Party business. Rent-seeking in Central-Eastern Europe

Stefan Sękowski: What is so specific in rent-seeking in Eastern and Central Europe these days?

Miklós Szanyi: The Central European area is not identical with the so-called „core-European Union”, i.e. the Western Europe. This area is situated between what I call “the Atlantic Model” and “the Russian/Balkan Model”. If you compare Central and Western Europe in a very mechanical way, and you expect the same responses from people and politicians as in the countries of the Western Europe, you are wrong. I wish the Central European model was closer to the Western one. I’m a liberal and I think the Atlantic Model is more efficient than Russian or Turkish models. But, unfortunately, historical evidence shows that countries of the Eastern Europe, especially Poland and Hungary, used to shuttle between both these models – between the Atlantic and the Russian/Balkan one. In the first decade of the transition period this tendency was very clear. It meant of course taking over the acquis communautaire of the European Union, which included the most important values of the Atlantic Model, i.a. the control of corruption and rent-seeking, separation of politics and business and many other. This policy at that time served a certain elite in Poland, Hungary and other countries in this region.

The Atlantic Model is, at least in principle, based on competition. To a large extent, the economic policies – as we learn at the university and from most economic papers – are about expanding competition. And the other models – the Hungarian one, the Russian or the Turkish one are not about competition, but about creating and distributing rents.

In your article „The emergence of patronage and changing forms of rent-seeking in East Central Europe” you call it the „comprador service sector”.

We can criticise the path taken in the 1990s, but we should not discard its values just because the process was not perfect. The governments in Poland and Hungary discard it and try to replace it with something completely different. It reminds us of the Russian and Balkan Model. This is a backswing of the pendulum.

Can we say that before 2010 we had a different type of a rent-seeking system in our countries?

This is another issue. First, I was talking about the main two types of elites in these countries. The first type is the “comprador elite”, the second is the more nationalistic or patriotic elite. The elite of the second type has not gained the same advantages as the first one during the transition process, and now they would like to expand, both in Poland and Hungary. The other issue is, how can this expansion be carried out.

What are the differences between these elites? Why did only the comprador elite take advantage of the transformation?

Earlier I used to think that the difference was ideological. In Hungary the “comprador elite” consisted of the Free Democrats, in Poland – the millieu of Leszek Balcerowicz and many others, who had the ideological background which conformed with the Atlantic Model. There were also other parties and people, whose ideological background was different, and they could not participate in that comprador elite, because they simply did not fit into that picture. In my article, I mentioned some politicians whose ideological view had changed. Now we can say that both elites are „pragmatic”. They use ideological arguments which are popular at the present time. They are flexible.

Orbán was also a liberal in the early 90s.

Of course he was! It is very important to see that for Viktor Orbán the ideology doesn’t matter. There are also people in Poland – Jan Krzysztof Bielecki for example – who do not care much for ideology, but rather for money. Perhaps there are also other sources of this situation. Also the nomenklatura, which took advantage of the transformation at the beginning.

I remember discussing with my Polish friends on our interpretation of the term “privatisation”. I always said that privatisation is a “sale of state-owned assets”. My Polish friends said that this is wrong, and that privatisation means increase of the share of the private sector in the economy, which can also be based on the accumulation of private capital outside the state economy

The Hungarian case is absolutely in line with this statement. During the 1990s the nomenklatura retained much of its previous position in the state owned enterprises (SOE) and even after privatisation they could keep their places. Of course, it depended on how the privatisation was designed, but – especially in small and medium sized SOEs – they even became owners. In larger SOEs it was less frequent, although we can name many big companies in which even today the CEO hasn’t changed for 30 years. The case of the biggest pharmaceutical company, Gedeon Richter, could serve as an example. The majority of shares is owned by foreign investors, and this dispersed structure gives an opportunity for CEOs to keep their places. By the way, this particular CEO is a brilliant professional.

On the one hand it was inevitable: if we were to transform our economic system from socialism to capitalism, we had to privatise the enterprises. But on the other hand – was it also an opportunity for rent-seeking?

Yes, of course. Where there is money, there is also a risk of corruption or rent-seeking. In the privatisation process, picking the winners in the tenders was an opportunity for such activities. In Hungary, especially big SOEs were sold to the highest bidders from the private sector. This was the favoured privatisation method, but of course the conditions of the tenders can prefer, in advance, certain investors. Obviously this used to happen, although very few cases were filed at the court. Hardly any evidence of corruption in the privatisation process was manifested, but the researchers believe that a massive corruption took place, but was not discovered. I may even risk an assumption that these scandalous cases were not discovered because of an agreement between the parties not to uncover any dirty secrets. Even the opposition gained something.

You wrote that in Hungary between 1989 and 2001 the share of enterprises, in which party members and clients took control, grew from 10% to almost 20%, and in terms of capitalisation – from 10% to over 40%. How could that happen?

This happened through two channels. The amount of assets owned by party-related persons – not necessarily party members, but also their cronies – could increase during the privatisation process. This happened on a mass scale, mainly in the sector of small and medium enterprises, where the firms were sold to their CEOs. As you mentioned, nomenklatura, basically from the Socialist Party, was the main beneficiary. There was a very clear party affiliation in most of these cases. Not in all of them – I can also mention some examples, for example Gábor Széles (the owner of Videoton) gained in the privatisation proces a lot of assets and now is a quite wealthy Hungarian, and he is not a Socialist, but he’s associated with Fidesz.

The other way was of course a genuine accumulation of the capital in the private sector. I remember discussing with my Polish friends on our interpretation of the term “privatisation”. I always said that privatisation is a “sale of state-owned assets”. My Polish friends understood this term differently: for them, the privatisation meaned increase of the private sector’s share in the economy, and such an increase can also be based on the accumulation of private capital outside the state economy. The state ownership need not necessarily be used in order to increase the share of the private sector. I think the main reason for this way of thinking was the fact that the Polish process of privatisation was slower than the Hungarian one, and also because my Polish friends wanted to show that there is an increase of the private sector also in Poland. And I must say that maybe the genuine capital accumulation in the long term was a more effective way of the developing the private sector.

Today the ECE economies don’t seek competition anymore. Quite the opposite: they would like to limit competition in certain economic branches. The lack of competition is the source of rents

Why?

There are many Polish companies which have been established after the fall of communism, which have no SOE origin and are extremely successful, more successful than the privatised companies. They became international players. In the early 1990s they had no handicap of being bound to, for example, the „Solidarność” movement, which effectively blocked some of the necessary decisions regarding adjustment to the new system in many SOEs. It was always a political issue to ask „Solidarność” if they agree or not, and in many cases – it is a trade union, not only a political movement – they did not agree. And this blocked the adjustment process. A new company had no barriers of this type.

You state that in Hungary privatisation meant mostly selling of the state assets, and not development of new enterprises. Is that one of the reasons why Viktor Orbán has established, after 2010, a policy of strengthening the local bourgeoisie?

Of course, everything is in some sense related to the 1990s, but Viktor Orbán’s main objective is not to promote the local bourgeoisie in general, but the partisan one. What he wants to see is an economic background that supports Fidesz and him personally. For him it’s a political issue.

Could you give some examples?

At the beginning of our interview, we mentioned various forms of rent-seeking. Today it is not privatisation anymore – it is e.g. access to public procurement tenders, the government investment programmes etc. These funds are distributed mostly among the cronies. If you are interested, as a private enterprise, in any public contract, you have to comply with the government or the local authorities. This is the main form of rent-seeking today. If you attend the soccer games which Viktor Orbán also personally attends, you have a chance to meet Orbán himself, or high-ranking state officials, and in the half-time break you can talk about business. This is a typical situation.

Is there a significant different between the situation now and in the 1990s or 2000s?

I think that forms of rent-seeking changed. The primary form of rent-seeking now is not the privatisation, it is not the board membership in the state owned enterprises. It is “partisan business” now. The money comes from partly the government budget and partly from the European funds. These two channels go through various bodies of the government and are distributed in the economy. The whole process is totally controlled by Fidesz. This is the basic difference. The sources of rent are different as well as the vehicles through which rent is achieved. It is also important that the elites have changed, but the comprador elite still exists.

If such a large part of the economy in the Central European countries is under the control of the parties, if everything depends on compliance and linkages to various levels of government, it must be inefficient, because there is no competition. If this phenomenon is so pervasive, so overwhelming, the economy should collapse. But it does not. Poland has – or had before the outbreak of the COVID-19 pandemic – a high rate of economic growth, the unemployement rate is low…

Viktor Orbán’s main objective is not to promote the local bourgeoisie in general, but the partisan one. What he wants to see is an economic background that supports Fidesz and him personally

The economic figures are very sound, especially in Poland, but also in Hungary. The secret are the international companies. The government appears anti-globalist, but it supports very strongly many multinational companies. The German automotive industry is very strong in Hungary, the four major factories are German (Opel, Mercedes, Audi, VW). At the same time their factories are also present in Poland, Czech Republic etc. They receive massive government support, tax allowances and so on. The multinational sector still relies primarily on the comprador elite. But it is also supported by the government, because their performance is necessary in order to keep the balance of economy in Hungary.

Is there a symbiosis between both elites?

No. They are working in other branches. The comprador elite works in the global industries – electronics or the automotive industry. Their suppliers are also related to the comprador elites. The other elite concentrates on the partisan firms and on the public procurements of the government. They are most present in consumer goods sector, tourism, trade, construction, personal services, transportation and banking. It was interesting to see how the ownership pattern of the financial sector in Hungary was changed. It was foreign-owned in 90%, and the government decided to take over more than 50% of the turnover of the financial sector. The means of achieving this goal were not very elegant. The state purchased 2 of 3 of the main foreign-owned banks that provided at least 50% of the activity in the financial sector. But this was an exemption. Most often, the new elite works in less competitive sectors. This is exactly because of the rent-seeking opportunities in these sectors. This specialisation allows them access to easy money.

The economy is successful, both elites do not compete with each other and their economic interest in most cases does not clash with politics. Everyone is happy. Perhaps it doesn’t matter that we have so many rent-seeking opportunities?

The economy could be a lot more efficient, if competition was also present in the branches controlled by the second elite. This is the only problem. This development model leads the Central European countries into the middle-income trap. The economy doesn’t generate enough capital for investments in innovation, in booming sectors that need excessive funds. It is concentrated on “old-fashioned” industries like the automotive sector. In 20 years this industry will be not more significant than the agriculture.

The money comes from partly the government budget and partly from the European funds. These two channels go through various bodies of the government and are distributed in the economy. The whole process is totally controlled by Fidesz

Why?

Because it is not a booming sector anymore. Let’s take the COVID-19 story for example. We are not travelling as much as in the past. Local and international travel will shrink and you won’t need so much vehicles anymore. The way of life will change.

The ideological justification of the policy of Orbán, Kaczyński and other politicians in our region is an idea of “economic patriotism”. Is the present situation an inevitable outcome of “economic patriotism”?

Of course there is an open, ongoing discussion on the issue of economic patriotism, if the national interests or patriotic sentiments should matter in economic development and if protectionist measures should be used.

The modern economic thinking is about efficiency. Efficiency is created through competition. If economic tools serve the competition in the long run, they can be justified. But I think today the ECE economies don’t seek competition anymore. Quite the opposite: they would like to limit competition in certain economic branches. The lack of competition is the source of rent. There is absolutely no sign of a potential change.

But what you call the “Atlantic Model” is not free from rent-seeking.

My critics say: look at the French government, it is also protectionist. Look at the American government. One third of the American federal budget is spent without real competition on NASA and the military sector. This is right. There are certain similar elements, but again: we can criticise things, but we shouldn’t say openly that the Atlantic Model does not exist or that it is not different from what we see in Eastern and Central Europe. The Atlantic Model is, at least in principle, based on competition. To a large extent, the economic policies – as we learn at the university and from most economic papers – are about expanding competition. And the other models – the Hungarian one, the Russian or the Turkish one are not about competition, but about creating and distributing rents.

This development model leads the Central European countries into the middle-income trap. The economy doesn’t generate enough capital for investments in innovation, in booming sectors that need excessive funds. It is concentrated on “old-fashioned” industries like the automotive sector. In 20 years this industry will be not more significant than the agriculture

How can we put an end to such a rent-seeking system?

This is usually the last question and I cannot give you a good answer. Of course, if voices like yours and mine disappear, we are going to lose. I have studied the historical roots of that system, because I wanted to see if the intensity of the problem increases or decreases over time. I see that the issue is more complicated, because there is another element of the system, which is the foreign dominance. Poland is maybe big enough now, at least to bargain with the European Union on certain issues, but Hungary is not strong enough – and that is because Orbán simply does not pay attention to the instructions of the EU anymore. But clearly because we are members of the EU and most importantly before we became members, the whole region was dominated by the requirements and requests of the Western advisors, mostly of the EU. The Polish and Hungarian history is to a large extent a history of foreign dominance. Much depends on the qualities of the dominant power. I said formerly that the Hungarian economy mostly depends on the German economy. The German dependence in Hungary is not treated in a very negative manner, still if there is a German, EU or any other Atlantic dominance in the region, we will move towards the Atlantic Model. On the other hand, we had almost 50 years Soviet occupation and at that time we moved toward the Russian model. Now I see we that again we are moving away from the Atlantic Model. Where exactly? I don’t know. Perhaps a critique of this new swing will evolve, also among populist parties. People will also compare both regions, and will finally see that the inequalities rise, and that rent-seeking brings benefits mostly to the elites and decelerates social and economic progress. This could then lead to a change in the patterns of rent seeking and competition.