05 Nov AmCham: A trusted partner to a pro-business Hungarian government
Dr. Farkas Bársony, President, American Chamber of Commerce in Hungary, discusses how the influential organization is ensuring the country remains highly attractive for investors
Until 2019, and even in 2020, Hungary was Europe’s second fastest growing economy with 4.9 percent annual gross domestic product (GDP) growth putting it just behind Ireland. Like anywhere else in the world, the COVID-19 pandemic has given a major blow to its economy. To start this interview, can you tell us a bit about the American Chamber of Commerce’s (AmCham’s) view on the current state of the Hungarian economy?
It’s no surprise that COVID-19 has hit our economy quite hard. The downturn had slowed a little bit by June as experienced among our members, but looking at the status of the Hungarian economy, GDP is expected to shrink by 5 to 6 percent this year, which is a significant loss. The road to recovery is expected to be long and difficult due to the looming uncertainty here. Obviously, we are in the middle of the second wave with a dramatic increase in case numbers and with no vaccine in sight. This puts every decision maker in a difficult situation, but we must become comfortable with the uncertainty.
It’s important to stress that the Hungarian government responded early on and pretty quickly with restrictions to contain the spread of the virus, and with an economic action plan to protect jobs and support the sectors most heavily hit by the pandemic, such as the tourism industry.
We had a job retention subsidy program introduced very quickly, and the government provided supplements for those working in research and development (R&D) and engineering to maintain our R&D capacity. Facilitating job creation was obviously a priority, hence the introduction of subsidies for new hires, training programs, infrastructure development and investment support. We cannot forget taxation: the government very quickly reacted with measures to ease administrative burdens when filing a tax return, giving more time for filing. Finally, several loan, equity and capital programs were launched to aid the recovery of startups, small- and medium-sized enterprises (SMEs) and even larger enterprises.
It was a pretty rapid response and, to the government’s credit, it reached out to the business sector quite early by starting an economic strategy council, which AmCham has been a part of together with the German chamber and the Hungarian Chamber of Commerce and Industry. The first meeting was in April and, since then, we have come together every Monday to get firsthand information regarding the government’s measures, review the impact of these actions and discuss the proposals of the business community. It’s all online now, obviously.
Since the outbreak, AmCham has been talking with its members from week to week to gain a better understanding of their situation, collect their ideas and deliver their recommendations to the government. We have tried to our best to serve the interests of every individual member.
Overall, businesses adapted well to working remotely but we realized very soon that the labor code must be modified to make sure that remote working is placed appropriately within the legislation. We are actually still working with the government to clarify certain issues in the labor code to introduce more flexibility because the home office was not directly regulated beforehand, which is the situation in many other countries as well. Most companies had a home office, but not at this scale. In light of the COVID situation, we need to make sure we address issues like who’s responsible for accidents happening at home while you’re working, who needs to cover your costs when you work home using your own infrastructure and so on. There’s no question that remote working and home office regulations need to be in place, and we are working on that with the government.
Digital education was another major challenge, even bigger than remote work for businesses. All countries experienced a similar struggle to adopt digital learning tools for teachers or students at such short notice. We realized how far we really were from being digital in education. AmCham has been pushing for educational reforms for a long time, including paying more attention to digital education. Obviously, COVID-19 sped up many of our ongoing conversations with the government—we must work hard to reduce the regional differences in terms of infrastructure and capabilities. However, it’s not only about the technology but also about the curriculum itself, which must be modernized to teach the next generation the skills and competencies they need to succeed in this century’s dynamic labor market. Most of the topics we are pushing from AmCham’s side have already been out there, we are only accelerating the discussions to find potential solutions through the expertise of the business community.
Also, healthcare remains a big challenge here. Even though AmCham isn’t in any position to dictate what the right response to contain the spread is, we highlighted the need for healthcare reforms at government meetings. During the crisis, the government reacted relatively quickly to give more support to doctors and healthcare workers, increasing pay and providing equipment. The COVID-19 crisis has brought us a lot of understanding about the healthcare system. I think we’ve done much as a country to improve the infrastructure in this emergency. There are enough beds and hospitals out there, but the big question is human capacity—our frontline workers are shorthanded. We struggled with allocating the necessary resources and operating infrastructure that we have.
Before COVID, the Hungarian government also announced a kind of de-industrialization and COVID accelerated the importance of this project. Hungary is known for its manufacturing background, we have lots of manufacturing and assembly facilities across the country but a couple of years ago, with the support of AmCham, the government has begun to transition toward innovation, R&D and services—creating higher-added-value jobs. We need a strong paradigm shift: Hungary cannot always remain the country of cheap and unlimited labor. We have almost full employment, so we can no longer talk about unlimited labor resources and they are not cheap anymore. We really need to realize as a country that we have to move away from being a simple manufacturing base. It’s still important and still the backbone of our economy, but we must strive to create an innovation hub in this competitive region.
László György, State Secretary at the Ministry of Innovation mentioned that, “As production will move closer to consumers, that’s a big chance for the Central Eastern European region. Visegrad Four (V4) countries will have a chance to increase their value added.” Do you think this is something Hungary is promoting enough for the post-COVID-19 world?
That’s perfectly right—especially if you look at the global supply chains that are seeing significant disruption. In a way, this is also an opportunity and we could witness a kind of supply chain that is onshoring, if you can say that. You need to have more supply chain sources in the future. You cannot be exposed to one source but you need to have alternatives and I definitely think Hungary can benefit from this situation.
Hungary as a country is very focused on foreign trade and on attracting foreign direct investment (FDI). Last year saw an all-time record, as FDI grew by 24 percent in comparison to the previous year, with 101 investments in 21 different sectors coming from 20 different source countries. How important is the presence of U.S. companies in Hungary?
Absolutely. We’ve experienced an increasing FDI growth last year and the U.S. is still the largest non-EU investor in Hungary. The U.S. accounted for €11.6 billion of investments in Hungary in 2018. Currently, we have more than 1,700 U.S. companies in the country that employ over 100,000 people. The government has signed strategic partnership agreements with 80-plus companies so far, with 14 of them being American. Overall, American businesses have a significant presence in the country and have been crucial since 1989. That was the time when General Electric (GE) and the first U.S. investors came into the country. I was the managing director of GE for many years and was one of the crusaders to bring more investments to Hungary within GE. The success of GE has attracted many other U.S. multinationals to Hungary since 1989 and we believe this country has many opportunities to offer businesses, not just to Americans but to everybody else in the world.
Aside from your position as president of AmCham, and partner and CEO of Kondor Holding, you are also a member of the National Competitiveness Council and co-founder of Visegrad Consulting Group. How do you rate Hungary’s value proposition and ease of doing business when compared to its peers in the V4 group?
That’s a good question. Obviously, there’s competition even on the EU playground, which has its own rules that everybody needs to respect and follow, but still there’s some room for competition. The EU makes a lot of efforts to harmonize, for example, corporate income tax base and taxes, and to come up with regulations on how to tackle the digital economy, how to allocate taxing rights and so on. There are lots of interesting questions out there right now, but still there is some room for competition.
We have a very pro-business government that is considering potential investors as a top priority and the latest data shows that we are pretty successful in attracting potential investors coming into the country and supporting those who are already here. The Hungarian Investment Promotion Agency is one of the most successful promotion agencies in the region.
The government’s approach is to talk to the decision makers, which helps them to make investment decisions fast. They can confirm very rapidly what the actions are that they could do to support investments here. We’re sitting in the heart of Europe with access to a market of 500 million people. The geopolitical situation of Hungary is stable and we have a very favorable tax and financial environment, with a very competitive corporate income tax at a 9-percent flat rate. Hungary also has an extremely extensive tax treaty network with other countries to make sure we avoid double taxation.
At the heart of it all is Budapest, one of the most liveable and affordable cities on the continent and an essential business hub in the region. But there have been massive improvements in the countryside to strengthen research capabilities and attract investments as well.
In terms of infrastructure, we have advanced transport, telecoms and logistics infrastructure that makes a good basis. We have traditionally excelled at manufacturing, but we are pushing toward higher-added-value jobs. On the supplier side, it’s very important for multinationals to find quality suppliers for the region in the country. We have many high-quality suppliers in the country, such as in the automotive industry, for example. We have companies like Audi, Mercedes and BMW, and so we need to have quality suppliers to make sure these companies are successful here.
Last but not least, the higher education background is firm, especially in Budapest, but also in some of the bigger cities in the countryside. We have a rich tradition and world-renowned strength in science and technology. All these make Hungary a very favorable investment location, even during COVID-19. Most of the investments announced before COVID are confirmed with some exceptions, obviously some with some delay; but this is acceptable under the current crisis. We also have new potential investors in the pipeline.
AmCham Hungary is one of the largest American Chambers of Commerce in Central and Eastern Europe. This October, the chamber hosted a strategic meeting with working group leaders and patron member CEOs to discuss its new policy agenda for the next five years. Can you disclose the outcome of this meeting and what are AmCham Hungary’s top global priorities at the moment?
The goal of our organization is to make Hungary more competitive through our advocacy work, which is primarily focused on four major areas: investment, competitive workforce and education, innovation and digitalization—this is where we can have the most impact.
The goal of the strategic meeting was to draw a roadmap for the next five years. We wanted to better understand the state of the economy, learn about the drivers of growth, and the potential areas of improvement. We also reviewed the progress we had seen since the publication of our current policy agenda, the strategic guideline of AmCham since 2017. When determining our direction for the next five years, we must also analyze the COVID-19 situation and study the impact of the pandemic in all areas.
Our priority is to make sure that Hungary remains an investor-friendly economy. So far, businesses have remained committed to the country and we are demonstrating that we are not just after the new investors, but we do a lot to make sure that we keep those investors in the country once they have committed to it. Along this, we must preserve the advantages and capabilities with which we have attracted this outstanding number and amount of investments in recent years.
We want to help build a more competitive business environment with a more transparent regulatory framework, a predictable tax regime, easier administration and infrastructure development. We want to protect the supply chains and support the modernization of SMEs, the cornerstones of our economy. It is also important to support large corporations that bring investment, lead innovation, employ a considerable part of our workforce and account for a significant share of our exports.
Apart from attracting investments, workforce-related challenges are the top priority for our members these days. A highly skilled, adaptive and flexible workforce is required everywhere, and as we almost had full employment before COVID, we realized that we need to perform better in education as well. As I said before, AmCham has pushed for educational reforms for years. We called for a considerable increase in the education budget and are looking at this as a vital investment into our future. We are strong advocates of lifelong learning, continuously pushing for reforms for adult and vocational training. One of the positive outcomes of COVID-19 is that this subject is becoming increasingly important.
Everything is highly interrelated. Some countries are well ahead of us and we need to catch up. On the labor front, we proposed modifications to the labor code to promote flexible forms of working and remote-work home offices, that’s still in focus.
We have advocated for the prioritization of innovation for years. R&D has an essential role in the response to the COVID crisis. Innovation is basically a tool that could boost the resilience of sectors, improves the competitiveness of economies and accelerates economic reform. Innovation is a critical driver of productivity, growth and job creation. It will certainly remain high on our agenda.
Digitalization has also been part of our agenda for quite some time and we are determined to continue our work in this area. The digital transformation leads to more efficient, effective and sustainable businesses with the new technologies. Digitalization can give us an edge to transform the landscape in terms of competitiveness. For instance, businesses that got in early were better equipped to handle the COVID-19 crisis and are much more successful in future business development now. You cannot succeed without building in digital resiliency.
Now, again with COVID, we need to accelerate these processes not just at company level, but at education and government levels. Some other countries are much better on e-government, for example. We keep emphasizing to the government that they need to push digitalization and automation, and there has been progress in this area. Also, in the field of taxation: personal income tax returns are basically drafted by the national tax authority. We have the technology that enables the tax authority to prepare your personal income tax return. The plan is the same with corporate tax and VAT returns, so in a few years I won’t be surprised to see those returns being drafted then made by the tax authority.
COVID-19 showed us that, from now on, we must look at the economy through the lens of sustainability, resilience, and reinvention. This will be reflected in our recommendation package we put together every year that contains our proposals in the aforementioned areas: investment, competitive workforce and education, innovation and digitalization. This document is submitted to the Prime Minister and other relevant ministers and serves as the basis of our discussion throughout the year. AmCham is a trusted partner and a strong voice in advocacy, so the government relies on our input.
To conclude, what is your final message for our audience?
Hungary is a very attractive place for investment and we see a lot of opportunities for investors in the country. We are also learning from the COVID-19 situation: we adapt as fast as we can to the new normal and it is a very attractive investment location. Despite the hardships of the pandemic, we must look at this situation as an opportunity. We can have an unparalleled chance to collectively make great strides in education, education, jobs, health, research and innovation, digital services, clean energy, smart city programs—all contributing to a more attractive business environment. In the COVID-19 and post-COVID world, we must strive to be flexible, adaptable, resilient and sustainable by design, not by emergency.