DE-INDUSTRIALISATION OR RE-INDUSTRIALISATION IN BUDAPEST?
THE FUTURE OF BUDAPEST’S INDUSTRY
Expected industrial growth
Economic forecasts predict an upward trend in the world’s economy (IKIM 1995). For the Hungarian economy, this implies the possibility of maintaining an export- oriented attitude. (International demand will positively affect the chemicals and pharma
ceuticals industry, office equipment and computer manufacture as well as the production o f precision machinery, optic instruments, electric devices and applications. Average demand can be expected in other sectors of the machine and paper industry. Finally, moderately increasing demand is predicted, among others, for metallurgical products and the textile industry). These predictions are particularly favourable for Budapest’s industry where chemicals and engineering industries are responsible for two-thirds of production.
Investments in the processing industry make up a growing share of total in
vestments in Budapest (from 115.2% in 1994/95 to 122.8% in 1995/96). It is likely, therefore, that the processing industry will contribute to the production of Budapest’s
economy at an increasing rate. Interestingly, however, foreign investments are falling both in industry in general and in the processing industry in particular. (The latest for
eign investments have shown more interest in the telecommunications, financial, insur
ance and real estate sectors. The composition of foreign direct investments FDI in the
‘second division’ of developed countries shows a similar trend.) It follows that domestic investments on the other hand have been on the rise in recent times. (85% of investments in the processing industry came from abroad in 1994, 83% in 1995, but only 66% in 1996).
Forecasts predict a steadily growing industrial contribution to the GDP until 2003 in Hungary, including the building sector. A gradual decline in the share of indus
try and building in total production is only expected in approximately 6-7 years (Petsch- nig, M.Z. /ed./ 1997). At the same time, a further decrease in industrial employment in Budapest seems likely as well. Calculations reckon with 20-25 thousand jobs less in industry by 2005, amounting to a 19-20% share of industry and the building sector at the time. Nevertheless, in the future, cuts in the size of the labour force - one of the avail
able means to increase productivity - will be less frequently accompanied by the com
plete closing down of companies in the category of medium-sized and large enterprises.
It can be concluded, therefore, that industry will most probably remain an im
portant sector of Budapest’s economy in the next 10 to 15 years, even if it is bound to lose some of its former importance. In Eastern European countries, a shrinking industrial workforce seems to be a direct consequence of the economic transition itself (the trans
formation of the centrally planned economic structure to a market economy), i.e. result
ing from an initial economic recession and subsequent period of gradual growth. In short, falling employment figures in industry do not entail the same process of radical de-industrialization which large cities of the most developed countries have had to un
dergo.
A transforming industrial structure
The last few years have brought about the emergence of market-economic structures, including wide-ranging changes in ownership (foreign ownership amounted to 45% in 1995, while Hungarian private ownership was around 28%, similar percent
ages were recorded in Budapest’s industry as well). Nevertheless, capital concentration will long remain the characteristic trend. Although there is no doubt that a thorough transformation of company-size structure took place in the early 1990’s, the organiza
tional structure o f companies is still changing continuously. In particular, considerable fluctuation can be observed in the category of small enterprises. There have been con
siderable shifts, especially since 1993, within the various sectors of the processing in
dustry as well, textile and clothing industry has declined significantly, while machine, food and chemicals industries are responsible for 82% of the industrial output in Buda
pest.
The dynamics and structure o f investments enables the making of certain pre
dictions concerning the production structure of the next few years.
Table 2. Structure o f industrial investments (%)
Source: Statistical Yearbook Budapest, 1996. p. 266
Three sectors of the processing industry have concentrated investments in the last three years: fo o d industry (although at a decreasing rate), chemicals and machine industries (at an increasing rate). These percentages highlight the fact that current in
vestments actually consolidate the structural transformation of Budapest’s industry.
(This investment structure more or less corresponds to national figures as well.) Danger o f the dual economy
The structure o f economy has been still far from a balanced, stabilized stage, and even more there are unstable elements in the economic structure, which can hamper or slow down the positive macroeconomic tendencies as well. The contradiction o f the Hungarian economy is associated with the fact, that the economic dynamism is exclu
sively due to the FDI (particularly to that o f multinationals), while the majority o f small companies have not been prospering, and the category o f the medium size companies is relatively "thin".
After the change of the political-economic regime the small companies have been mushrooming, partly because of the desintegration of the huge socialist enterprises, partly as new foundations. A big part of them has been the result of the difficult eco
nomic situation (as the only possibility for people trying to avoid unemployment). Ma
jority of the small companies are fighting with a severe lack of capital, the shrinking domestic consumption, with the unacceptable high interest for credits, the irreally high taxes, and the lack of the protectionism of the state economic policy. This way the small companies (in Hungarian ownership basically) suffer from limited competitiveness.
Because of the very slow domestic capital accummulation a tiny part of small and me
dium enterprises was able to enlarge or develop.
The "curative injection'Tor the ill Hungarian economy was a totally imported one. It is well known, that approximately a half of the western foreign capital invested in Eastern Europe was concentrated in Hungary. The FDI is already producing, but at the same time its integration into the domestic economy is slow, or going on with diffi
culties. The main reason of this fact is the widened technological gap between the for
eign and domestic enterprises, but their interests and possibilities are basically different, too (Barta, Gy. 1994, Csáki, Gy. et al. 1996).
All these tendencies can pose the danger o f a dual economy. The question is, whether the present and future, international and domestic circumstances will help the inner integration of the Hungarian economy, or they will rather stabilize the dual char
acter of the economic system?
Technological development / R&D
One of the legacies of the former central planning is a serious technological gap between developed countries and Eastern Europe. It is true, however, that after the change of the political system the motivation for innovation has not reappeared, and R&D activity has not yet been revived in the Hungarian economy/industry. Yet the abil
ity of the new enterprises for a more rapid adjustment to new circumstances is recognis
able. organisations in a differentiated way. Some of the industrial research institutes have been closed down, while others just barely survive in a day-to-day struggle with the lack of contracts and scientific projects. Between 1988 and 1993, the nominal value of the revenues received by research institutes decreased by 82%. R&D activities as well as the underlying institutional system have been subject to a fundamental restructuring process.
While independent R&D activities and separate R&D departments within companies have been on the decline, the number of occasional and specialised R&D tasks has increased significantly.
Industrial enterprises have generally shown a lessening and less interest in innovation. Spending on R&D has decreased. Enterprises have to rely on their own resources to finance the bulk of their R&D costs. The government has only limited funds available to foster domestic R&D potential, and foreign investors are rarely interested in sponsoring R&D in Hungary. Consequently, R&D activities of enterprises in foreign ownership are not pursued with great intensity (Tamás, P. 1995). It must be noted, however, that the dwindling of R&D is not only a result of changing spending policies.
It seems to be overwhelmingly the case that company managements prefer the application of foreign technologies to the potential results of in-house research. This explains the growing import of licences and know-how, especially in joint ventures with foreign participation.
The cutbacks in R&D activities are also to be attributed to the shrinking average size of companies. As already mentioned, one of the principal reasons for the
fragmentation of the structure of enterprise organisations has been the disintegration of large industrial companies dominating the centrally planned economy. These had functioned as the main centres of technological development. Small companies are less innovative and their financial possibilities are much more limited.
It is clear, that the role of the state can not be shifted to the market-oriented institutions. But at the same time any governmental R&D policy can only be based on a market economy. As a consequence, a successful R&D activity, an effective relationship between R&D and production in Eastern European countries can be expected only after the transitional period of economic development has ended.
New orientation o f enterprises, networks, central functions
The fundamental problem of the present Hungarian/Budapest industry is the fact that only a minority of the small and medium-sized companies is able to act as sup
pliers or subcontractors to the big companies, mainly in foreign ownership, producing the major part of industrial output and exports. The main obstacle to the co-operation is a technological gap.
An interesting finding of our research is that multi-plant enterprise structure of the former centrally planned economy has partly survived, even after privatisation. A certain continuity exists, although a part of the former units of the giant enterprises hav
ing emerged during the period of state socialism has become independent (the other part was, or will be, closed down). But the former, mostly personal relations and contacts are still there and active or are being rebuilt between these newly independent companies.
New networks of enterprises have begun shaping, too, creating, for example, new plants abroad, mostly in countries of the former Soviet-bloc. Very often, a decisive and strong purpose of western investments is to develop a "bridgehead" or distributing centres for western companies founded in Hungary in general or at Budapest in particu
lar. From there, they hope to continue their expansion into other countries of Central and Eastern Europe and the CIS. Such efforts are in fact strengthening the position of Buda
pest as a regional centre, on the one hand, and the long-range presence of industrial activities in the Budapest economy, on the other.
The changing location o f industry in the Budapest agglomeration
„Industrial ruins” in Budapest will probably disappear in the not too distant fu
ture. The utilisation of empty industrial factory buildings has already changed, and most of them will be remodelled or razed sooner or later. The disintegrated, restructured or closed giant industrial enterprise-empires of the past will be industrial history, hopefully recorded and analysed in the future.
But there is some discussion among urban planners and industrialists as far as the future of Budapest's industry is concerned. Urbanists believe in total de
industrialisation, i.e. the complete disappearance of industrial activities from Budapest, while, according to economists and industrialists, Budapest will remain an industrial
centre for a long time to come, and the Hungarian capital, as an industrial location, will continue to offer several advantages for further industrial development. At any rate the spatial division of labour will be changed.
The belt of the Budapest agglomeration and the region between Budapest and the Austrian border, is becoming the preferred location of new industrial siting, particu
larly for greenfield investments (Matolcsy, Gy. 1997). Yet the slowly growing subcon
tracting system and the increasing co-operation between enterprises of all sizes will multiply economic transactions mostly in the Budapest agglomeration. As a conse
quence, this development will create industrial districts in Budapest that are more inte
grated into the Hungarian, European and global economies than ever before.
CONCLUSIONS
As far as the international and domestic circumstances are concerned, both the international and home prognoses predict a global - at least European - economic pros
perity. This may open perspectives for SMEs those to be joining the big foreign and domestic companies, multinationals as subcontractors. The internal integration will be supported by the European integration processes. There is a hope Hungary will join European Union by 2002-2003. The EU membership will help the companies to in
crease their export, and to create a larger network of subcontracting, but at the same time the competition will be sharper. The Hungarian policy will probably increase - particularly during the period of the preparation for joining EU - its support in order to improve the positions of the domestic economy.
Summarising the ideas about the future: there is no need fo r too vivid imagi
nation to forecast the prosperity o f the industry in Budapest. It will bear marks o f the peripheral economies (an increase o f mass production, a limited interest in innovation, and a relative "low tech-big success" orientation) on the one hand, and the strengthen
ing control function o f the metropolis on the other. Budapest will be an industrial centre in the semi-peripheral Hungary.
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