Amid the social and economic pain brought by the global COVID-19 crisis, remembering past strengths and looking beyond the pandemic might be difficult. As they work to mitigate the impact of the pandemic, Hungary’s public and private leaders must set aside time to envision and implement measures that will build on the country’s solid fundamentals and seize opportunities, according to a study published this week by McKinsey&Company. With strong leadership, the country can move from policies focused on catching up to its European peers to one that strives to create regional champions across many sectors.
In the decade before the pandemic ruptured the global economy, Hungary was enjoying dynamic growth, which surpassed that of most European countries. The primary driver of the economy was the manufacturing industry, which generated the highest increase in the number of jobs, which in turn resulted in improved productivity. The consistent rise of the country’s GDP has boosted catching-up efforts, and if the trend continues, Hungary will be able to reach the standard of living in Western Europe in the foreseeable future, according to the study by Mckinsey&Company. The study examines the foundations of that success, as well as the likely impact of the pandemic and ongoing trends, such as the spread of digital technologies, to suggest ways the country can emerge stronger and, within a decade, reach European economic norms. The analysis closely examines 13 industries crucial to Hungary’s continuing economic development and makes specific recommendations for each based on powerful growth levers. By actively working to address weaknesses within the industries, adopt digital technologies, and capture opportunities, the country can increase its productivity and competitiveness.
The impact of the pandemic
Similarly to most countries in the world, the COVID-19 pandemic has interrupted Hungary’s relentless economic march. The health crisis has led to serious disruptions in international trade, a significant reduction in passenger traffic and tourism, and restrictions introduced to curb the spread of the virus have significantly slowed down most economic activity. The nation’s GDP is set to decline by 6.4% in 2020 as a result. However, economic trends could start to change from the second quarter of 2021, with a vaccine against the coronavirus possibly available by that time, Finance Minister Mihály Varga announced earlier this week. The minister stressed that the economy would only recover at a slow pace from the coronavirus pandemic. The budget deficit in 2020 will be significantly higher than in past years, amounting to around 8-9% of GPD, Varga added.
Despite the grim economic reality, Mckinsey is confident that Hungary can emerge victorious from the current crisis. “Our analysis clearly points out that by applying the appropriate tools and policies in the country’s key economic sectors, the growth stalled the epidemic stalled can be revived,” the authors of the study said.
Key economic drivers
McKinsey identified 4 areas of economic policy that could help steer Hungary back to a path of sustainable growth: increasing investments, the development of the country’s workforce, encouraging innovation and setting up a supportive institutional framework.
Investments have proven to be the strongest drivers of economic performance. In order to increase productivity, public and private investments in infrastructure and local companies will be essential. In addition to foreign direct investment (FDI), investments financed from domestic savings will help create “regional champions” (leading local companies) in certain industries, and adequately finance the development of individual businesses. In order to increase investments, it is vital to create a favorable business environment, according to the study.
In terms of workforce development, Hungary is at a disadvantage, as it lags behind the other Visegrád 4 countries in terms of the proportion of people with tertiary and secondary qualifications. Developing key competencies is extremely important to meet the needs of modern businesses, especially digital skills, foreign language skills, and critical thinking. The teaching of these skills and competencies should be integrated into the national curriculum, starting from primary school through vocational training to adult education programs.
Innovation is the basis for productivity growth. Without strong innovation as well as advanced research and development, no country can be competitive in the modern economy. The pandemic has accelerated the introduction of innovative digital technologies in all sectors, transforming entire industries. Closer cooperation between companies and universities and a faster uptake of digital technologies, especially among small and medium-sized enterprises (SMEs), will be crucial in fostering innovation and increased competitiveness.
Simplifying regulations and improving institutional processes such as court and authorization procedures would be important steps toward creating a more supportive environment. There is also a need to increase the efficiency of sectors that have an impact beyond the productivity of the economy as a whole, such as public services, healthcare, education and the energy sector.
“At the same time, the economy has stable fundamentals, and if it succeeds in harnessing the drivers of growth effectively, the economy can regain the momentum stalled by the pandemic,” the McKinsey study said.
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