The ‘Battle over Women’…and over the Hungarian Economy

It happens quite often that celebrities are asked questions in interviews that lead them to comment on things that are clearly outside of their area of expertise. The result can be quite disastrous. As a common example, footballers sometimes reveal worrying world views when venturing into the area of politics. A famous example is the former Bayern Munich midfielder Mehmet Scholl who once declared that his life motto was ‘lynch the greens, as long as there are still trees’.
It is much rarer, however, that such gaffes make international headlines and affect a country’s politics and the economy. This is, however, what has happened last week when the Hungarian pop singer Akos Kovacs gave an interview to Echo TV. In the interview Kovacs stated that women should aim “to belong to someone, to bear children for someone, to be a mother”, rather than seeking equal pay to men in the work place.

In reaction to these remarks, the Hungarian subsidiary of Deutsche Telekom – Magyar Telekom – immediately cancelled its sponsoring contract with the singer, declaring that Kovacs' remarks were not "compatible with our beliefs and value system."

This move triggered, in turn, what Bloomberg has called the ‘Battle over Women’. Indeed, the reaction by the Hungarian government must have come as a shock to Deutsche Telekom. Prime Minister Victor Orbán had a spokesperson accuse the German company of a "dictatorship of opinion". The government turned Kovacs into the victim, referring to his right to free speech: "We consider it unacceptable that today in Hungary, anyone can be discriminated against in such a way because of their opinion or view". As a result, Orbán’s government ordered ministries to cancel their Magyar Telekom subscriptions. Given the importance of state contracts in the Hungarian telecommunications market, this constitutes a major blow to Magyar Telekom, which was reflected in a temporary 3% drop in the share price following the government’s announcement.

Beyond this particular case, this episode is interesting in what it reveals about the nature of the Orbán regime and indeed possibly other post-socialist Eastern European countries. In several of these countries, including Hungary, the state has recently taken back a considerable part of the control over the economy that it had lost to ‘oligarchs’ during the first decade after the fall of communism. This phenomenon has been labeled the ‘return of state capitalism’ (cf. the special report in The Economist). Several Eastern European countries have elected governments over the past decades that increasingly deviate from the liberal-democratic reform agenda that was imposed on them by international financial institutions and Western partners after the fall of communism.
While these reforms have led in some cases to stunning results and impressive catch-up growth and industrialization (e.g. in Poland, Estonia and others), it has also led to a large number of losers from this development who grew increasingly dissatisfied with the pro-Western reform path. Indeed, according to certain surveys, a sizeable number of Eastern Europeans started to consider that they had been better off under communism than under the new capitalist-democratic system (Orenstein 2012). As disillusion with capitalism-cum-democracy increased, support for more nationalist and authoritarian parties grew. Orbán’s Fidesz party is one example of this. Putin’s United Russia is another one, which often served Orbán as model to follow. As a result, one can arguably speak of an ‘authoritarian turn’ in several Eastern European countries following the neo-liberal phase of the 1990s and early 2000s. This situation has led to a redefinition of the role of the state in the economy and has created a new situation for companies to deal with in such countries.

Together with my former PhD student Dorottya Sallai, University of Greenwich, we have carried out research into this phenomenon. We tried to find out two things: Firstly, how exactly does the emerging authoritarian state in Hungary ‘take the power back’ from the economic elite? Secondly, what type of ‘coping mechanisms’ do companies use to deal with this new situation?

There has not been much research into how companies deal with authoritarian regimes; notably because management and business studies (MBS) are not very well equipped with conceptual tools for analyzing the political context. Indeed, the underlying concept of the state in MBS is rather simplistic; often simply oscillating between two views: Firstly, a libertarian view that sees the state as a parasitic evil that should be limited to an absolute minimum (the so-called ‘grabbing hand’ or ‘predatory state’ model – Shleifer & Vishny 1997). Secondly, a more benign – but also rarer – view that sees the state as a potentially useful actor in fostering economic growth and promote business activities through targeted, but non-predatory intervention, such as providing investment capital for certain industries (the ‘helping hand-‘ or developmental state model).
In our study, we show that neither of these caricatured views is particularly useful to capture the complex transformation of the state in Eastern Europe since the end of the socialist state. Indeed, we draw on various fields, including political science, anthropology, and post-soviet studies, to develop a more fine-grained analysis of what type of state is emerging in Orbàn’s Hungary. We follow Wedel (2003) in calling this type of state a ‘clan state’, whose main characteristic is the complete blurring of the boundaries between the economy and the political sphere. In the ‘clan state’ the state’s interests are identical to the interests of the group of people who are in power, and this group essentially uses the state in an instrumental way to consolidate their power and enrich themselves. The group resembles a ‘clan’ rather than an actual political party, although the clan structure may not be based on family ties.

The ‘Akosgate’ scandal illustrates very well, how the behaviour of the state is transformed under the ‘clan state’. There are at least three striking features: Firstly, a seemingly minor disagreement between a private individual – although a well-known one – and a foreign company is turned into an affair of state. This hints at the high level of politicization of the economy and society in Hungary.

Secondly, the links between the individual in question and the governmental party are rather obscure, but still clearly very close. Kovacs is indeed well-known for his support for Orbán’s Fidesz party. Moreover, his statement about women’s role in society is remarkably close to a statement made by a high-profile Fidesz politician a week earlier. Indeed, the speaker of parliament, Laszlo Kover, reportedly stated that "[w]e would like it if our daughters considered it the highest degree of self-fulfilment to give birth to grandchildren." This hints at the ideological proximity of the singer with members of the governmental clan, which certainly explains the government’s stern reaction.

Thirdly, the government unflinchingly uses its power to punish a foreign company for behavior that is deemed inappropriate, regardless of the signal that this sends to the international investor community. This is one of the most striking features of the ‘clan state’, which very much contrast with how worried governments in other countries usually are when interfering with foreign MNCs even if the reasons were less controversial than in the present case.

These three elements are characteristic of the clan state in the sense that they show the blurring of private and public interests via personal ties among the country’s elite. The case also illustrates the means that the Orbán government uses to intimidate businesses, both foreign and domestic. Indeed, our study shows that handing out or withdrawing government contracts is one of the key means of pressure the government has in hand against the economic elite. Other such means that emerge from our interviews are the use of taxation or specific laws to squeeze out companies from a given industry to create a temporary state monopoly that can then be re-privatised to people close to the clan; and the practice of forced buy outs (FBOs) which are essentially a form of expropriation of companies through members of the clan under the threat of state intervention.

Our study then investigates how companies react when faced with a state that uses such means to wrestle power back from the economic elite. We have carried out approximately fifty interviews with CEOs in various companies active in Hungary and with other well-informed actors. Our main finding in this respect is that, contrary to existing studies, companies in Hungary do not try to cope with autocracy by adapting a specific organisational structure that ‘immunises’ the company from expropriation, as the large and opaque business groups in Indonesia do for instance. Neither do foreign MNCs completely exit the Hungarian market, which is an obvious and commonly observed coping mechanism. Rather, they tend to follow one of two strategies: Either they give in to the political pressures and ‘play the game’ (i.e. they try and keep clan members happy by engaging in corruption and other illicit activities), or they adopt a strategy, which we term ‘dormancy’. This latter strategy is interesting, because it has not been described in the extant literature. By dormancy we essentially mean that the companies put forward-looking investments on hold and simply try to maintain a presence in the country, while staying below the government’s ‘radar’. Companies that choose this strategy seem to simply focus on survival, but refuse to play the game dictated by the government. We speculate, however, that the dormancy strategy will only work in the short- to medium-term and is indeed based on the assumption that the Orbán regime will eventually give way to a more business friendly regime. Time will tell whether this assumption is indeed correct.

The paper is available on SSRN (The references cited in this post can be found in the paper).