tobacco monopoly

Nationalization Hungarian style

It is hard not to notice that the Orbán government is very fond of state ownership, especially in business sectors that they deem of “vital interest to the nation.” The first major venture of the Hungarian government was the purchase of a 21.1% share in MOL. It was a fantastic deal for the Russian company that owned these shares and a truly rotten one for the Hungarian government. As we discussed at the time, the Orbán government overpaid: 22,400 forints per share. Today the price is 16,350.

The next move was to buy out Rába Automotive Holding, whose stock is languishing on the Budapest Stock Exchange. This was followed shortly thereafter by the purchase of the German E-ON storage facilities. Again the price was too high according to people in the know.

So, one can ask,what is the Orbán government after? When we hear about the nationalization of private property, we tend to think of the kind that took place in 1948-49 when one day the store owner arrived to open up his small store only to be barred from entering. Surely, this kind of nationalization is out of the question today. If the state wants to have a greater share in the economy, it has to find more subtle ways of achieving its desired end.

Policy Agenda, an economic and political think-tank, estimates that up to date the Orbán government has spent more than three trillion Hungarian forints on purchasing or acquiring in one way or the other hitherto privately owned businesses. In most cases, at least outside of the energy sector, the state doesn’t actually want to own these companies. Rather, it wants to change the ownership structure of a particular business sector. In plain language, to take away from some in order to give to others.

Reaching hands / tmblr.com

Reaching hands / tmblr.com

One method is direct interference in the ownership of entire business sectors. The government is able by legal means to force current business owners to give up their businesses and sell them to others. The transfer in such cases is direct; the state is not an intermediary.

A good example of this type of state interference is the pharmacies. Soon after the Orbán government came into power the decision was reached that by a certain date all pharmacies must be owned by a practicing pharmacist working on the premises. Now it seems that relatively few employees want to buy their boss’s pharmacy although the government is offering loans. So for the time being the state will have to step in and assume “temporary” ownership.

Another example of direct transfer of ownership is the heavily criticized land lease program by which state-owned lands are distributed to people close to Fidesz and their relatives. By legal means the government can also achieve a transfer of ownership in the banking sector by demanding a minimum 50% Hungarian stake in all banks in the country.

A second method of ownership transfer is for the state to make a certain segment of the economy a monopoly. Cases in point: the monopolization of tobacco products or, earlier, of  slot machines. Here the state not only interferes with private property ownership but shuts down all activities connected to a market segment. The same thing happened to the so-called Elizabeth lunch vouchers, the issuance of which became a state monopoly. It’s no wonder that the European Commission objects to the practice.

A third method used by the Orbán government to achieve a change of ownership is price fixing. No one doubts that a government has the right to adjust tax laws, but when it also decides the final price of the product the owners of the enterprise might be forced to sell because of financial pressures. The much lauded mandatory lowering of utility prices is a good example of this method.

A fourth method of ownership transfer occurs when the central government takes over the responsibilities of the municipalities and consequently their business activities. This is what happened in the case of schools and hospitals. The municipalities now own the buildings and therefore are responsible for their maintenance but the activities within these buildings are supervised by the central government.

I doubt that we’ve seen the end of the state’s expansion into the domestic economy. If tobacco products could be made a monopoly why not have national liquor stores? I’m also certain that casinos are on the list. Perhaps the transfer of Margaret Island from District XIII to the City of Budapest is the first step in building a state casino on the island.

A final note on the French Suez  Environment  Co. that was part owner of Pécs’s water company. You may recall that shortly after Zsolt Páva, the new Fidesz mayor, took office in 2009 security officers in the dead of night locked out the employees of Suez and the city forcibly took over the company. The head of the company couldn’t even enter the building. Suez naturally sued. It was only a few days ago that Páva proudly announced that they settled with Suez for 7.5 billion forints instead of the 10 billion (34  million euros) originally demanded by Suez. The central government will take over part of the obligation.  Meanwhile the price of water has gone up substantially and local MSZP officials claim that investors cannot be convinced to come to Pécs. They all remember the fate of Suez. Currently unemployment in the city is 13%, well above the national average.

Who ever said that governments were great entrepreneurs?