I’ve just returned from spending Easter in Hungary, which regularly vies for the title of the most pessimistic country in the world. Although the mention of Hungary rarely makes it into the Western press, the country has recently crept back into the headlines as one of the countries alongside Iceland, the Ukraine and the Baltic states of Estonia and Latvia on the verge of economic collapse. Like many, small developing countries, Hungary is an economic minnow. Its GDP of around $140 billion gives it as much economic heft as an average U.S. Midwestern city — say Minneapolis. But if Chile has been posited as a model for how a small developing country should conduct its economic affairs, consider the case of Hungary as a warning of the consequences of a dangerous cocktail of cronyism, a culture of petty corruption, leavened by a good dose of a uniquely local brand of negative thinking.
Once at the vanguard of economic reforms of the former Communist bloc, Hungary has become Europe’s biggest economic basket case. Today, Budapest’s graffiti-infested streets stand in sharp contrast to the Disneyland quality of renovated Prague to the north. Ambitiously designed “corporate campuses” that sought to replicate the high tech success of Hungarian-Americans Andrew Grove (Intel) and Charles Simonyi (Microsoft) now stand largely empty on the banks of the Danube. American law firms that once worked on setting up joint ventures in what was Eastern Europe’s most attractive destination of foreign investment 10 years ago, now pay their bills working on the bankruptcies of AIG and GM. Real estate projects along Budapest’s Andrassy Boulevard — whose asking prices rivaled that of prime West London property only a year ago — now stand unfinished, and seemingly abandoned.
Ironically, Hungary’s travails are not about size or about the current economic crisis. Hungary was in deep trouble even before October, when it was bailed out to the tune of $25 billion by the IMF and the European Union. Instead, Hungary’s problems can be traced back to the inevitable consequences of irresponsible economic policies, cronyism, and a widespread culture of petty corruption. From his perch at the European Union headquarters in Brussels, a British diplomat told me last week that Hungarian politicians are widely viewed as ranking “number 27 out of 27 among the EU members.” Indeed, Hungary has become somewhat of an economic pariah even in its own run-down neighborhood. When outgoing Prime Minister Gyurcsany dramatically warned of “a new economic Iron Curtain” descending upon Eastern Europe if his demands for an economic bailout package amounting to 180 billion euros weren’t met, the Czech Republic and Poland were quick to distance themselves from their profligate neighbor. The Germans — the rich uncle in the EU who would get to pick up the tab — dripped with vitriol in condemning Hungary’s chutzpah.
Although there is no room for it in the economist’s textbook, I think culture, values and psychology have much to do with a country’s success. It’s the Americans’ hard work and optimism that accounted for the rise of the United States. And it’s a culture of excessive debt that accounts for its current travails.
Twenty years ago, Budapest was the shining star of the Communist Bloc and Prague was a sleepy backwater, even as its Karl Marx University, where I was a Fulbright scholar, still had a “Department of Central Planning” and Marxian “dialectical materialism” was a two-year required course for all economics undergraduates. From that intellectual tradition arose one of the most open and progressive regimes for foreign investment in all of Eastern Europe.
By the mid-1990s, I was working for a Hungarian branch of an Austrian investment bank, which was the Goldman Sachs of the local market during the heyday of Hungarian privatizations and foreign investments. Its influence in Hungary certainly exceeded that of the White House and Goldman Sachs in the United States combined. I was hired by the CEO, who is currently the president of the Hungarian Central Bank. I worked on the initial public offerings of Hungarian companies with the current CEO of the Budapest Stock Exchange, as well as (of today) Hungary’s new prime minister. Two of my former colleagues also occupy top positions in Hungary’s equivalent of the Forbes 400. The guy who I hired to design an ad campaign for an investment fund I launched is now CEO of the country’s second-largest TV station.
In U.S. terms, it would have been as if I had worked with Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, President Barack Obama, with Amazon founder Jeff Bezos, Michael Dell and NBC President Jeff Zucker thrown in for good measure — all in a 40-person firm. Not that this is unique to Hungary. An Irish acquaintance who has lived and worked in New York and London pointed out that this dynamic was identical in his native Ireland. And I suspect it is very similar in many Asian and Latin American countries as well.
But if such concentrations of influence are inevitable in small countries, I wonder if other pernicious values aren’t. Hungary suffers from a particular breed of anti-cosmopolitanism. Hungarian senior managers at multi-nationals shudder at the thought of being sent abroad for regional positions. The former and current Hungarian prime minister cut their political teeth as leaders of the Communist Youth League. In contrast, the president of Estonia is a Columbia and Penn graduate and sends his son to Stanford. And while even some Russian oligarchs invested in getting a Harvard MBA, Hungary’s current political leaders wouldn’t know Harvard Business School from a hole in the ground.
And then there is the culture of petty corruption that has penetrated the interstices of everyday life. A few years ago, I once sat at a dinner with leading figures in the Hungarian media world as each regaled our fellow guests with stories of how they cheated their way into university, and then how they systematically stole copies of exams to pass their courses. To them, their scam was a sign of their intelligence. Just this weekend, I witnessed an upper middle class professional family scheming how the mother could stop working by the age of 55, yet still get a full state pension. Cheating the government in Hungary is a way of life. Whether you call this “street smarts” versus “book smarts” doesn’t really matter. The cancerous effect of this culture speaks for itself.
The Sad Story of Europe’s Ne’er-Do-Well: Culture Has Consequences
There are some signs that a global perspective is reaching into even Hungary. The recommendations of Hungarian portfolio managers in a local business magazine include bets on U.S.-listed gold ETFs and plays on the U.S. financial sector. I was surprised to find the only pro-American article I have ever seen in Europe in a local business publication — though a Hungarian friend pointed out the author did not dare to sign it. The long arm of U.S. law is also reaching into Hungary, with some real consequences. The CEO of Magyar Telecom (MTA), the only Hungarian company listed on the New York Stock Exchange, was ousted a few years ago after running afoul of some U.S. regulations. The entire senior management of Hungary’s leading cable company was recently replaced for irregularities that came up during an investigation triggered by the much reviled Sarbanes-Oxley Act.
But I suspect even an economic miracle and graffiti-free buildings wouldn’t make Hungarians any happier. Just as American optimism is the motor of American life, Hungarian pessimism is the engine behind the country’s petty corruption and constant political bickering. As a Hungarian psychologist pointed out to me, Hungarians rarely take responsibility for their actions. They will always lay the blame at the feet of the Mongol hordes, the Battle of Mohács (1526), the Turkish occupation, Habsburg rule, Treaty of Trianon (1920), two lost wars, and the crushed revolution of 1956. In other countries, fairy tales may end with the phrase: “And they lived happily ever after.” In Hungary, fairy tales end with: “And they lived happily ever after… until they died.”
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