Privatization targets few remaining public services

Matyas Benyik
ATTAC Hungary

Practically all areas of social policy have been affected by the transition from a socialist to a capitalist economy and by the neoliberal policies dictated by the international financial institutions. Wide-scale privatization has resulted in foreign ownership of two thirds of industry, and today even the handful of public services still provided by the state are being privatized under the official slogan of ‘necessary reforms’.

After the collapseof the socialist system, the transformation to a capitalist economy had severesocial impacts. In the early years of the transition, up until the mid-1990s,GDP fell by about 20%, accompanied by a drastic decline in real wages and adramatic increase in unemployment and poverty. The country’s GDP eventuallyreached its 1989 level in 1999, while real wages only recovered theirpre-transition level in 2002. The number of jobs sunk from 5 million to 3.8million. The loss of jobs and growing unemployment have become the main factorscausing poverty. With growing inequalities, about 60% of the population of 10million have been adversely affected. The sectors hardest hit by thedifficulties include unskilled workers, the population living in smallsettlements, families with children, and the Roma people (who made up about 7%of the total population in 2006).

Based on UNDP’s definition of poverty – namely the proportion of thoseliving on a daily income of less than USD 4.3 in terms of purchasing powerparity (PPP) – 11% of the population was poor in 1991. During the subsequenteconomic recession the poverty rate steadily increased and reached its peak(18%) in 1996, then began to decrease consistently. By the end of the 1990s thisfigure had fallen to 6%. The relative poverty rate (the proportion of thoseliving on less than 60% of the median income) increased from 11% in 1991 to 13%in 1995, and in 2004, 13.9% of the population could be considered poor inaccordance with this standard. However, when measured on the basis of anotherdefinition of poverty –the proportion of those living on less than half of theaverage consumption level of the EU-15[1]– 73% of Hungarians are poor.

Practically all areas of social policy have been affected by the transition andthe neoliberal policies dictated by the international financial institutions inaccordance with the Washington Consensus, in other words, the strengthening ofindividual responsibility and the weakening of public responsibility. Meanwhile,labour rights have been weakened and joblessness has increased, so that laboursecurity has been strongly undermined.

In accordance with theLisbon Strategy, the EU’s open method of coordination (OMC) on socialprotection and social inclusion is based on the fight against poverty and socialexclusion, and includes the establishment of adequate and sustainable pensionand health care systems. As part of the OMC, a standardized Hungarian NationalStrategy Report (HNSR) was prepared in 2006 by the Committee Against SocialExclusion for the period 2006-2008. The HNSR was drawn up in parallel with theelaboration of measures to implement the new government’s comprehensivepackage of reforms, aiming at:

Restoringmacroeconomic balance.

Implementinga reform process encompassing the entire operation of the state, includingsocial services (public health, pension system, education, social policy, etc.

Elaboratingand implementing a comprehensive development policy.

The HNSR was submitted to the European Commission in autumn 2006 together withthe Convergence Programme, the New Hungary Development Plan and the RevisedNational Lisbon Action Programme.

The official slogan of ‘necessary reforms’

Privatizationhad already begun in the early 1980s. In ‘socialist’ Hungary, a dual economyemerged, consisting of the first economy, which covered the state sector, andthe second economy, covering all private initiatives and contributing close toone quarter of the aggregate household income in 1988. Some of these privateinitiatives were legalized and even encouraged by the ‘socialist’ state.

Another stage of privatization, starting in 1988, was the so-called"spontaneous privatization", which meant the uncontrolled process ofthe transfer of state-owned property into private hands. The main players inthis process were managers with connections in the state machinery, and itprimarily involved the establishment of joint ventures with Western partners.Spontaneous privatization came to an end in early 1990 because the governmentrealized that managers were an important source of capital and a legal frameworkfor management buyouts was set up. Beginning in early 1993, it was also possiblefor employees to obtain shares in large state-owned companies, although theshares made available represented only 10% to 15% of total ownership.Privatization was led centrally and proceeded at a fairly brisk pace until 1994.

In the mid-1990s, the Hungarian privatization policy was aimed at the fiscalpotential of privatization and therefore favoured direct sales of state-ownedcompanies to foreign strategic investors. Some of the largest privatizationdeals in the Central and Eastern European region were struck, including the saleof gas distribution companies, electricity distributors and power stations. As aresult of this policy, the flow of foreign direct investment into the countrysince 1990 has exceeded EUR 62 billion (USD
84.3 billion),which is now the highest in the region in per capita terms. The share of foreigncapital (mostly transnational corporations) in industrial ownership is twothirds.

By the end of the 1990s, the privatization process had been practicallycompleted, and only a small number of public services (e.g. health care,transport, postal services, education) remained in state hands. But even thesepublic services are now being privatized under the official slogan of‘necessary reforms’.

Pensions shift from social security to private investment focus

Since1998 the mandatory public pension system has consisted of two ‘pillars’. Thefirst is the social security pension system, operating on a ‘pay as you go’basis and financed from contributions paid by the employer and the employee. Thesecond pillar comprises market-based private pension funds.[2]Individuals starting out in the work force are obliged to participate in themixed system (i.e. in both pillars) and a considerable part of their individualpension contribution (8% of 8.5%) goes to the private pension fund they select.The mixed system currently covers over 60% of the whole insured population.Private pension funds will begin to administer their services as of 2013, andwill not comprise a ‘typical’ pension payment system until 2020, whichleaves the social security pension system as an exclusive or predominant playerfor decades to come.

The retirement age is now 62 years for men and 60 years for women. However,various forms of early retirement exist and are often used, which means theaverage effective retirement age is significantly lower. The amount of pensionreceived under the social security pension system depends on the pre-retirementaverage monthly salary and the number of years of employment. In the secondpillar it will depend on the contribution paid, plus yields, minus the costs ofthe fund chosen by the insurance holder. In 2006 the minimum pension was aboutEUR 100 per month (USD 136).

In addition to providing an income for the elderly, pensions comprise asignificant source of income for a large number of households and thus have animpact on the standard of living of the economically active population as well.

Public health: structural problems,misguided reforms

The financing of health care is based on two pillars. Maintenance costs areborne by the clinic and hospital owners (primarily local governments), whileoperating costs are covered by the National Health Insurance Fund (NHIF). TheNHIF is partially funded through compulsory payroll contributions from bothemployers and employees
,combined withtransfers from the central budget. In addition, private expenditures areestimated to represent between 20% and 30% of health expenditures today.

The current health care system faces serious structural problems. Healthservices do not rely on potential prevention and screening systems from eitheran organizational or a professional point of view, and the capacity ofrehabilitation centres is insufficient as well. Structural problems are mademore severe by overlaps existing between certain services (e.g. health andsocial system), and the lack of advanced communications, which further obstructsthe efficient operation of the health service system.

Under the slogan of ‘reforms’, the ruling social-liberal government isclosing down hospitals, leading to a significant decrease in the number ofhospital beds. Another objective of this ‘reform policy’ is to open the wayfor private health insurance companies.

Increased joblessness, decreasedprotection

During the socialist era, the country followed the principle of ‘fullemployment’. Today, its labour market is characterized by a low employmentrate (56.9% in 2005, although the rate of unregistered employment is estimatedto be around 15% to 20%); a moderate – yet growing – rate of unemployment(7.5% in 2006); and a rather high rate of inactivity (38.6% in 2005).

Theemployment rate is especially low among individuals with low skills, members ofdisadvantaged groups, young people and the elderly. The unemployment rate amongpeople with no elementary education was 35.3%, and among those with anelementary education it was 13.6%, while for the population aged 15 to 24 it was19.1% in 2006.

Sincethe beginning of the systemic change, the unemployment rate has beenconsistently lower for women than for men, although the decline in activity hasbeen greater among women, contributing largely to the decreasing totalparticipation. One of the main reasons for this is that women faced with thedifficulty of finding a job were more inclined to choose early retirementschemes as a preferred way of withdrawing from the labour market: severalhundred thousand took early retirement or simply became housewives. The factthat the retirement age was lower under the socialist planned economy (55 yearsfor women, 60 years for men) contributed to the widespread use of these schemes.The gender gap is greatest in the activity rate of the 55-59 age group, where itstands at 45.9% for men and only 16.6% for women.

The Romapopulation is faced with the most disadvantaged situation. They were among thefirst to become unemployed in the late 1980s, and most have been unable tore-enter the labour market, where they face serious discrimination. Althoughthey make up only 7% of the country’s population, they represent between 25%and 30% of the registered unemployed. In 2003, only 29% of Roma men and 15% ofRoma women aged 15 to 59 had jobs.

Inthe meantime, social insurance in times of unemployment has become increasinglylimited. Tighter eligibility conditions for unemployment benefits were firstintroduced in 1992, and the entitlement period was cut initially from two yearsto 18 months, and later to one year. The ratio of benefit to last wage was alsoreduced. In 2000 the entitlement period for unemployment benefits was furtherreduced to only nine months, and since 1 November 2005, unemployment benefitshave been replaced by a ‘job-search benefit’.

Social protection

Socialprotection expenditure constitutes over one fifth of the GDP. In 2003, over onethird of welfare spending went to financing old age pensions, while old age,survivors and disability pensions combined accounted for 50% of socialprotection expenditure (10.5% of GDP). A further 30% of expenditure wasallocated to health care, while family/children’s benefits represent almost 3%of GDP.

Hungary operates a sophisticated family benefit system in which various forms ofbenefits may be universal, tied to the payment of contributions, orincome-dependent. Benefits include, among others, family allowance, family taxbenefits, pregnancy confinement benefits and child-care allowance. The reductionof child poverty has been a social expenditure priority since 2006.

According to a survey taken in 2005, on average 52% of the total annual incomeof households derives from work and 43% is some kind of welfare transfer. Thelargest welfare contribution to household income – approximately one fourth– comes from old age pensions, including all pension-like benefits. The secondlargest item (5%) is family benefits (maternity and child-related benefitstogether), while disability pensions represent a similar share (4%). More thanhalf of the population receives payment compensation for electricity and gasexpenditures. The disbursement of social assistance is basically theresponsibility of local governments.


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[1] The 15 membersof the European Union before the 2004 enlargement.
[2] There is also a‘third pillar’ of fully voluntary contributions to private mutual fund.