and that monitoring the foreign trade price index is more important than considering the consumer price index or the investor confidence index for crisis signals.

Journal of Economic Literature (EL) codes: C10, C80, E17.

Period poverty as an invisible deprivation. A summary of international and Hungarian experience

LÁSZLÓ ERDEY – EDINA VÁRNAGY

Contrary to stereotypes, menstruation poverty is not just a recurring monthly problem for homeless or severely disadvantaged women but also occurs in workplaces, schools and universities. The consequences of the Covid-19 pandemic have made this situation more difficult and brought invisible inadequacies surrounded by a multitude of taboos to the surface. Drawing on lessons from international examples, the most common steps are the provision of free feminine hygiene products in public institutions and schools and the reduction or complete abolition of the general sales tax or value-added tax, also known as the tampon tax on basic feminine hygiene products. Data from the European Commission’s Taxes in Europe Database show that Hungary has the highest tax on these products in the European Union, even ahead of Scandinavian countries. This topic is not widely researched in Hungary, but it is an area that needs to be explored even more urgently.

JEL: I31, J16, O10.

The praise of context – or on the state of economics in the context of Beáta Farkas’ book A Brief History of Economic Thought

PÉTER ÁKOS BOD

(Akadémia Publishing House, 2022, 488 pages)

The theory of economic thoughts has gradually lost ground in the economics curriculum, and the economic actors seemed to assume in the period of intensive technological and mar­ket changes that the former ideational debates had lost their relevance. Yet, recent financial and non-economic crises, as well as renewed antipathy toward free trade and market competition within large segments of society have brought back long-debated academic issues such as the relationship between the market and the state, or challenges of global trade and financial openness. The monography of Prof. Beáta Farkas provides a comprehensive review of leading thinkers and the main schools of economic science and it also exposes the historical and social environment in which the great contributions to our stock of knowledge have been accomplished. The present economics mainstream has eventually absorbed a lot from previously peripheral tendencies such as the behavioural school, the institutionalists, spatial economics, and welfare economics. Yet it is hard to tell how much the present economics consensus influences what business leaders and po­licy makers think of the economy and economics and, as importantly, what leverage the modern economic thought may exert on the economy and its shapers.

Journal of Economic Literature (JEL) codes: A10, B00, D02, N10

The protection of foreign investments in Mongolia

NINJIN BATAA

This paper describes the evolution of Mongolia’s regulatory environment for the protection of foreign direct investment from the country’s democratic transition in the early 1990s to the present. The changes analysed in the study point towards a more level playing field for investors, as investment protection initially created significantly more favourable conditions for foreign investors compared to the situation of domestic investors. The continuous changes in the legal framework for investment protection have also affected the requirements for investment licensing, leading to the introduction of restrictions that have affected the activities of foreign state-owned enterprises in Mongolia. They also served to protect national mineral resources. The study will also cover the various instruments of investment protection, including the state’s commitment to the taxation environment. It also discusses international arbitration case law on foreign invest­ment in Mongolia.

Journal of Economic Literature (JEL) code: K33.