How Hungary’s Oligarchs destroy Standards of Living for the Majority By Les Nemethy, CEO, Euro-Phoenix M&A Advisors, former World Banker

Soon after re-election in 2010, Fidesz, the ruling party in Hungary, introduced a new ideology, the National System of Cooperation (Nemzeti Együtműködesi Rendszer, NER); it is related to Orban’s concept of “illiberal” democracy.

Part of this ideology is the creation of a new class — the NER Knights, oligarchs who owe their wealth to Government (not market forces). This new aristocracy negatively impacts the income, wealth and standard of living of a large majority of the population.

1, How NER Knights were created

NER Knights are generally friends of Orban, made very wealthy by Government in one or more of the following ways:
  • 1. Tenders. Since 2010, vast amounts of EU and Government funds have been awarded by tenders, awarding free grant money and very low interest loans. A lion’s share of these funds have flowed to NER Knights, using multiple techniques: sole source exemptions, tender criteria that favor the intended winner, and dummy competitors. Funds have been siphoned off that could have been used for the benefit of the poor, or in areas like health care and education, which have been sorely neglected.
  • 2.Oligarchs squeeze out business owners. Virtually any enterprise that grows beyond a few million euros in revenues is at risk of receiving an “irresistible offer” from a NER Knight. Those who refuse may count on punitive tax audits and other reprisals. There are no statistics; the author estimates that the number of such transfers is at least in the hundreds.
  • 3.Taxation. NER Knights have taken over significant market share of key sectors, including energy, telecoms and banking, facilitated by Government imposing confiscatory taxes on these sectors. Diminished profitability paved the way for NER Knights to buy them on the cheap.
  • 4.Bank ownership. NER-owned banks provide a piggy bank for Government to fund its pet projects, from Marie-LePen’s election to its oligarch friends, often without adequate collateral.
  • 5.Legislation. Two illustrations:

    a, In 2013, the sale of tobacco in Hungary was made subject to state monopoly and lucrative retail locations were granted by concession to friends.

    b, The Government wanted to ensure that billboards, the carriers of important political messages, were in friendly hands. Lex Garancsi, named after the oligarch by this surname, facilitated this process.
  • 6. Rezoning and building permits. Friends of Government seem to enjoy preferences. For example, the NER has largely turned Lake Balaton, the largest lake in Central Europe, into a NER lake, fencing off public beaches, developing campgrounds, engaging in massive hotel developments (once again with EU grant funding and concessional financing).
Aggrieved parties cannot count on a court system that is impartial, nor a press that is objective and independent.

The poster-boy of NER Knights, Mr. Lorinc Meszaros, was a humble gasfitter 15 years ago; he became mayor of Felcsut, hometown of Orban. He went on to accumulate a vast business empire, spanning tourism, infrastructure, construction and other sectors. He vies for the title of wealthiest Hungarian.

Although the Competition Office had previously refused a merger of two foreign-owned media companies, they had no problem with 400 media companies being simultaneously merged into a Meszaros-managed company, nor with the media empire of Lajos Simicska, an oligarch who fell out of favor, subsequently being merged into the Meszaros media empire.

Meszaros has publically attributed his good fortune to “God, good luck, and Orban” and humbly remarked that his business talent surpasses that of Mark Zuckerberg.

It would be fair to say oligarchs control the commanding heights of the Hungarian economy. While the author is not aware of any official statistics, a best guess would be in the range of 20-30% of GDP.

2. Why NER Wealth is to the detriment to the income and wealth of most Hungarians Other than directly rechanneling EU and state funds (which could be used for poverty alleviation, healthcare, education, etc.) to NER Knights, there are many substantial, but impossible to quantify indirect effects of the NER system. To name a few:
  • Past NER purchases of SME’s and reluctance of many SME owners to expand for fear that expansion will put them on the NER’s radar, may be an explanation as to why the SME sector in Hungary is stunted.
  • Certain Western investors may be deterred from operating in such an environment; there seems to be a much larger share of investment coming from Asia.
  • A weaker competition policy fuels inflation.
  • Income and wealth concentration have many negative social effects.
  • The NER system has put vast resources into the hands of managers with little experience–a partial explanation for annual Hungarian productivity increases (0.8%) being only half the European average over the past decade, which in turn contributes to currency devaluation and inflation.

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