Overview of Political Capital Institute’s 2010 Political Risk Index

 

Hungary’s 2010 Political Risk Index1 (PRI) score is 66 points – the first year the country’s political risk has declined since the index began in 2005. However, a closer examination of the details shows that the lower risk is not necessarily cause for celebration: Political risks stemming from corruption and prejudice remain persistently high, and, for the first time, risks to press freedom are on the rise.

 

  • The main reason behind Hungary’s improved political-risk situation is the surge in government stability that followed the Fidesz party’s overwhelming victory in the April 2010 elections. However, this will only last as long as Prime Minister Viktor Orbán’s administration keeps strict budgetary policy and handles its power to amend Hungary’s Constitution responsibly. (Fidesz has the unprecedented power to make constitutional changes thanks to its two-thirds majority in Parliament.)
  • Corruption and prejudice continue to pose a high political risk and restrictions on press freedom represent a new threat. The new press-freedom risks stem from a strong market concentration of private news organizations with ties to Fidesz, rather than stronger government influence on public media.
  • The possibility that Fidesz will make haphazard changes to criminal law raises risk levels in the Rule of Law category (in the same way that half-baked constitutional amendments may pose risks to government stability). Fidesz’s pledge to seek out and punish members of the previous Socialist administration in connection with corruption merits particularly close scrutiny; the so-called process of elszámoltatás (“calling to account”) may pose risks to the independence of investigators and the judiciary.  
  • Risks related to state bureaucracy and government intervention in the economy will likely remain low. The government has already implemented several initiatives aimed at streamlining state administration. Fidesz is also unlikely to boost the rate of wealth redistribution or tighten restrictions on economic freedom, although it might boost control over certain economic sectors. The biggest risk for the new government is if Fidesz leaders maintain the rhetoric and the policies they espoused while in opposition, which can bring severe punishment from the markets.

PRI subindices

 

Risk is measured on a scale of zero to 100, with zero representing the greatest risk and 100 the least.

 

Hungary’s overall PRI score has risen to 66, compared with an all-time low score of 64 in 2008 and 2009. Hungary’s hitherto uninterrupted rise in political risk has thus turned around for the first time since 2005.

 

Hungary’s PRI Scores for the Past Five Years

 

 

High-risk areas

  1. Corruption: Hungary’s widespread corruption fuels negative opinions abroad and resentment toward politicians at home. Corrupt behavior is not specific to any single political group, nor is it limited to the political sphere. The government will need to push through fundamental systemic changes if it wants to fight the problem. However, the change in government does not bode well for any anti-corruption fight: The Orbán administration has implemented a brand-new government structure (the “superministry” system), which will inevitably create temporary dysfunctionalities in state administration and raise corruption risks. Also, business interests that have performed favors for Fidesz will now expect “payback” in the form of government contracts. Finally, it cannot be ruled out that certain people close to the new government will get buried in the “avalanche” of corruption prosecutions that Orbán has promised, as happened in Bulgaria’s anti-crime crackdown.
  2. Press Freedom: According to unconfirmed reports, Fidesz is planning to create a more centralized management structure for state media. The new arrangement may be justified by a need to “rationalize” public media, especially in financial terms. However, the changes may prove dangerous, especially if they create opportunities for politicians to increase their (already significant) influence over state news organizations. In addition, recent developments in the private media market bode badly for press freedom. The past eight years have seen a proliferation of private media groups that are linked to Fidesz. They exercise substantial influence over advertisers, which may mean less ad revenue for news outlets that are not allied with the government.
  3. Prejudice: Questions over how to integrate the Roma minority and roll back anti-Gypsy prejudice will become increasingly urgent across Central and Eastern Europe. Hungary is by no means alone: Roma citizens in the Czech Republic, Romania and Bulgaria have experienced even greater difficulties in integration than in Hungary. The most important questions for the near future are: (1) Will the region’s extremist political parties continue to gain ground by using anti-Roma slogans? (2) Will moderate parties try to boost their popularity by appropriating elements of the extremist parties’ programs? (3) Will recovery from the financial crisis ease anti-Gypsy sentiments and anti-foreigner attitudes?

 

Rule of Law: 62 (-4) Increased Risk

 

The “rule of law” category is approaching a medium-risk level this year. Although Hungary’s Constitutional Court has recently ordered Parliament to modify several laws that require a two-thirds vote for amendments, lawmakers were unable to muster the 66.7% majority, creating an atmosphere of legal limbo. This situation now poses a risk: Since Fidesz basically has carte blanche to modify laws that require a two-thirds majority for changes – without consulting any other political group – the Orbán administration may go “hog-wild” with amendments without taking adequate deliberations. Such half-baked legal changes may create long-term chaos in Hungary’s constitutional law system.

 

Fidesz’s plan to “call to account” and punish members of the previous Socialist government in relation to corruption also deserves special scrutiny. The current laws give Fidesz a very narrow room for maneuver in this area. Any relaxation of these rules, or the slightest suspicion that defendants are being politically targeted for corruption prosecutions will raise serious doubts about the independence of the judiciary and the validity of the legal system.

 

The fact that opposition parties have practically zero influence on the lawmaking process also presents a risk because their only option will be to attack Fidesz’s laws on grounds of anti-constitutionality. Rule of law may be damaged if opposition parties overuse this method. A similar risk arises should opposition parties try to block the government’s initiatives by calling referendums. In representative democracies, the referendum is a tool that should be used only in exceptional circumstances; parties stand may endanger rule of law if they use public votes to achieve political aims.

 

 

Government Stability: 75 (+15) Strong government, strong anti-establishment attitudes

 

Government stability has increased substantially thanks to Fidesz’s 68% majority in Parliament (this includes the Christian Democratic People’s Party (KDNP), which is essentially a faction within Fidesz). Meanwhile, the severely divided opposition parties – some of whom are preoccupied with internal troubles – have no hope of challenging Fidesz-KDNP’s supremacy in the near future. The new Orbán government enjoys a level of administrative and political stability that no other Hungarian government has had since the transformation. However, this stability will only be positive for investors and international institutions if the government maintains budgetary discipline. The Orbán administration therefore faces significant pressure to implement structural reforms that may be unpopular with voters.

 

The fact that the government is stable does not automatically mean the political system will also remain stable. Fidesz, as the leading government force, will have to address rising anti-establishment sentiments. These voters not only reject the political elite, they reject the system in its entirety. At present, more than 20% of Hungarians are open to prejudicial, anti-establishment, authoritarian ideologies and policies – more than double the percentage of Hungarians who espoused such views in 2003. Hungary is currently the fifth-most anti-establishment country in Europe; this is reflected by the fact that trust in public institutions has been spiraling downwards and that the extreme right-wing Jobbik party made a strong showing in both the 2010 general elections and the 2009 vote for European Parliament. Fidesz is trying to address the demand for a new political system by portraying its own rise to power as a “revolution,” using words such as “social contract” and “national cooperation.”

 

The government can take two different routes. One possibility is that Fidesz will try to fulfill the expectations of anti-establishment voters by setting up an entirely new political system in the new Constitution promised for 2012-2013. The other possibility is that Fidesz will stick with the current system and try to disperse the anti-establishment groups rather than appease them.

 

At present, it is not clear which direction the administration will choose – but the decision is not up to the Fidesz leadership alone. The party’s voter base, its intelligentsia, domestic politics and the international environment will have key roles in determining which path the Orbán government takes.

 

 

Freedom of Press and Speech: 61 (-2) Stronger political influence

 

Sales in Hungary’s print media continued to decline in 2009, which can be explained by the rise of online and electronic media and the decreasing demand during the global financial crisis. International organizations that monitor press freedom took a dim view of developments in Hungary, mostly thanks to Hungary’s anachronistic media-regulation laws. The Fidesz government’s two-thirds parliamentary majority creates an opportunity to resolve the long-standing problems in the media law, but it also opens the door for increased political influence. Current trends show little reason for optimism: Hungarians’ trust in the press in 2009 was far weaker than in other countries in the region, as well as the European Union average. Developments in the country’s private media market will be crucial.

 

 

Corruption: 58 (+2) Slight improvement, serious risk

 

Hungary is in the middleweight class of corrupt countries. In comparison with other CEE countries, Hungary has made minimal gains against corruption since 2008, helped by the fact that authorities are investigating numerous accusations that have surfaced over the past year. Although these much-publicized inquiries may discourage future malfeasance, corruption remains a high-risk area. Contrary to popular perception, corruption is not always linked to an unprincipled political elite; it has deep roots in Hungarian society. At this point, it remains unclear how the Orbán administration plans to roll back the problem. One of the most crucial points in Fidesz’s government program was its pledge to bring corrupt politicians from the previous government to justice. Yet beyond naming some murky affairs that need to be investigated, the document does not offer many concrete details.

 

 

Prejudice and Xenophobia: 59 (-1) Worsening anti-Gypsy discrimination

 

Prejudice and xenophobia have remained strong over the past year. The biggest risk remains anti-Gypsy discrimination. The majority of Hungarians have long held strong prejudice toward the Roma minority. However, the past few years have witnessed a surge in anti-Roma sentiments. Many Hungarians now consider it acceptable to speak openly about “Gypsy crime” and express prejudicial feelings. The most important question is what initiatives the new government will undertake. In the short term, Fidesz will try to curry favor by imposing law-and-order policies (more police on the streets, decisive steps against criminals) and passing laws aimed at reassuring the majority of Hungarians (a California-style “three strikes” law, abolishing “crimes of necessity” as a legal defense, cutting off welfare payments for parents whose children skip school, and harsher punishments for crimes committed against schoolteachers). Yet such initiatives treat the problem of Roma integration as a criminological issue; they do not address the roots of the problem.

 

 

State Bureaucracy: 74 (+3) Opportunity for more-efficient public administration

 

Fidesz will continue the effort to merge government departments and eliminate redundancies, which began in 2006 but soon ran out of steam. Orbán’s penchant for centralized control will help boost efficiency in public administration. The transformation of the government system appears positive, especially given the restoration of the position of state secretary in charge of public administration. It also poses risks – for example, Fidesz’s decision to restructure the government has left some ministries with an overly broad scope of authority. Centralization will extend to regional administrative bodies as well. As with any systemic transformation, streamlining the state will inevitably create short-term chaos in certain areas, but will probably reduce political risk in the long term – as long as the new system proves workable. 

 

 

State Role in the Economy: 71 (0) Continued low risk

 

Over the past eight years, Fidesz has consistently argued for greater state intervention in sectors such as healthcare, public transport and utilities. The state will probably step up its control in these areas. At the same time, the Fidesz’s primary goal is to kick-start economic growth; this can only be achieved by tax cuts that are financed by lower government spending. For this reason, we expect a smaller, leaner state in the medium tp long term. As Fidesz Vice President Lajos Kósa and Orbán spokesman Péter Szijjártó demonstrated in their “smash the forint” speeches on June 3 and 4, the biggest risk for the new government is if Fidesz leaders maintain the rhetoric and the policies they espoused while in opposition. In this perspective, the most critical policy area is healthcare. Fidesz lashed out at every single initiative to reform Hungary’s medical-provision system over the past four years. However, tight financing means the government will have no choice but to make changes; there are even signs that private capital might play a role.

 

The full study and an explanation of its methodology are available for download at www.orszagjelentes.hu.

 

 


1Political Capital Institute’s annual Political Risk Index (PRI) measures a country's political and social stability on a 100-point scale. Political Capital develops the index and the related study based upon its own analyses and forecasts, as well as data from more than 40 other research institutes. A higher index score indicates a lower risk level: 0 represents maximum political risk and 100 indicates minimal risk. Political Capital published its first political risk analysis in 2003. In establishing the index values, our methodology utilizes data and events from the past year and takes future expectations into account. Our analyses emphasize forecasts of future risks and strive to put all country information in a regional context.