Pierre-Alain Pionnier
OECD Economic Surveys: Hungary 2024
OECD Economic Surveys: Hungary
3. Raising productivity and strengthening institutions
Abstract
Productivity growth is key to sustain living standards, especially in a context where the working-age population share is declining due to ageing. Labour productivity growth in Hungary has resumed only recently after a decade of decline, but it remains lower than before the Great Financial Crisis. Boosting productivity will necessitate lifting barriers to entry for new businesses and fostering competition, especially in network sectors such as energy, transport, and telecommunication. Strengthening the insolvency framework and advancing the digitalisation of firms will also be key. Despite a good internet infrastructure, Hungarian firms are lagging behind OECD peers in the adoption of advanced digital technologies, and the digital divide between small and large firms has increased during the pandemic. Lower telecommunication prices and a wider diffusion of digital skills in the population would help improve the situation. Recent reforms to the anti-corruption and public integrity framework will also support the business environment if they are fully implemented.
Productivity has slowed since the mid-2000s
Labour productivity growth is the key to sustaining living standards. This is particularly important in the context of an ageing population. Hungary’s working-age population is set to decline from 60% to just above 50% of the total population between 2020 and 2070, an evolution that is close to the average across OECD countries (United Nations, 2022[1]). This will weigh on GDP per capita unless productivity can be increased to compensate for this trend.
Like in other Central and Eastern European (CEE) countries, labour productivity in Hungary rapidly caught up with the most advanced economies between the mid-1990s and the mid-2000s. In contrast to neighbouring countries, however, this catching-up process then came to a halt in Hungary in the wake of Great Financial Crisis (GFC) of 2008-09 and only resumed in the late 2010s. Nevertheless, labour productivity growth remains lower than before the GFC, as well as the convergence process towards the most advanced economies (Figure 3.1, Table 3.1).
Figure 3.1. Labour productivity in Central and Eastern European countries
Total economy, G7 = 100, constant prices and PPPs
Note: Labour productivity is defined as value added divided by total hours worked by employees and self-employed workers. Due to the lack of industry-level PPPs, labour productivity convergence across countries can only be meaningfully assessed at the total economy level.
Source: OECD Database on Productivity Statistics
Table 3.1. Average productivity growth in Central and Eastern European countries
Note: Periods have been selected to match the break points in the Hungary series in Figure 3.1.
Source: OECD Database on Productivity Statistics
The Hungarian economy has undergone major structural changes since the mid-1990s as it transitioned from a command-and-control to a market economy. These structural changes could have affected aggregate labour productivity developments through various channels.
One of these channels is reallocation of labour resources between economic activities with different productivity levels or growth trajectories. Before 2008, the movement of workers away from agriculture, where labour productivity is below the average level in the economy, towards services sectors where labour productivity is above average, has contributed positively to labour productivity growth, but only to a limited extent. The lockdown of contact-intensive industries during the pandemic also triggered reallocation effects, but these were short-lived and did not contribute much to labour productivity growth between 2019 and 2021. Consistently with the evidence in other OECD countries (OECD, 2023[2]) (Pionnier, Zinni and Luu, 2023[3]), the aggregate productivity impact of reallocations across sectors has been small in Hungary (Figure 3.2, panels A and C). Looking ahead, more significant reallocation effects may be triggered by the green transition and will need to be monitored (see Chapter 5).
Figure 3.2. The labour productivity slowdown is mainly related to within-industry developments
Note: Labour productivity is defined as value added divided by total hours worked by employees and self-employed workers.
Panel A considers reallocations across 2-digit industries. Panels B and C: The within-industry and reallocation effects presented in Panel A are broken down into contributions of specific industries. All underlying calculations are done at the 2-digit industry level.
Source: OECD Compendium of Productivity Indicators 2023 (OECD, 2023[2])
By contrast, developments within specific industries have been a key driver of aggregate labour productivity growth in Hungary over the medium term. Within-sector developments are also the main explanation for the productivity slowdown after the mid-2000s. The manufacturing sector explains much of the decline in the within-industry contribution to aggregate labour productivity growth (Figure 3.2, Panel B). The slowdown in manufacturing productivity after the mid-2000s is mainly related to the TFP slowdown of exporting firms, with no significant difference between foreign- and domestic-owned firms (Muraközy, Bisztray and Reizer, 2018, pp. 81-82[4]).
Within-industry productivity growth is generally related to the strength of competitive forces among existing and future firms within specific sectors, as firms strive to stay ahead of their competition by offering better goods and services at competitive prices (Syverson, 2011[5]). Productivity growth within industries can be further decomposed into the contribution of productivity growth that takes place within firms, the contribution of business creations and destructions, and the contribution of reallocations between existing firms. Evidence based on comprehensive firm-level data covering the market sector suggests a decline in all three contributions in Hungary since the mid-2000s, with the largest impact from the slowdown in within-firm productivity growth (Muraközy, Bisztray and Reizer, 2018[4]).
Lowering entry barriers for new businesses would boost competition and productivity
The entry of new firms on a market facilitates the diffusion of innovations and can be an important source of future growth. For example, the significant FDI that Hungary is currently attracting in the manufacturing sector, mainly in relation to electric mobility, will contribute to the transition of this sector to green technologies. Nevertheless, it is still too early to assess to what extent they will increase domestic value added and productivity in the long term. Moreover, the benefit of these investment projects for the Hungarian economy will depend on the ability of domestic SMEs to contribute to the new value chains.
Entry, and potential entry, also play a role for maintaining the necessary competitive pressures on incumbents to enhance their productivity and prices competitively (OECD, 2015[6]). Nevertheless, business entry rates in Hungary are lower than in other OECD countries, in almost all economic sectors (Figure 3.3), but particularly in telecommunication and IT services. In most sectors, these lower-than-average entry rates are also compounded by lower-than-average survival rates of new entrants in the first five years after their arrival on the market (OECD, 2020[7]).
Hungary has favourable product market regulations (PMR) overall, as measured by the OECD PMR indicators, but some aspects contribute to limit business dynamism. On the positive side, administrative burdens on start-ups are low by OECD standards. One-stop shops inform businesses about their licensing requirements and deal with issuing all licenses and permits. There is also a “silence is consent” rule that accelerates approval procedures.
In some sectors, however, regulations create barriers to competition and market entry. The number of regulated professions in Hungary is the highest in any European country (Figure 3.4) (OECD, 2018[8]). For example, stringent regulations affect competition in legal professions such as lawyers and notaries, as well as water and road transport. Regarding the latter, licenses are required to operate freight and long-distance passenger transport by road, regional monopolies are in charge of long-distance passenger transport by road, and itineraries need to be approved by the administration.
In the household retail electricity market, there is a strong presence of state-owned enterprises and the regulations in place tend to hinder the entry of competitors. First, potential competitors perceive the risk of changing regulations as high (Felsmann et al., 2021[9]). Second, low regulated prices discourage competitors from entering the market as their return on investment would be insufficient and the low regulated prices would not give them the opportunity to distinguish themselves from incumbents by offering lower prices (Felsmann et al., 2021[9]). Replacing the current energy price caps with targeted cash transfers to vulnerable households, as advocated in Chapter 2, would increase the attractiveness of the Hungarian retail electricity market for new investors. In turn, increased competition may contribute to efficiency gains and reduce the cost of targeted cash transfers for the government.
Figure 3.3. Business entry rates are lower than in other OECD countries in most sectors
Entry rates in manufacturing and services, 2010-15, %
Note: Calculations based on the OECD DynEmp3 database. The underlying microdata sources for Hungary are Corporate Income Tax data and National Tax and Custom Administration data. Benchmark countries are all OECD and G20 countries for which similar data are available in the DynEmp3 database: Austria, Belgium, Brazil, Canada, Costa Rica, Finland, France, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and Türkiye.
Source (OECD, 2020[7]):
Figure 3.4. The regulation of network sectors and professional services is relatively stringent
Note: Panel A: Information refers to laws and regulation in force on 1 January 2018.
Source: Panel A: OECD - 2018 PMR database; Panel B: European Commission – Regulated Profession database
The low entry and survival rates of new businesses are likely related to the dominant position of a few firms (Figure 3.5). This, in turn, limits competitive pressure on incumbent firms and probably contributes to the fact that both innovation activities and business-financed R&D are low compared to other EU and OECD countries (Figure 3.6). Identifying and eliminating barriers to competition in network sectors and professional services will be a priority to boost productivity growth.
Moreover, state-owned firms tend to be less productive than privately-owned firms operating in the same sector (Muraközy, Bisztray and Reizer, 2018, p. 48;57[4]). This may be due to the fact that they are largely shielded from competition, but also to potentially weaker corporate governance structures.
Figure 3.5. Few firms dominate markets in Hungary
Extent of market dominance, 1-7 (best), 2019
Note: A lower score indicates that markets are spread among fewer firms.
Source: (World Economic Forum, 2019[10])
Figure 3.6. Innovation and R&D expenditures are low
Business-financed Gross domestic expenditure on R&D (GERD) as a percentage of GDP, 2019
Note: Panel A: A lower score indicates a lower performance of innovation systems.
Source: Panel A: (European Commission, 2022[11]); Panel B: OECD Main Science and Technology Indicators (MSTI) database.
A lack of competition in upstream network and services sectors is not only harmful for productivity in these sectors, but can also curb productivity in downstream sectors (Arnold, Javorcik and Mattoo, 2011[12]) (Bourlès et al., 2013[13]). For example, restrictive regulations and limited competition in transport services may hinder the development of efficient distribution channels and thus indirectly affect productivity in the rest of the economy.
Downstream productivity effects are also particularly relevant for the telecommunication sector, as telecommunication services often lay the grounds for productivity-enhancing digital applications. Currently only a minority of firms at the frontier are adopting advanced digital technologies (see below). Lower prices of communication services would likely encourage a wider use of digital technologies. In fact, considering that Hungary’s overall price level of consumer services is lower than in other OECD countries, the price level of communication services stands out as relatively high (Figure 3.7).
Figure 3.7. Communication prices are relatively high
Price level indices of communication and consumer services as a whole (OECD = 100, 2020)
Note: Price level indices measure price ratios across countries once prices have been converted into a common currency. Communication services include postal services, telephone equipment, wired and wireless telephone services, internet access provision services, bundled telecommunication services, and other information transmission services.
Source: Eurostat-OECD Purchasing Power Parity (PPP) Programme, 2020 results
Hungary’s mobile telecommunication market recently went through a major reorganisation. While three independent operators shared most of the market until 2022, the government partnered with a private company to buy one of the three operators in early 2023, and temporarily held a 25% share of another one which it finally sold in late 2023. These transactions were declared as being of national economic importance, thus allowing to bypass the Competition Authority.
Across Europe, multiple service providers have replaced historical monopolies, and effective competition between the new operators enforced by both national and European authorities has led to more investment and lower prices (European Commission, 2017[14]). The example of France shows that the opening of the market to a fourth operator, the intervention of the competition authority to stop the collusion between three incumbents, and the enforcement of an adequate regulation to organise network sharing between operators were key to achieve lower prices and increase investments (Box 3.1).
One of the lessons that emerges from other EU countries is the need for a strong role of the Competition Authority in preventing collusion between existing operators and in assessing any future reorganisation of the telecommunication sector. Second, additional market entry may help to boost competition in this sector. Third, mandating the sharing of infrastructure between operators through the network regulator, the NMHH in the case of Hungary, can help to foster investment in costly high-speed fiber-optics and 5G networks (OECD, 2019[15]).
Box 3.1. Competition in the French mobile telecommunication sector
Despite the coexistence of three different operators on the market since 1994, mobile prices in France remained relatively high and infrastructure investments sluggish until the competition authority condemned the three incumbents for collusive behaviour, and a fourth operator was allowed to enter the market in 2012. Its aggressive marketing strategy led to a sharp decrease in mobile services prices (Figure 3.8).
Figure 3.8. Mobile services prices in France (January 2010 = 100)
Source: (Dozias, 2023[16]), based on ARCEP data
France also intervened actively to achieve the sharing of network infrastructure between operators. New operators were initially granted access to the historical operator’s copper network. In the 2010s, a specific legal framework organised the large-scale rollout of the fibre optic network. Any operator providing fibre optic access to a subscriber had to provide access to alternative internet providers, subject to prices and conditions determined by the regulator (ARCEP).
Source: (Dozias, 2023[16])
The insolvency framework can be strengthened
The scope for new firm entry will also depend on the policies that effectively facilitate the exit or restructuring of weak firms, to free up resources needed for new entrants to grow. Policies should therefore aim to avoid that the persistence of so-called Zombie firms, defined as low productivity firms that would typically exit in a competitive market, crowds-out the growth in capital stock of more productive firms, as this would slow aggregate TFP growth via less efficient capital allocation (Adalet McGowan, Andrews and Millot, 2017[17]). While there is no evidence that the share of zombie firms has increased in recent years in Hungary, their presence immobilises a significant amount of capital that is not available for more productive firms (Muraközy, Bisztray and Reizer, 2018[4]).
Sound insolvency frameworks contribute to an efficient allocation of resources across firms by facilitating corporate restructuring, allowing a timely exit of non-viable companies and a partial recovery of outstanding debts, preventing the failure of viable firms, and promoting entrepreneurship by offering a second chance to honest failed entrepreneurs. In the current environment where the number of business failures is increasing (see Chapter 2), streamlining procedures becomes even more important to ensure that courts have enough resources to deal with the increased number of cases in reasonable time.
In recent years, Hungary’s insolvency framework has made progress with respect to the early detection and resolution of debt distress (Figure 3.9). At the same time, there is scope for further improvements. Remaining shortcomings include a long time of discharge for failed entrepreneurs, the inability for creditors alone to initiate debt restructuring, and the absence of simplified debt restructuring procedures for SMEs.
While an amendment to the Personal Insolvency Act introduced in July 2022 now in principle gives failed entrepreneurs the possibility to be discharged after three years, its practical effects remain to be seen. So far, the average time to discharge is five years and can reach up to seven years.
Regarding debt restructuring, the current legislation allows debtors to apply for debt restructuring, either alone or jointly with creditors, but creditors alone cannot initiate debt restructuring. Moreover, while simplified liquidation procedures exist, no simplified debt restructuring procedures exist for SMEs. Such procedures, including more scope for out-of-court debt restructuring, could help reduce the share of zombie firms, which is usually higher among SMEs than among larger firms (Banerjee and Hofmann, 2020[18]). Moreover, the low asset values of SMEs may lead creditors to adopt a passive role if procedures are cumbersome, and the usual insolvency procedures may be too costly for SMEs with limited financial resources (André and Demmou, 2022[19]). An out-of-court regime for debt restructuring can speed up debt resolution proceedings at an early stage to prevent the deterioration of the debtor’s assets. Such a system has recently been introduced in other OECD countries, such as Japan and Portugal (OECD, 2017[20]) (OECD, 2017[21]).
Figure 3.9. Hungary has a less favourable insolvency framework than most EU and OECD countries
OECD Insolvency framework indicator, 2022
Note: The scores for the three components of the indicator are scaled from 0 to 1, with lower scores indicating more favourable insolvency frameworks. The treatment of failed entrepreneurs includes all factors affecting the ability of failed entrepreneurs to start a new business (e.g. obligation of repaying past debt due to bankruptcy). Prevention and streamlining refers to mechanisms allowing the early detection and resolution of debt distress. Restructuring tools refer to the way debt restructuring is organised (e.g. ability of creditors to initiate debt restructuring, and possibility for a minority of shareholders to block a restructuring plan).
Source: (André and Demmou, 2022[19])
Bolstering the productivity of existing firms through digital technologies
The wider diffusion of digital technologies is a key instrument to strengthen the productivity of existing firms. Information and communication technologies (ICT) have been a key driver of labour productivity growth in the United States and, to a lesser extent, in Europe (Jorgenson, Ho and Stiroh, 2008[22]) (Cette et al., 2016[23]). While the potential of the current digital revolution to continue driving productivity growth in the most advanced countries and firms is subject to debate, a large empirical literature suggests that the diffusion of digital technologies has been unequal across countries, and across firms belonging to the same narrowly-defined industries within countries. This, in turn, has contributed to a widening of the productivity divergence between firms (Andrews, Criscuolo and Gal, 2016[24]). This suggests vast underexploited potential for a wider diffusion of existing technologies and a more efficient use of these technologies, especially in Hungary.
Digitalisation has made uneven progress in Hungary. Good connectivity of households and firms overall, exceeding the EU average, contrasts with a limited take-up of digital technologies by firms, especially when it comes to small firms and the most advanced technologies.
The coverage of Hungarian households with high-speed broadband and a 5G mobile network has increased rapidly over the last years (Figure 3.10). Further investments are required to reach the EU target of having all households covered by a gigabit broadband and a 5G mobile network by 2030, but this objective seems achievable. This will be important to boost the use and development of new applications and services at higher speed, including the greater use of cloud solutions and “Internet of Things” applications (OECD, 2019[15]). These are areas where Hungarian firms are lagging behind (see below).
Figure 3.10. Further investments are needed to keep Hungary's Internet infrastructure at the frontier
Share of households with access to a broadband download speed of at least 1Gbps (Panel A) or a 5G mobile network (Panel B)
Source: Eurostat (Database on Digital Economy and Society)
While good infrastructure is necessary for digitalisation, it is not sufficient in itself. According to the EU Digital Intensity Index measuring the digital activity of firms, Hungarian firms are among the least digital-intensive in the EU. Two thirds of Hungarian firms had a very low Digital Intensity Index in 2021 (Figure 3.11).
Figure 3.11. The digitalisation of firms is lagging behind
Distribution of firms according to the EU Digital Intensity Index (2021, %)
Note: Businesses with 10 persons employed or more. The 2021 DII is based on a business survey where firms are asked whether more than 50% of their employees use computers with access to Internet for business purposes; the maximum contracted download speed of the fastest fixed line Internet connection is at least 30Mbps; the company uses any social media; the company uses two or more social media; web sales represent at least 1% of total turnover; web sales represent more than 1% of total turnover and B2C web sales more than 10% of web sales; the company buys cloud-computing (CC) services; the company buys sophisticated or intermediate CC services; uses a customer relationship management software; uses an enterprise resource planning software; uses any Internet of Things (IoT); and uses any AI technology.
Source: Eurostat Database on Digital Economy and Society.
In absolute terms, most indicators measuring the digitalisation of firms have improved since 2019, largely due to the accelerated digitalisation of the economy during the pandemic. The most significant improvements include the ability of firms to receive orders online, and the rising share of employees using a computer with internet access. These are two areas where Hungary has caught up with the EU average between 2019 and 2022 (Figure 3.12, Panels A and B).
Compared to other OECD countries, Hungary is mainly lagging behind in the adoption of advanced digital technologies, such as cloud computing, the use of customer relationship management (CRM) or enterprise resource planning (ERP) software. While the situation improved during the pandemic, Hungary did not manage to bridge the gap with other EU countries (Figure 3.12, Panels C and D).
Figure 3.12. Hungarian firms are lagging behind for the adoption of advanced digital technologies
Note: Businesses with 10 persons employed or more.
Source: OECD Database on ICT Access and Usage by Businesses.
Moreover, the diffusion of digital technologies tends to be unequal across firms. Already before the pandemic, the empirical evidence in most countries pointed to a significant digital adoption gap between firms (Bach, Zoroja and Vukšic, 2013[25]). Indeed, digital technologies and other intangible assets are characterised by scalability, large sunk costs and synergies which give an advantage to the largest and most established firms on a market (Haskel and Westlake, 2018[26]). The available evidence for Hungary shows that the pandemic accelerated the digitalisation of firms, but also widened the digital divide between small and large firms for the adoption of advanced digital technologies. For example, while the share of employees using a computer with internet access and the share of businesses receiving online orders increased similarly for small and large firms, cloud-computing services and CRM software were adopted more consistently among large firms (Figure 3.13). This may exacerbate the pre-existing productivity gap between small and large firms in Hungary.
Figure 3.13. The digital divide between small and large firms has widened during the pandemic
Note: Businesses with 10 persons employed or more.
Each dot corresponds to a country, red dots identify Hungary, and red lines are 45° lines. In countries below (above) the 45° lines, the digitalisation of large firms improved more (less) rapidly than the digitalisation of small firms during the COVID-19 pandemic.
Source: OECD Database on ICT Access and Usage by Businesses
In addition to lower telecommunication prices, accelerating the acquisition of digital skills in all segments of the population would also facilitate a wider diffusion and use of digital technologies. While the share of Hungarian firms employing ICT specialists has continued to increase during the pandemic and is now above the EU average, the diffusion of generic digital skills in the population remains weak (Figure 3.14). Empirical evidence shows that skill shortages prevent less productive firms, which are less able to attract the most qualified workforce, from reaping the productivity gains from investments in digital technologies (Figure 3.15). Dedicating more time to ICT in all school and adult training programmes would be a first step in this direction, as recommended in the 2021 Economic Survey of Hungary (OECD, 2021[27]). Managerial skills and the organisation of firms are also key to ensure that investments in ICT assets actually translate into productivity improvements. For example, management practices related to how promotions are granted, and how hiring and firing decisions are taken, have been one factor behind a more rapid ICT adoption in US firms relative to their European counterparts at the turn of the 21st century (Bloom, Sadun and van Reenen, 2012[28]). Returns on ICT investments have also proven higher in firms with a more decentralised work organisation (Bresnahan, Brynjolfsson and Hitt, 2002[29]).
Figure 3.14. Generic digital skills should be improved
Note: Panel B: The Digital Skills Indicator 2.0 (DSI) is a composite indicator which is based on selected activities related to Internet or software use that individuals aged 16-74 perform in five specific areas (Information and data literacy, Communication and collaboration, Digital content creation, Safety, and Problem solving). It is one of key performance indicators in the context of the Digital Decade, which sets out Europe's ambition on digital. The 2030 target of the Digital Compass is that at least 80% of citizens aged 16-74 have at least basic digital skills.
Source: Panel A: OECD Database on ICT Access and Usage by Businesses. Panel B: Eurostat Digital Economy and Society database
Figure 3.15. Digital skill shortages reduce gains from digitalisation in less productive firms
Productivity gain in most productive firms without skill shortages = 100
Note: Estimated effect on TFP of adoption of a mix of digital technologies (high-speed broadband, cloud computing, ERP and CRM software) for two categories of firms: the 25% most productive firms in each industry, and those between the 50th and the 75th percentiles of the productivity distribution in each industry (“less productive firms”).
Source: (Sorbe et al., 2019[30])
Strengthening the role of the National Competitiveness Council
Many OECD Member countries have long-standing institutions that aim to improve productivity and competitiveness at the national level (e.g. Australia, Denmark and Ireland). Over the past few years, several European Member countries have established pro-productivity institutions, in line with a 2016 European Commission’s recommendation asking that all countries in the Euro area set up National Productivity Boards (NPBs). Such institutions have been successfully contributing to productivity analysis and advising governments in different countries. Their aim is to bring together academic research and policy making. They are intended to function as independent expert bodies, with clear guarantees regarding their financing, the appointment of their members based on competence criteria, and autonomy in the choice of their work programme. While independence is key for their credibility, regular exchanges with the government at technical and political levels make it more likely that their analysis effectively contributes to policymaking. They also benefit from the feedback of trade unions, social partners, and relevant stakeholders, through open and formal exchanges. (Cavassini et al., 2022[31]).
In Hungary, the government decided in 2016 to set up the National Competitiveness Council (NCC). The NCC is a consultative body consisting of economic actors and academics whose aim is to provide economic analysis and policy advice to help the government address policy challenges related to productivity and competitiveness. The role of this institution to analyse productivity developments could be strengthened and made more visible, especially in a context where the green and digital transitions may have a large impact on productivity. The impact of health conditions on productivity would be another relevant issue to analyse in Hungary, given the challenges in this area (OECD/European Observatory on Health Systems and Policies, 2021[32]).
Table 3.2. Past recommendations on productivity and business dynamism
A full implementation of recent reforms would strengthen public integrity
Corruption and challenges with respect to public sector integrity reduce economic efficiency, lead to a waste of public resources, widen economic and social inequalities, and reduce trust in institutions (OECD, 2017[33]). International indicators available until 2021 or 2022 show that corruption in Hungary is perceived to be higher than in most other OECD countries (Figure 3.16).
Hungary has launched important efforts to improve the country’s rule of law with a focus on strengthening anti-corruption efforts and promoting public integrity. The main objectives include strengthening Hungary’s institutional capacity to fight corruption, improving conflict of interest and asset declaration regulations, enhancing transparency and reducing corruption risks in public procurement, increasing the systematic use of digital tools in selected policy areas, and strengthening Hungary’s capacity to detect, investigate and prosecute corruption cases, including foreign bribery.
Hungary has taken a number of steps to improve the effectiveness of its anti-corruption framework. In 2022, the government adopted the “Integrity Authority Act” introducing the Integrity Authority and the Anti-Corruption Task Force to strengthen the country’s institutional capacity to fight corruption. During this process, Hungary consulted both the Council of Europe and the OECD and considered certain recommendations by these institutions. In addition, Hungary adopted a new Strategy Against Fraud and Corruption for EU Funds in September 2022 and a National Anti-Corruption Strategy for 2024-25 in February 2024.
Figure 3.16. Corruption is perceived as high
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B and C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12
The Integrity Authority is a major step forward but its powers should be further enhanced
The Integrity Authority is tasked with the prevention, detection and correction of fraud, conflicts of interest and corruption, and other irregularities in the implementation of EU financial support. The Integrity Authority has powers to request information, carry out analysis, make recommendations and suspend public procurement procedures. These powers are exercised in coordination with other state bodies within the existing governance structure (e.g. the Prosecution Service, the Competition Authority, the Public Procurement Authority, the State Audit Office), which are invited by the Integrity Authority to take action in their respective areas of competence. For example, the Integrity Authority can instruct contracting authorities to suspend tenders, recommend the exclusion of specific economic operations from EU funding, request administrative investigative bodies to carry out investigations, and request a judicial review of all decisions of authorities concerning public procurement procedures that involve any financial support from the EU. The EU Council has positively assessed the scope of the Integrity Authority’s purpose and objectives, its mandate and powers, and the rules on the appointment of its board (EU Council, 2022[34]).
Despite these efforts, recent external assessments indicate that certain weaknesses remain regarding the Integrity Authority (EU Council, 2022[34]) (GRECO, 2022[35]) (OECD, 2023[36]). These relate to a large extent to its competences. For example, the Integrity Authority Act currently leaves it unclear whether the Integrity Authority retains its competence after a project is withdrawn from EU financing. In addition, the scope of the Integrity Authority’s verification powers in relation to asset declarations remains limited, as it does not cover all “high-risk officials”, such as members of Parliament and high-level decision makers, and does not enable access to information otherwise protected by law, on banking, tax, and insurance, for example. Additional measures could also be implemented to strengthen the system for the judicial review of the decisions of contracting authorities that do not follow the recommendations of the Integrity Authority. Finally, the arrangements for the Authority’s co-operation with other bodies and access to information and the Authority’s powers to independently conduct investigations could be clarified in law.
In light of these findings and building on recent reforms, Hungary should enhance the powers of the Integrity Authority to remove any constrains which may undermine the Authority’s capacity to effectively fulfil its purpose and objectives. Latvia’s Corruption Prevention and Combating Bureau (KNAB) could provide a useful example of good practice in this regard.
The role of the Anti-Corruption Task Force should be clarified
The Anti-Corruption Task Force is tasked with a broader remit and is responsible for examining the existing anti-corruption measures and elaborating proposals concerning detection, investigation, prosecution, and sanction of corruption, as well as putting forward proposals to improve corruption prevention and detection. Part of this role includes evaluating the implementation of Hungary’s NACS on an annual basis. The establishment of the Anti-Corruption Task Force also offers potential for meaningful dialogue and engagement with civil society organisations, with 50% of its members representing non-governmental actors and selected based on an open, transparent, non-discriminatory selection process with objective criteria related to expertise and merits.
The regulatory framework for the new Anti-Corruption Task Force is in line with Hungary’s commitments set out in the remedial measures agreed with the EC (EU Council, 2022[34]). Following these positive developments and to fully utilise the role of the Anti-Corruption Task Force, Hungary could consider streamlining its functions to mobilise evidence and insights that will inform government action, such as in monitoring and evaluating the implementation of the NACS and ensuring its consistency with the new Strategy against fraud and corruption for EU Funds.
The two parallel anti-corruption strategies should be consistent with each other
In September 2022, Hungary adopted a new Strategy against fraud and corruption for EU Funds for the 2021-2027 programming period (Hungarian Government, 2022[37]). This Strategy defines the tasks of entities involved in the implementation of any EU financial support in relation to the prevention, detection and correction of fraud, conflict of interest and corruption. The EC has positively assessed the adoption of the new Strategy and considers that Hungary has successfully fulfilled its commitments in this area (EU Council, 2022[34]).
In February 2024, Hungary also adopted a National Anti-Corruption Strategy for 2024-25, which is a comprehensive prevention document, designed to enhance awareness and responsibility regarding the fight against corruption across the whole of society.
The ongoing reforms have the potential to significantly improve Hungary’s anti-corruption and public integrity system at all levels of government and the private sector, and into wider society, in line with OECD standards, including the OECD Anti-Bribery Convention and its 2021 Anti-Bribery Recommendation, and the Recommendation on Public Integrity (OECD, 2017[33]). While it is still too early to assess the impact of these reforms, their timely and effective implementation is not only important to ensure the release of EU funds, but also because strong transparency, anti-corruption and public integrity measures are crucial to improve the business environment and the efficiency of public spending.
Ahead of its adoption, the OECD provided an assessment of Hungary’s NACS against OECD standards and international best practice. The OECD made several recommendations for improving the NACS and Hungary’s wider integrity framework. These included that the NACS could improve its problem analysis to better define the challenges it is seeking to overcome, clarify certain measures in the action plan, and potentially add more on asset declarations, political financing and the revolving door, and could improve its monitoring and evaluation processes to ensure effective implementation. The OECD also recommended strengthening measures to detect and investigate foreign bribery cases, reviewing the investigation time limit for foreign bribery offences, and clarifying the scope and application of Hungary’s framework for holding legal persons liable for foreign bribery. Hungary is expected to report back to the OECD Working Group on Bribery (WGB) with regard to progress made in addressing these recommendations in the NACS.
Looking ahead, Hungary should focus on developing and maintaining a monitoring and evaluation system, which will allow to understand what works and why, and enable the authorities responsible for overseeing the strategies to ensure their continued relevance and effective implementation.
The monitoring and implementation of two separate but related strategies in the same field (the Strategy against fraud and corruption for EU Funds 2021-27 and the NACS 2024-25) might prove challenging in practice. Hungary should continue to enhance coherence and avoid duplication. The Anti-Corruption Task Force could assess the strategies’ complementarity in its annual evaluation process.
Table 3.3. Past recommendations on fighting corruption and the public integrity framework
Table 3.4. Policy recommendations from this chapter (key recommendations in bold)
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