Hungary’s rule of law backsliding continues amidst the COVID-19 crisis

The publication of the latest results of the Corruption Perceptions Index (CPI) marks the end of a decade characterized by democratic backsliding in Hungary: the country, once a forerunner among Central and Eastern European countries in terms of the adaptation of EU norms, ended up among the worst performers in Europe, with a CPI score of 44. This result puts Hungary on par with Romania and Bulgaria, countries that it has historically outperformed. In order to understand the context of this result, it is instructive to examine the impact the coronavirus pandemic had on Hungary’s rule of law performance, and the distribution of state resources.

The outbreak of the coronavirus pandemic and the government’s response to its challenges accelerated democratic erosion in Hungary. This is exemplified by the introduction of a rule by decree regime, which substantially broadened the government’s room for manoeuvre. The government also took aim at municipalities, diverting a substantial share of their revenues through the designation of so-called special economic zones, and by depriving them of crucial unrestricted financial resources, such as the vehicle tax and a local business tax.

The government has also abused the pandemic as a pretext to further curtail the accessibility of public interest information. Beside tripling the 15-day deadline set out in the law for servicing freedom of information requests, the government also amended the Fundamental Law, for the nineth time since its entry into force in 2012. The Nineth Amendment rewrites the constitutional definition of public funds, thus enabling the further transformation of public funds into private assets.

Electoral rules were also amended to toughen the conditions in which a party can present a list for national elections, forcing opposition parties to contest the elections with a single party list. At the same time, the amendment fails to exclude “fake parties” from the elections which have siphoned off approximately HUF 7 billion in campaign funds since 2014.

Public resources reallocated for crisis management purposes were often used inefficiently, or to promote oligarchs and the government’s clientele. This is exemplified by the distribution of non-refundable grants worth HUF 83.5 billion by Hungary’s Tourism Agency, benefiting, among other recipients, Hunguest Hotels. The company belongs to the interest group of Lőrinc Mészáros (the country’s wealthiest individual, close friend of Prime Minister Orbán, and someone who has already benefited from public money in recent years). The money was used+ for financing the development of yacht harbours and luxury resorts around the Lake Balaton, while totally ignoring hotels operating in Budapest, even though this segment of the market was most severely hit by the crisis.

Funds allocated to the healthcare system were often spent in extraordinary procedures that circumvented regular procurement rules, contributing to the overpriced procurement of medical equipment in the interest of intermediary companies with irrelevant professional backgrounds and an unclear mandate.

Despite robust economic growth before the pandemic, and unprecedentedly generous funding by the European Union, Hungary failed to establish a trajectory for inclusive and sustainable economic growth. Hungary performs poorly in the global competitiveness rankings, for which the weaknesses of democratic institutions, the declining output of the healthcare and the education systems, and the low level of innovation are to be blamed.

However, the investment rate was outstanding in 2018 and in 2019, despite the steady decline in the rule of law indicators. The ambiguous trend of growing investments regardless of the decay in the country’s rule of law performance can be explained by the negative real interest rate, the macroeconomic stability, and by the fact that most investors have already factored in systemic corruption as part of doing business in Hungary.

The pandemic had a negative impact on the public procurement market as well. The proportion of single-bidder public procurement processes above the European Union threshold was 40 percent in 2019, one of the highest ratios in the EU. Parallel to this, the concentration of the public procurement market has intensified: based on the Corruption Research Center Budapest’s data, in 2019, 51 percent of tenders won by businesses with government ties lacked competition, and this proportion increased in 2020’s first trimester.

To improve Hungary’s track record in corruption prevention, it is essential to install stricter mechanisms to control procurement and the use of EU funds, especially as Hungary is set to receive a record EUR 40.6 billion funding during the 2021-2027 budgetary cycle. Moreover, the remaining freedom of information channels need to be utilised to their highest potential to make sure that the government spends COVID-related funds on crisis management instead of enriching its cronies.

See TI Hungary’s full report on the 2020 Corruption Perceptions Index here.