Goulash Corruption

by Joshua Dill, On July 9, 2015

Corruption in Hungary and other post-Communist nations in Central and Eastern European countries has been a persistent problem since the political transition after 1989. The issue began to receive heightened public attention in October 2014, when the United States denied visas to six Hungarian government officials suspected of corruption. Even more recently, strong suspicions of illicit relationships between government organs and financial firms arose when the Hungarian Foreign Ministry removed several billion forints of its investments from the brokerage Quaestor immediately before its license was suspended for issuing fraudulent bonds, the third in a string of brokerages to collapse in this way, affecting the investments of thousands of Hungarians.

According to the NGO Transparency International, party financing, the revolving door between government and private enterprise, and weak checks and balances on the government are all important corruption risks for Hungary. The country’s persistently poor ranking in these regards seems to be related to the country’s economic stagnation since the early 2000s. A 2012 OECD study noted a strong negative correlation between GDP per capita and corruption, though teasing out the exact causal relationship between these indicators—strongly correlated with rule of law and quality of governance and regulation—is difficult.

According to Transparency International’s 2014 Corruption Perceptions Index, Hungary’s overall level of corruption puts it in the bottom third of EU member states, among peers like Latvia, Slovakia, the Czech Republic, and Croatia (and ahead of Italy). However, while it has stayed largely within the same range as other Central-Eastern European nations, the country has slipped during the last decade. Between 1999 and 2005, for example, Hungary ranked second in its region, whereas it has now fallen to sixth. Hungary’s middling ranking may also distract from the fact that in certain areas its performance is dismal. According to the World Economic Forum’s Global Competitiveness Report, Hungary is in the bottom quarter of all countries surveyed when it comes to factors like diversion of public funds, public trust in politicians, bribery in the awarding of public contracts, efficiency of legal framework in challenging regulations, and transparency of government policymaking. Nevertheless, even in the institutional factors where Hungary’s worldwide ranking is most worrying, fellow EU member states like Slovakia, the Czech Republic, Bulgaria, and Italy generally perform even worse (Italy, for example, ranks a stunning 143 of 144 when it comes to transparency of government policymaking).

Corruption in Hungary, then, shares much in common with that in neighboring countries, but there are also characteristics that make it unique. When I spoke with József Péter Martin of Transparency International’s Hungary chapter, he identified two main elements that distinguish Hungary from other EU countries. The first is the centralization of corruption. Mr. Martin pointed out that Hungary has the most centralized political and economic system in the EU, especially after the introduction of the new constitution in 2010, characteristics that impact the nature of its corruption. What does this mean? Whereas corruption in other nations, and indeed in Hungary in the past, was generally diffused throughout the various levels of government, corruption in Hungary now occurs mostly at the upper levels of the polity.

The second factor that Mr. Martin pointed out was what he called the legalized nature of corruption. With this seemingly paradoxical phrase, Mr. Martin was indicating how political actors can transfer wealth or surreptitiously influence the market through means that, while technically legal, undermine impartial and transparent governance. One high-profile example was the establishment of the state monopoly on tobacco sales in 2012-2013. Viktor Orbán’s Fidesz government decided that from that point forward, tobacco would only be sold at shops possessing an official state concession—thus reducing the number of tobacco shops from more than 40,000 to about 5,000. Besides depriving many shops of a lucrative product, the concession was redistributed in a way widely perceived to reward political insiders and government allies. Another case was the nationalization and subsequent re-privatization of the Takarékbank banking cooperative, a transaction implemented through extraordinary legislation and still shrouded in secrecy, as the relevant documents are classified. While in principle all of these actions were legal, they amount to state capture—in other words, a symbiosis between state officials and oligarchs that holds public decision-making hostage to private interests.

Anticorruption is a matter of concern to the general public and regularly forms a part of opposition parties’ critique of whichever government is currently in power. 89% of Hungarians, as compared to 76% of the EU population, think corruption is a big problem. However, Hungarians have a pessimistic streak when it comes to corruption, considering it to be a sadly ineradicable part of life. This means that corruption has to pass a relatively high threshold before it provokes a major public reaction in Hungary. However, Mr. Martin suggested that the high-profile visa ban controversy might increase the issue’s political salience.

Anticorruption has become an effective political issue for the radical nationalist opposition party Jobbik, especially because the ruling Fidesz party and the main left-wing opposition party (MSZP) are both associated with political corruption in the public eye. The ecological and left-wing party LMP (Lehet Más a Politika, “Politics Can Be Different”) has also made anti-corruption a major part of its political platform.

EU institutions have also taken notice. The EU Commission’s 2015 Country Report for Hungary expresses concern over “informal relations between businesses and political actors at local level,” “’close contractual relationships’ between business and political elites,” and partiality in major infrastructure investments. On public procurement bids, the report states that “the high frequency of tenders obtained by some specific contractors and bidding by consortia involving the major actors of the market are signs for limited or distorted competition.” But despite their disapproval, EU institutions often lack legally binding rules and mechanisms to fight corruption and fraud. They also lack the political will to bring serious consequences to bear against problem countries. As always, it is difficult to develop an objective measurement or ranking of corruption. Finally, national governments often know how far they can go without provoking a reaction by EU institutions.

What trajectory can one expect from Hungary and its neighbors going forward? Within Central and Eastern Europe, the Baltic nations, especially Estonia, have long been leaders in terms of clean governance; Poland, especially under the leadership of former PM Donald Tusk, has seen significant improvements. Hungary and Slovakia, on the other hand, have both been worsening, both in corruption and in quality of governance. The Czech Republic is an ambiguous case. It ranks worse than Hungary on the Corruption Perceptions Index, but some think that the higher number of oligarchs there may lead to a competitive situation that could have positive side effects. Czech and Slovak corruption remain in the news. Hungary has addressed concerns over corruption with new laws on public procurement, transparency, and competition, but according to the EU’s 2015 Country Report, its progress has so far been “limited,” with the effectiveness of the new laws yet to be proven.

–Joshua Dill was a Pannonius Fellow of the Common Sense Society. He holds a degree in German and European Studies from Georgetown University School of Foreign Service. 

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This blog is provided by the Common Sense Society of Budapest as an online, English-language platform for the publication and exchange of diverse and differing perspectives about Hungarian politics, economy, and culture. The views represented here are those of the authors and do not necessarily reflect the opinions of CSS. The Common Sense Society does not receive funding from any government entity or political party.