May 6, 2016

The Hungarian economy has expanded strongly in recent years, helped by robust exports and firm domestic demand. But incomes are among the lowest in the OECD and structural reforms will be needed to sustain growth over the medium term, strengthen business investment and better match skills to labour market needs, according to a new OECD report.

The OECD Economic Survey of Hungary says boosting business sector investment among small and medium-sized enterprises would help raise incomes and well-being by increasing the relatively low level of labour productivity.

Enabling workers to gain better skills that match labour market needs would also help improve productivity and allow more people to benefit from economic growth.

Presenting the survey in Budapest, OECD Secretary-General Angel Gurría said: “On the occasion of the 20th Anniversary of Hungary’s membership to the OECD I congratulate Hungary on an economy that has expanded since 2012 – fuelled by stronger exports and macroeconomic policy stimulus. But important challenges remain. Hungary has the second lowest life expectancy in the OECD after my own country, Mexico. The Education system has reacted slowly to changing skill requirements as the economy becomes more knowledge- based. And domestic business investment, particularly by SMEs, is being held back by a frequently changing regulatory environment and entry barriers in network industries.”

The survey says unless there is reform to foster stronger business investment and a better match between the skills of workers and jobs there is little prospect of more robust, sustained growth as the working age population is declining. It also calls for improved regulatory transparency, less red tape and effective regulatory impact assessments.

Healthy business competition to foster competitive firms is being hampered by exemptions from the rules in some sectors. In agriculture, for instance, the ban on restrictive practices is not binding on local markets.

The OECD says Hungary’s education and training systems have not kept up with the rising demand for more technical skills as the economy has restructured. The survey says the promotion of life-long learning needs to be stepped up while more focus should be placed on effective training in the government’s public works schemes.

Relatively few women with young children have jobs. To increase the participation of women in the labour market, early childhood care needs to be expanded and incentives provided for paternity leave.

Although university enrolment has increased sharply, completion and graduation rates are among the lowest in the OECD. The government should increase funding of tertiary education and encourage stronger partnerships between universities and private companies to help more graduates get jobs for which they are qualified, the survey says.

Since 2008 the number of Hungarians emigrating has tripled to 3% of the labour force and is contributing to shortages in some sectors such as health care. In addition, population ageing is more advanced in Hungary than in many other OECD countries. The prime working age population is projected to fall to one of the smallest in Europe as a share of total population in the coming decades, leading to high old age dependency ratios. In the long run the ageing population will be the main driver of public spending.