1 The conditions for sustainable convergence – Pitfalls and entry points

2010 marked the end of procyclical economic policy in Hungary, which had sacrificed macroeconomic stability for short-term economic growth prior to the crisis. The fiscal reforms and turnaround in monetary policy put the Hungarian economy back on a growth trajectory in 2013. The new model was based on rising employment, the transformation of the tax regime, the establishment of macro-financial stability and a monetary policy that supports economic growth through new, innovative instruments. As a result of the economic policy turnaround, convergence with the economic development level of advanced European countries gained new momentum. To allow convergence to continue even in the constantly changing world economy, Hungarian economic policy needs to find ways to raise productivity and capital intensity on the one hand, and work to bolster the adaptive capacity of the economy on the other hand. As full employment is approached and demographic constraints become tighter, the previous labour-intensive growth must be increasingly replaced by a capital- and knowledgeintensive model.

It is vital to appropriately manage the pitfalls threatening the Hungarian economy to ensure that economic growth remains sustainable in the long run. In Hungary, along with the declining size of the population, ageing may also increasingly stifle growth. The higher old-age dependency ratio may prove to be a challenge to the major social security systems (pension system, healthcare). In line with demographic constraints becoming ever more severe and rapid technological progress (automation), competition for labour has become global. Retaining and attracting the appropriate quality and quantity of labour is also crucial for Hungary, as this is the basis of the capital- and knowledge-intensive growth model. The Hungarian economy has recently become increasingly integrated into the manufacturing global value chain, especially in the automotive industry. However, the sector’s value-creating capacity is relatively low, and the economy has become more vulnerable to fluctuations in external demand due to the rise in specialisation and openness. Long-term convergence depends on the productivity of the corporate sector. The SME sector is crucial in the economic system, but there is a huge gap between the productivity of large enterprises and SMEs in international comparison. Corporate duality is due to factors such as the fragmentation of the SME sector, the low number of exporting SMEs, shortcomings in management capabilities, the difficulty of a fresh start as well as the low technological readiness and innovation capacity of the sector.

With the current structure of the economy, the GDP–GNI gap is expected to widen, which needs to be avoided with targeted measures to improve competitiveness. Bolstering the productivity of the SME sector, strengthening domestic financing and thus lowering the interest balance are key elements in closing the GDP–GNI gap. Long-term, sustainable economic growth is based on financial stability and sustainable financing. However, this requires that companies have access to the appropriate amount and structure of external financing through all stages of their life cycle. In addition to avoiding the traps inherent in demographic developments, the economic structure and financing, a psychological turnaround is needed in society to enter on a new growth trajectory.

New global megatrends serving as entry points for Hungary have appeared or strengthened recently. The expansion and ageing of the world’s population, the widening of the global middle class and rapid urbanisation have the potential to rearrange income and consumption patterns. Hungary and the Visegrád region are situated on the transit route between the developed countries of Western Europe and the rapidly developing Asian markets, which creates a perfect opportunity for the traditional service sectors (tourism, transportation) as well as modern services. The world has entered a new technological cycle. The new, disruptive technologies can transform the structure of economic production and labour markets. In order to move towards higher value-added production and services, participation in innovation, the use of new technological inventions and solutions, and furthermore, a modern physical and digital infrastructure is essential. Nowadays, services are offered globally: they are not bound to a physical location thanks to the widespread use of the Internet. The spread of digital platforms and changing consumer trends may offer entry points for SMEs. The issues of sustainability and energy efficiency are crucial when analysing the challenges of the upcoming decades. Identifying the trends and harnessing the opportunities of the changing global energy mix are also critical for Hungary.