GO HUNGARY GO INDONESIA. White Paper on Business, Cultural and Educational Cooperation

Transcription

1 1 GO HUNGARY GO INDONESIA White Paper on Business, Cultural and Educational Cooperation 2015 Budapest Business School

2 Go Hungary Go Indonesia

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4 GO HUNGARY GO INDONESIA White Paper on Business, Cultural and Educational Cooperation 2015 Budapest Business School

5 Go Hungary Go Indonesia White Paper on Business, Cultural and Educational Cooperation ISBN: Published by the Budapest Business School Budapest Business School, 2015 Authors, 2015 Editors: Tamás Novák; Tamás Halm Cover design and graphics: József Pintér All rights reserved. No part of this publication may be reproduced or used in any form or by any means without permission from the publisher. Printed in Hungary

6 Table of Content Preface 7 I. BACKGROUND AND SETTING Tamás Novák 60 Years of Hungarian Indonesian Relations 11 Tamás Novák Hungary s External Economic Strategy The Need for Diversification 17 Csaba Moldicz Hungary s Investment Profile A Macroeconomic Background 25 II. DOING BUSINESS Judit Hidasi Doing Business in Hungary and Indonesia An Intercultural Approach 37 Cungki Kusdarjito Civil Society and NGOs: A Possible Field for Joint Actions and Program between Indonesia and Hungary 45 III. SPECIAL ISSUES Éva Sándor-Kriszt Prospects for Cooperation in Higher Education 55 Judit Kiss Prospects for Trade between Indonesia and Hungary with Special Focus on Agricultural Products 62 Ernő Fleit and Zoltán Melicz Water Technologies Water Management: Specific Cooperation between Hungary and Indonesia 71 About the Authors 80

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8 Preface Hungary and Indonesia established their diplomatic relations 60 years ago. This anniversary is coupled with a strong need for international economic diversification in both states, the increasing interest of internationalisation in higher education, and a growing demand for the dissemination of knowledge on the respective country. Large geographical distances always make the development of relations difficult but with the advancement of communication and transport infrastructures, vast distances may be overcome. We would like to further shorten the distance between our countries by enhancing information flow. The White Book is a joint effort of Hungarian and Indonesian academics made in order to lay down the scientific foundations for identifying the potential fields of cooperation. On the Hungarian side, we have the Budapest Business School coordinating the research while in Indonesia, APTISI (Association of Indonesian Private Higher Education Institutions) organises the work. This survey (White Paper) focuses on several prospective fields. The topics discussed include the investment environment in Hungary, the characteristics of bilateral trade and a case study of Hungarian investment in Indonesia. We emphasise the importance of several perspectives of doing business in both countries such as the role of non-governmental organisations, the different traditions and business practises. In addition to these, we also carefully examine the educational and cultural aspects of cooperation a very promising issue of increasing importance. The analysis mainly focuses on the Hungarian perspectives and serves as a basis for fostering dialogue between the academic, business and governmental actors. In the coming months the discussion between Hungarian and Indonesian experts and stakeholders will explore further issues and sectors for analysis. Getting to know each other better is a precondition to achieving any successful cooperation in business, trade or investments. We are keen to have the elaboration of the White Book starting to deliver results and benefits as soon as possible.

9 8 The authors hope that the reader will find the short papers of this compendium interesting and intriguing enough for triggering a more intense debate and further analysis. We believe that the date for finalisation of the full White Book should be the end of Éva Sándor-Kriszt Rector Budapest Business School George Iwan Marantika Responsible President of International Relations APTISI

10 I. BACKGROUND AND SETTING

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12 60 Years of Hungarian Indonesian Relations Tamás Novák Economic and political relations between Hungary and Indonesia have a long history with diplomatic ties having been established as early as 1955 and the Hungarian Embassy opening its doors in Djakarta in In the 60 years since then, several changes and dramatic events have taken place in both countries. At the time of building diplomatic ties between the two countries, Hungary was bound to the Soviet Union and was organised along a Soviet type centralised economic and political system. Indonesia had just gained international reputation by the organisation of the Bandung conference in 1955, which then led to the 1961 establishment of the Non-aligned movement. Although the nations political systems were different, they shared several characteristics with respect to political development and economic challenges. The development of relations Despite the vast geographical distances separating the two countries and the contrasting domestic political stances and international relations, ties of compassion began to develop between the two countries when in 1956 Hungary was waging a revolution to gain full independence from the Soviet Union and the Indonesian press was following and reporting on the developments in Hungary as the people of Indonesia expressed compassion and sorrow in sympathy in mass demonstrations for the unfortunate turn of events. Nine years later in 1965 it was Indonesia s turn to face difficult times as the conflict between domestic political forces escalated into long lasting violence and bloody fights. In the years following the conflicts, similar developments and changes had unfolded in Hungary and Indonesia alike. In Hungary the so called Kadarian consolidation and in Indonesia the Suharto consolidation were based on comparable principles: better living conditions, improving economic perspectives with softening central power control. But the signs of democratisation would only transpire at a very slow pace and it had taken several decades for a full transformation to materialize.

13 12 The first high level visits in the 1980s were clear testaments to intensifying economic interests between the two countries. In 1984 President Pál Losonczi paid a visit to Indonesia, which was reciprocated by the Indonesian President Suharto in the following year. The intention to improve relations was expressed in the signing of the Double Taxation Avoidance Agreement between Indonesia and Hungary in The better framework conditions, however, could not be translated into deepening economic ties in the coming decade because the sequence of economic changes and trends in the nineties were completely different in the two countries, which made economic relations difficult to nurture. At the beginning of the nineties, Hungary was facing a very difficult period of economic restructuring, transformational recession and massive macroeconomic imbalances resulting in several years of recession, soaring unemployment rates which could only be stabilized in the second half of the nineties. After stabilisation in 1997, relatively fast economic recovery was witnessed with dynamically expanding exports, nevertheless, imbalances persisted in various fields for years. When economic trends had turned promising in Hungary, the Asian financial crisis beginning in mid-1997 in Indonesia created a very difficult economic situation with soaring indebtedness of firms due to the collapsing domestic and external demand and non-performing loans in the economy, which was crippled by the sharp depreciation of the currency. The crisis had probably hit the Indonesian economy the worst in the region and caused a 13.1 percent drop in GDP in From the turn of the millennium onward, however, economic developments had been following similar trajectories in both countries with comparable yearly GDP growth of 4-5 percent, quite until the crisis of The impact of the global economic and financial imbalances and crisis in 2008, however, had hit Hungary much more severely than expected and several years of recession ensued with no sign of growth. Tangible recovery was only starting to take shape from Indonesia displayed remarkable resilience during the crisis years with little impact on its economic growth figures. Currently both countries are enjoying relatively high growth rates. In recent years Indonesia was ranked the second/third fastest growing economy in the G20 country group while Hungary became one of the most dynamic economy in the European Union in In 2005 the Hungarian Prime minister visited Nangroe Aceh Darussalam after the earthquake and Tsunami causing serious and long lasting trauma for the people of Indonesia. At that time the building of the children s clinic in Meuraksa Hospital, Banda Aceh, was underway with humanitarian aid from the Hungarian people and government as an expression of sympathy for the people of Indonesia. The impacts of the tsunami really moved the Hungarian people and they voluntarily offered

14 13 surprisingly substantial financial aid to help alleviate the impacts of the disaster in Indonesia. The next breakthrough in bilateral relations came with president Yudhoyono s visit to Hungary in The Indonesian government and the Hungarian government had agreed on promoting bilateral economic cooperation through trade and investment and on involving the private sector in the process. They also recognised that the economies of the two countries were complementary and there was great potential for cooperation. From the Indonesian side, Hungary may be considered a potential market and a strategic point of entry for Indonesian products to the Eastern and Central European markets and the former Soviet countries. Hungary is also Indonesia s 4 th biggest trading partner in Eastern and Central Europe. Therefore, Indonesia has been making efforts to focus on its non-traditional market opportunities in addition to its traditional markets such as the US, Western Europe and East Asia. This objective fits in well with Hungary s strategy of opening towards non-european countries with the intention of taking advantage of more diversified international economic relations. Agreements and areas of cooperation Beside presidential or prime ministerial meetings, the past few years have also witnessed several high level visits from ministers and respective speakers of the house. In addition to the growing number of such high level visits, several bilateral agreements were also signed in demonstration of the strengthening economic, cultural and educational relations. Between 1955 and 2015, Indonesia and Hungary signed nearly 40 bilateral agreements including ones granting economic cooperation and visa exemption for diplomatic, service, and education passport holders; and other, business related agreements in order to facilitate business. Some of the most important agreements include the Agreement on Technical and Scientific Co-operation (1967), Agreement on the Avoidance of Double Taxation (1989), Agreement on the Mutual Protection of Investments (1992), Air Traffic Agreement (1994), Framework Agreement between Central Banks (1994), Co-operation Agreement between the Chambers of Commerce (2004), Agreement on the establishment of a Joint Business Council (2004), Economic Co-operation Agreement (2005). President Yudhoyono s visit had greatly contributed to the subsequent launch of cooperation in the sustainable water management sector. Hungary has a strong reputation for its expertise in the field and boasts more than 200 years of experience in water management. For Indonesia, clean water remains an important issue not only for today but also for the future, particularly in its effort to fulfil the demand for clean water in remote areas. In this respect,

15 14 in 2014 a very important agreement was concluded between the two countries creating favourable conditions and opportunities by offering concessional credits to Indonesia in the range of USD 50 million through the Hungarian Eximbank, a state owned development banking institution supporting Hungarian exporters in their internationalisation efforts. The funds can be used to finance Indonesian development objectives with the involvement of Hungarian firms offering products, services and knowledge in the execution of the projects. Currently several water supply projects are being implemented in a number of remote areas in Indonesia with the help of this financial instrument. (See further information about that on page 71.) There are several prospective fields where agreements and joint efforts are expected to contribute to furthering the relations between the two countries. These areas are most likely to include tourism, cultural exchange (which has become quite significant in recent years) and programs in higher education. On the Hungarian side great opportunities are being created by the Stipendium Hungaricum program for students who would like to study in Hungary. This Scholarship Program was founded by the Hungarian Government in 2013 with the aim of enabling students from the countries of the Global Opening 1 to finish their full-time bachelor, master or PhD courses in Hungary and later to facilitate economic and cultural development in their countries. It is expected that in 2016 Indonesian students will also take advantage of this program. On the Indonesian side, the Darmasiswa non-degree scholarship program is deserving of mention. This government-financed scheme offers foreign students the opportunity to study in 54 selected Indonesian higher education institutions in different cities across Indonesia. The program was established in 1974 originally admitting student only from ASEAN countries but later, in 1976 it was extended to other countries such as Australia, Canada, France, Germany, Hungary, Japan, Mexico, the Netherlands, Norway, Poland, Sweden, and USA. The number of eligible countries was further extended in the nineties. The main purpose of the program is to increase and foster interest of mainly young people in Bahasa Indonesia and Indonesian culture. It is also designed to enhance mutual understanding and provide stronger cultural links. Educational cooperation has also been furthered by regular meetings between Hungarian and Indonesian rectors since 2013 and the conclusion of several Memorandums of Understanding on future fields of cooperation in higher education. In addition to the contacts between public higher educational institutions, private universities in Hungary also offer several scholarships for students from Indonesia. 1 Global opening has been designed to develop bilateral relations, including economic, cultural and educational cooperation, with countries that Hungary did not traditionally have strong relations or Hungary had neglected relations with in the beginning of the ninteies.

16 15 Conclusions Improving economic, cultural and higher educational relations between geographically distant countries is never easy. The difficulties are easy to see thanks to the wellknown gravity model of world trade. The law of gravity states that the gravitational attraction between any two objects is proportional to the product of their masses and diminishes with distance. As a result, the trade between any two countries is, other things equal, proportional to the product of their GDPs and diminishes with distance. 2 But this general rule does not rule out anomalies, which means that long distances do not necessarily prevent improving connection leading to relatively strong trade, capital relations and developing contacts in fields like cultural and higher education cooperation and exchange. But in order for this to happen, several prerequisites must be met. The first in the line of such prerequisites is the responsibility of diplomacy. High level support of bilateral relations always facilitates the expansion of all forms of international relations. Frequent high level meetings inspire active relationship building endeavours on a lower level as well e.g. cooperation of chambers of commerce or between universities. Political contacts may also help set up financial funds to facilitate grassroots business development with publicly funded projects. The second important prerequisite relates to shared interests. In the 60 years of bilateral relations we have never witnessed such a constellation of common interests as we see today. And this interest is related to efforts of opening towards third countries in an era of global economic and power restructuring, when the competition between corporations and countries is steadily increasing. The growing pressure for improving competitiveness has developed along with growing opportunities: rapid economic development, improving transport and communication systems facilitate more and better business and cultural contacts. But the third prerequisite is the most problematic one. If we want to capitalize on the opportunities, lots of work and effort will be required. This work must include the desire to want to get to know each other better, understand the attitude of the people and cross-cultural differences, explore prospective fields of trade, capital and other business relations, and finally, we must facilitate the flow of information between the two countries. If these objectives are achieved, relations can reach a higher level. 2 Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz 2012: International Economics: Theory & Policy. 9th ed. p. 12.

17 16 Without putting in this arduous day to day work, the currently existing window of opportunity cannot be used, and the moment may be squandered. And finally, one additional aspect should be raised. Building relations between countries oftentimes require personalities who do not shirk their responsibilities, are willing to travel a lot and communicate with all stakeholders on a regular basis. These personalities could well be instrumental in the process. Finally, let us remember the famous eighteenth century Hungarian traveller, András Jelky, who arrived in the then Batavia (currently Jakarta) after unbelievably adventurous travels. He went on to become a much respected businessman and diplomat, which clearly proves that distance cannot prevent the development of business, cultural or educational relations if endeavours to achieve are strong. Bibliography Agreement between the Government of the Republic of Hungary and the Government of the Republic of Indonesia on Economic Co-operation. 121/2006. (V. 19.) Korm. rendelet Busztin, Gy. Gémes, F. Hrabovszki, A. Horváth, Z. 2005: Indonézia Delegációs kézikönyv. (Indonesia Delegation Handbook) Darmasiswa Indonesian Scholarship Program. darmasiswa/ Embassy of Hungary. Embassy of the Republic of Indonesia. FRAME AGREEMENT between the Government of Hungary and the Government of the Republic of Indonesia concerning general terms and procedures, institutional arrangements and financial frames for granting Hungarian concessional credits to the Republic of Indonesia. 54/2014. (III. 3.) Korm. rendelet Stipendium Hungaricum Scholarship Program.

18 Hungary s External Economic Strategy The Need for Diversification Tamás Novák In the early nineties, immediately after the political and economic systemic changes, the demand in Hungary s most important export markets (the Former Soviet Union and other Central and Eastern European countries) collapsed due to the unfolding transformational recession. 1 The need for the rapid reorientation of trade was now a pivotal objective and the logical choice was the geographically close markets of the Western European countries. In order to facilitate external trade with this region and to get additional development incentive, the unquestionable priority of the country was now to join the European Union, a large single market, as soon as possible. Other regions in the external economic strategy became unimportant. Along this objective, attractive investment opportunities had surfaced for large firms to take over the domestic markets (in every Central and Eastern European CEE country) from insolvent local firms through privatization from the early 90s. In addition, export-oriented greenfield investments (Foreign Direct Investments FDI), attracted by cheap labour and other cost related incentives, also started to increase. FDI was promoted by economic policies in the region, especially in Hungary, due to the scarcity of domestic investment financing. The sudden rush of western business into the region had resulted in several positive structural changes (and a number of negative consequences), 2 and created the basis for an export-led development pattern. This was the case in each of the CEE countries, leading to strong competition for FDI, not least because of the expectation of associated economic benefits in terms of export performance, economic structural change, employment, growth and competitiveness. As a result, for 1 This term was introduced into the economic literature by János Kornai describing the phenomenon developing in all the post-socialist countries in Central and Eastern Europe. He believed that there were similar causes and a common pattern behind this unfavourable development which was different from the usual cases described in the economic cycle theories. Later this term was widely used for economic crises emerging due to the transition from the socialist to the capitalist system. 2 See more on the positive and negative impacts for example: From plan to market: The transition process after 10 years (contributors: Berend, I., Svejnar, J., Berglöf, E., Welfens, P., Gomulka, S., Kopits, G., Malle, S., Menzinger, J., Grigoriev, L., Landesman, M., Hare, P., Nagy, A., Elman, M.), Economic Survey of Europe, No. 2/3 (1996). The assessment of the transition based on the Washington Consensus and the impacts of the chosen transformation method in individual countries remains controversial.

19 18 almost two decades, Central Europe s pre-crisis economic model, including Hungary s strategy was based on export orientation led by large inflows of foreign direct investment with the leading role being played by the European Union in both trade and FDI. The role of export-orientation theoretical considerations Development model questions, the issue of export-orientation, important substitution or other trade related aspects are always in the forefront of the economic and political thinking of countries where convergence towards more advanced regions is amongst the most important economic issues. In the case of emerging markets, export-oriented (or export-dependent) economic development is, in most cases, vital for achieving a certain degree of catching up, although in the long run export constraints may be significantly different from country to country. A large domestic market (or more precisely, significant and rapidly increasing domestic purchasing power) can partly substitute the role of export in GDP growth. Countries with small domestic markets, however, are much more likely to be forced to maintain export orientation in the long run at any price. Some of the heavily exporting countries (measured either in terms of export volume or export/gdp) rely on cheap labour (China etc.), the availability of crucial natural resources (Russia, oil-exporting countries, etc.) or the economies of scale. The impact of export, when based on economies of scale, can be crucial for smaller countries, where even a very limited number of large, export-oriented firms can significantly impact on GDP growth (and jobs). (Of course, the factors on which strong export performance is based may be mixed.) The prospects of these country groups differ with respect to export potential and FDI relations in the coming decade. 1. Cheap-labour countries can face increasing difficulties in a post-crisis world. Although cost factors are still important, at the same time, the speeding up of technological development renders labour force skills even more important as the wage level starts to increase parallel with the growing per capita GDP. This change is clearly reflected in the intensification of reshoring of industries from developing countries to developed nations for example. 3 This applies mostly to the relatively large 3 Paul A. Krugman, Robots and Robber Barons: [...] one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad. The New York Times, December 10, com/2012/12/10/opinion/krugman-robots-and-robber-barons.html?_r=1& (last retrieved: 25 March 2014) The BCG report on the significant impacts of reshoring projects from 2015 onward: bcg.com/media/pressreleasedetails.aspx?id=tcm:

20 19 emerging countries that need to change their underlying development model and promote a smooth transition to a much more domestic demand based strategy. 2. The position of exporters of natural resources seems to be strong, especially when we take into account that even after the commodity price increase witnessed during the last decade, future price developments for most of these commodities remain rather favourable. (Obviously, these countries also try to diversify their economies, which is quite clear, for example, in the case of several oil-exporting countries in the Middle East.) 3. The third group consists of export-oriented small countries that do not possess easily exportable natural resources, and have very high export openness (export/ GDP) reaching 75-90%. This is the case in several Central European countries, including Hungary. Their economic development mostly depends on export performance. If firms in these countries are to increase sales and create more jobs, there is simply no other alternative to internationalization. And as the exports of these countries, whose domestic purchasing power is limited, are mostly based on the performance of FDI-related manufacturing and services firms, they have to elaborate strategies that preserve and strengthen this export orientation. (This does not mean the negligence of domestic demand factors, such as consumption and investment, but rather indicates that their role is to balance the growth pattern, rather than replace export orientation). As Hungary cannot compete with really low wage countries (though wages are still low in international European comparisons), long-term sustainable strategies cannot avoid upgrading technological capabilities to maintain or increase current export levels. The other possibility is to find new markets and promote the internationalization of more and more small and medium sized domestic firms. The simultaneous application of these two strategies may be a starting point for the external economic strategy of Hungary in the future. Geographical and sectoral diversification Today s global political and economic environment cannot be described with the simple terms of the bipolar world s traditional centre-periphery relations when political support of large powers in order to gain more international influence helped the economic development of less developed states. The picture is further complicated by the transnationalisation of business activities as a result of increasing global

21 20 competition and by the surge of regional integration initiatives that sometimes overlap each other in terms of scope or geographic location. Peripheral or semi-peripheral countries in this sense no longer serve as the background territories for only one economic or political centre, but are influenced by several at the same time (although the level of political and economic influence varies from one centre to the other, not least because of geographical distances or ideological reasons). This is the very position of Hungary at the moment. It is clear that each country will always have a major international trade and capital partner (which in the Hungarian case is certainly the European Union), but countries consider other relations important too, which has been increasingly true in the past few years when the more advanced countries, notab ly members of the Eurozone, have been facing massive financial instabilities and growth problems. For Hungary, an export-oriented strategy will undoubtadly remain one of the most important elements for balanced economic growth in the coming decade. Domestic demand without significant export performance is insufficient to deliver sustained economic growth. Export openness, however, in most cases carries substantial risks. At the beginning of the economic crisis in 2008, export-oriented countries, such as Hungary, had been hit most severely. But the implications of this external demand shock were different from the earlier ones because international trade today is different from the pattern prevailing prior to the turn of the millennium. According to WTO estimates, close to 55 percent of the world s non-fuel trade is conducted in intermediate products. And it is mostly a result of the growing importance of the global value chains in which large multinational firms have dozens of subsidiaries in various countries and these subsidiaries trade with each other. Ultimately, demand for exported intermediate products in the Hungarian case is not necessarily defined by the demand in the importing country (Germany is by far the most important destination of Hungarian products, close to 30 precent of Hungary s export end up in Germany and about one fourth of FDI stock in Hungary has been sourced from this country. Despite hard efforts to open up to third countries in trade and investment, the concentration ratio is predicted to further grow unless a major economic shock takes place.) The growth of the supply chain has increased the exposure of Hungary to final demand outside Europe, to an extent that is no longer captured by bilateral trade statistics. Spillovers from aggregate demand and policy actions in the rest of the world are now much greater than ever before. Conversely, German domestic demand spillovers to Hungary remain relatively small. (IMF 2013: 2-3) A significant share of bilateral trade between Germany and Hungary is performed in intermediate goods: final demand in Germany is not the main determinant of exports to Germany. As a

22 21 result of this pattern, export orientation has made the country part of a large international network, which can mitigate external shocks. 4 Yet export performance rebounded very quickly after the 2008 crisis since it was not the ailing demand of the European Union, or of the Eurozone in particular that defined demand for Hungarian products. Exposure to international economic developments and demand may still make a country vulnerable to external shocks. However, when countries which import Hungarian intermediate products re-export finished goods containing the intermediate product that had originally come from Hungary, the ensuing positive impacts of such re-export translate to improved Hungarian export figures. Hence any increased demand for, let s say, German export products, will also improve Hungarian output. This indirect export due to the activity of multinational firms, mainly in the manufacturing sectors, has changed the nature of dependence on international trade and transformed it into stronger dependence on the strategy of multinational companies. Interestingly enough, the expansion of multinational firms and their global optimisation strategies have also led to increased presence of several Far Eastern emerging countries in international trade mainly through growing exports in intermediate products. (Of the six largest exporters of intermediate goods, four are from the Far East: China, Japan, the Republic of Korea, and Hong Kong followed by rapidly developing other countries from the region). Owing largely to the operation of foreign firms, Hungary has been strongly integrated into this production network and its export openness increased rapidly from percent at the beginning of the economic and political transformation to close to 80 percent by The relational and product structure of exports was mostly influenced by large European firms (which otherwise also nurture trade and investment relations with several Asian countries). All these have led to the significant concentration of the export sector and by today about percent of Hungarian exports come from the automotive industry and according to estimates, about 10 percent of the output directly depends on the performance of this sector. The geographical pattern closely mimicked the foreign direct investment pattern and this has led the European Union, and Germany in particular, absorbing the lion s share of Hungarian exports. 4 The success of export-led growth strategy depends on several factors and there are a number of risks and challenges inherent in such a strategy. For a comprehensive list of arguments for and against export-led economic strategy in small countries see: Andras Inotai, Sustainable growth based on export-oriented economic strategy, Economic policy analyses (FES-EPI,(April 2013) pp

23 22 Table 1 Share of exports to the EU-28 (percent of total export) EU Czech Republic Hungary Poland Slovakia Source: Own calculation, using Eurostat data This heavy reliance on a single region and one or two sectors has made the country vulnerable to the developments in the EU, mostly in the Eurozone and the car industry. It is this very pattern that calls for the diversification in terms of geography and product structure. But diversification is extremely difficult in a period when most trade is conducted by multinational firms and in intermediate products. The objective of diversification and creating improved relations with geographically distant countries and regions is to forge social, economic and cultural relations with them. More specifically, the diversification strategy envisages a three-pronged approach towards the countries of South-East Asia. The first objective is to renew political contacts and understanding. The second is to achieve enhanced economic interaction in investment and trade, science and technology, and in tourism. And thirdly, we aim to promote cultural, educational exchange and the flow of information. Future prospects Today competitiveness is more and more linked to the operations of large firms. For relatively small countries like Hungary, it is imperative that they attract high value added production or service firms, and secure a business-friendly environment and stability in economic management. This has been and must remain an important cornerstone of development strategy. But the sources of capital, the origins of foreign firms must be much more diversified and balanced. Excessive concentration of the source of capital will always involve risks this is one of the first lessons of economic history and portfolio theories. At the same time, the relevance of smaller firms may be increasing. The creation of a business-friendly and innovative environment is more and more important to support small and medium sized domestic firms such as high-tech companies or technology

24 23 intensive enterprises in the food processing industry. Enabling them to become competitive on a global scale and launch their internationalisation strategies successfully is an ever important economic policy objective. In the South East Asian region, we have examples for successful strategies building either on the activity of very large firms (South Korea) or on small and medium sized firms (Taiwan). A combination of these two models may be applied in Hungary taking into account the local conditions. Structural upgrading is even more crucial since in Hungary (and in several other Central European countries) a large share of exports and thus the GDP are very much dependent on the automotive industry. This excessive dependence has until now proved to be fruitful as it has greatly contributed to successful restructuring. Recent weeks, however, have clearly exposed the vulnerability of this strategy. 5 The other risk related to this sector concerns the strategy of China. What happens if Chinese car makers opt to step up exports of their cheap products to Europe? How could this possibly impact the Hungarian and more broadly the Central European economy? A much more diversified product structure would therefore be desirable. As for the geographical pattern, Hungary must try to diversify its international trade and capital relations following the examples of more advanced countries, such as Germany, or several less advanced states such as Latin American countries, which have been able to strengthen their relations with Southeast Asia or Australasia. Logically, the bigger Asia s economic power can grow, the greater will the focus be on Eastern markets. The central authorities involvement in Hungary in the facilitation of external economic relations that are planned to be diversified towards geographically distant countries should be viewed as a positive effort to strengthen economic relations with distant regions, where more often than not the right personal contact, or government interest and support can contribute to building a good investment climate and stronger trade links. In the future, this may result in new offers and probably favourable framework conditions. It is a necessary but not sufficient prerequisite for a real breakthrough in terms of intensifying trade and investment. What is needed is a genuine, grassroot cooperation spanning across several domains including higher education, joint research, cultural exchange, dissemination of information and the likes through the active involvement of business, academia, NGOs, civil society, students etc. Without such a multifaceted approach, government strategies cannot work successfully. What 5 The Volkswagen scandal may have a negative impact on the Hungarian processes due to the exposure of German car makers.

25 24 we can realistically expect is a step by step approach and improving business conditions with several geographically distant countries. Indonesia is a very promising country for Hungary in terms of trade perspectives. We may realistically be able to identify sectors in which Hungarian exporters even other than multinational firms will find opportunities to satisfy the world s fourth largest market in terms of population. Indonesia might serve as an entry point to the wider region. And vica versa, if areas of common interest are identified, Hungary may serve as an entry point for Indonesian business, products and services to the larger European market. Bibliography Éltető, A. Szunomár, Á. 2015: Ties of Visegrád countries with East Asia trade and investment. Centre for Economic and Regional Studies, HAS Institute of World Economics Working Paper No August 2015 Ando, M. Kimura, F. 2013: Production Linkage of Asia and Europe via Central and Eastern Europe. Journal of Economic Integration, vol.28, no. 2. June, pp IMF Multi-Country Report 2013: German-Central European Supply Chain Cluster Report. IMF Country Report No. 13/263 Roy, J. (ed.) 2015: A New Atlantic Community: The European Union, the US and Latin America. Miami-Florida European Union Center/Jean Monnet Chair WTO 2014: Hungary. (Statistics database) Accesible: WSDBCountryPFView.aspx?Language=F&Country=HU

26 Hungary s Investment Profile A Macroeconomic Background Csaba Moldicz In the early 90s, after the collapse of the centrally-planned economic and the non-democratic, centralised political system, Hungary underwent a painful economic and political transformation which had led to the complete transformation of the domestic institutional system, the dominance of private business, integration into the global production networks and to the emergence of a new economic structure. Since the beginning of the nineties, Hungary has been the only country in the Central European region in which every one of the elected governments has been able to fulfil their mandate (except for a few changes of government heads), hence political stability has been one of the most important long-lasting characteristics of Hungarian domestic politics. This remarkable political stability has been coupled with the inflow of foreign direct investment in the production and services sectors alike, which are the cornerstones of the rapid structural modernisation of the economy. The relatively favourable domestic and international environment, however, changed after the economic crisis of 2008, and some very serious challenges started to surface, the solution of which required adjustments in the economic policy in order to restore macroeconomic equilibrium and meet the increasing global competition in recent years. Structural problems and macroeconomic imbalances prior to 2008 Despite early successes in economic transformation, the global financial crisis in exposed long-term problems and deep imbalances in the economy. In the period before the global financial and the European debt crisis, Hungary had developed several economic weaknesses, which remained concealed under the then favourable international economic environment. 1. Following the late nineties, economic growth had continued to be robust in Hungary until 2005 (although average growth rates were lower than in the majority of the CEE countries), but this relatively favourable expansion was coupled with large imbalances. Current account deficit was high (4-8 precent of the GDP) public and private debt had been rising steadily before Traditionally, growth tends to coincide with

27 26 imbalances on the current account and with growing indebtedness in the Hungarian economy. It took severe financial and real economy adjustments to break down this vicious circle and to turn the current account deficit into a surplus in 2009 and maintain it along with relatively favourable economic growth figures in European comparison ever since. A similar problem was observed with respect to public deficit. Hungary persistently maintained a high budget deficit even during periods of rapid growth. This was different from several other countries in central Europe where rapid GDP growth, in most cases, was coupled with improving budget positions and debt indicators. This structural weakness had left Hungary vulnerable to international demand shocks. 2. The other feature of the pre-2008 period was the imprudent regulation of the banking sector which had led to the over-indebtedness of private households and firms. After the eruption of the credit crisis, the lack of domestic savings and lack of confidence in the international financial markets stopped the money flowing into the Hungarian economy. International financial liquidity was of utmost importance for the country since a large share of its public and private debt was denominated in foreign currency. The excessive state and private indebtedness exposed the country to international financial risks. 3. Another long-term problem which had not been successfully tackled yet by policy-makers was the low employment rate. Large segments of the labour force had been hard hit by the economic transformation of the nineties and made their knowledge and skills obsolete in the new economic structure. Thus they were unable to find a job or acquire new skills required by the business sector. In addition to the permanently high budget deficit, the low employment and labour market participation rate was yet another important reason behind the relative over-taxation of the Hungarian economy (including households and the corporate sector too) in comparison with its major competitiors. Hungary had an internationally high share of income centralization and redistribution ratio, which was not reflected in the quality of public services. 4. The economic model which had been built on external foreign financing was shaken by the credit crunch evolving from Hungary was the first country to apply for IMF funds, almost immediately after the collapse of Lehman Brothers in This step was a clear confession of the fact that despite the rapid modernisation which the economy had undergone in the previous two decades, the external vulnerability of the economy remained unchanged.

28 27 New trends and economic policy changes after 2008 Several conclusions were drawn from the economic shock during the economic and financial crisis. First, experiences triggered the need to remove the dependence of economic development on external debt generating funds. As a result, the objective since then has been to broaden the basis of economic growth and to include international trade, capital, and loan connections and the domestic demand factors in a more balanced way, which includes active labour market intervention too. The second conclusion was that the macroeconomic balance must be restored by controlling the budget deficit and decreasing public and private indebtedness. After the parliamentary elections in 2010, the newly formed government was able to adopt and implement regulations reforming the entire economy. After the growing political uncertainties of the post-2008 economic crisis, political stability was now a very important factor and precondition to making any major reform. This political stability came in the form of an unprecedented two-thirds majority the government enjoyed between 2010 and 2014, and this level of power was more or less maintained after the 2014 elections too. One of the features of the new economic policy that has emerged since 2010 is the application of the reasoning of economic theories which seeks to explain the risks and problems through the negative impacts of a liberalized international economic environment. This policy seeks out to have capacity, power and independence to define the directions of domestic development, give preference to domestic companies over stronger foreign competitors, and provide protection against foreign monopoly or oligopoly situations. At the same time, this principle acknowledges the importance of foreign-owned manufacturing firms in the Hungarian economy by concluding so-called strategic agreements instruments that express the government s intentions to promote their continued operation in Hungary. The other objective was to strengthen the power of domestic economic policy decision making and broaden its room for manoeuvre. The government s role in shaping the economy had increased after the crisis and included direct and indirect involvement in economic processes. The primary objective of this approach is to increase independence from international influence, which was, for example, demonstrated by the early repayment of the IMF loan and the adoption of a more critical approach to EU decision making practices. This goal was also an important factor behind the growing emphasis on trade and economic relations with countries which had previously been neglected or had not been considered important to Hungarian external economic relations.

29 28 With respect to domestic economic challenges, the economic policy attempted to find a solution to the low employment rate (which was very low in European comparison) too. In 2010 the employment rate was only 55.9 percent, while the EU average was close to 69 percent. By 2014, the difference was reduced to only 1.5 percentage points. (EU: 68.2 percent; Hungary: 66.7 percent) Reducing the average corporate tax and introducing new forms of taxation, and deregulating the labour law were also important elements of the reforms designed to increase labour market participation. In addition to this, the other fundamental pillar of this policy was to cut social benefits and transform them into work opportunities. As a result, a public works scheme was set up securing around 250,000 publicly financed jobs. After a peak in 2010, the Hungarian unemployment rate was improving between 2010 and 2014 resulting in favourable data in EU comparison. (EU: 10.2; Hungary: 7.7 percent in 2004) In order to reform the labour market and to increase participation rates, not only demand conditions were supposed to be altered, but the supply side had also to be uprooted. To this aim reforms in the educational system were also introduced. The major objective of this transformation from a labour market perspective was to adjust the output of the education system to better suit the needs of the industry, which is still the backbone of the Hungarian economy. (See more details on the major directions of change in Hungarian higher education on page: 55.) Special measures were also introduced in order to increase birth rates in Hungary. Family friendly taxation was put in place in 2010, in particular for families with more than two children. Since demographic trends are difficult to change, the challenge presented requires a complex solution. After 2010, low domestic savings coupled with high indebtedness were extremely urgent issues to deal with. (High indebtedness in foreign currency was not only a characteristic within the housing market, but it was also apparent in other sectors of lending.) To reverse indebtedness, from 2010, several saving schemes have been introduced and a financial deleveraging process of the private households has been supported by different state schemes and policies. One of the most notable and successful measures was the stimulation of savings by relatively high (In international comparison) interest rates on government bonds. Other measures were aimed at the restructuring of foreign currency debt into domestic currency denominated liabilities. At the same time, the deleveraging process of the banking sector had already been started in In order to prevent excess-lending, new legislation was adopted restricting lending in foreign currencies and irresponsible lending practices. These measures have helped decrease the domestic financial vulnerability of the country, which is a very important factor in economic stabilisation.

30 29 Another feature of the economic policy was the introduction of special taxation on several economic sectors with high potential to generate revenues and profits in order to secure funds to finance the much needed reduction of the payroll and also to manage the parallel problem of high budget deficit. The new sectoral taxes were levied on the banking-, energy-, telecommunication sector, and retail chains. Sectoral taxes had not been mainstream economic policy instruments in Europe prior to the economic crisis, but since then several economic policies have applied similar measures (although their objective and particulars may vary widely in the countries that have applied such instrument). Another source of funding came from the nationalization of the private pension funds. 1 These private savings had made the financing of the public pension scheme difficult in view of the budget deficit reduction requirements during the period of low growth and recession after (Hungary had to decrease its budget deficit in order to be eligible for EU transfers, a very important source in financing public investments.) This step was also heavily criticised by international economic organisations, but not many viable options were offered in place. In recent years, a number of countries introduced similar, although slightly different measures (mostly because they did not find alternative and sustainable source to increase budged revenues). As a result of this strategy, the country has been able to keep the budget deficit under control and since 2012 the deficit has steadily remained below 3 percent of the GDP. This is a remarkable achievement after several decades of very high budget deficit, particularly in a period when most EU countries are still facing the challenge of relatively high budget deficit and the incessantly spiralling government debt problem. Table 1 General government deficit (percent of GDP) EU Hungary Portugal Spain Italy Greece France United Kingdom Source: Eurostat 1 Compulsory private pension fund system was introduced in several Central and Eastern European countries in the nineties in order to diversify pension savings.

31 30 Table 2 Public debt (percent of GDP) EU Hungary Portugal Spain Italy Greece France United Kingdom Source: Eurostat The policy changes also affected the country s external economic strategy. After , fiscal and monetary policies in the centres and large countries of the world economy (US, China, Russia, India, Indonesia and Western Europe etc.) had successfully mitigated the risks of another global credit crisis. In the Eurozone, however, this could not prevent a new wave of crisis, which deepened with the financing problems of Greece in early 2010 and the crisis had also hit other Eurozone countries (often called PIIGS 2 ). This crisis affected the Hungarian economy adversely through two channels: (1) the demand for Hungarian exports remained relatively weak, and (2) European financial uncertainties curbed the demand for Hungarian assets which contributed to exchange rate volatility. In response to this challenge, a concerted policy to diversify Hungarian trade relations was put in place. The main goal of this policy change was to boost Hungarian exports into fast growing regions and economies and encourage investments from these countries in Hungary. (See more on this diversification strategy on page 17.) Conclusions In recent years the Hungarian economic policy changed enormously compared to the previous decade. This was partly caused by the unprecedented external global economic hardships, and more specifically those sustained by Hungary s most important economic partners in the European Union. Not only do these challenges force countries to seek new methods and instruments of crisis management, but they also 2 PIIGS: Portugal, Italy, Ireland, Greece, Spain

32 31 question mainstream economic theories underpinning current economic policies. 3 It is not clear at the moment which strategies may be the best in this fast-changing economic environment. The Hungarian strategy seems to be successful in several respects at this moment (financial stabilisation especially) but there are several challenges remaining (most importantly sustainability concerns) which require continuous economic policy responses. Looking at the data, the following conclusions can be drawn: Growth: GDP growth in the Hungarian economy between 2010 and 2014 was greater than the EU average, but it was not really remarkable in comparison with some of the other Central European countries. In 2014, however, the GDP growth was the third fastest in the EU (only Ireland and Luxembourg were able to deliver better results). The coming years are burdened with several risk factors, but if no major external shock occurs, a 2-3 percent annual GDP growth can be realistically maintained. Financial stability: In this respect, the country has been very successful. Not only was the growth of government debt curtailed, but the trend was reversed after In 2010, general government debt was 80.9 percent, in 2014 only 76.9 percent. This result is remarkable given the increasing trend in a number of countries (See Table 2) Similarly, the government has been successful in balancing the government budget and since 2012, the annual government deficit has been below 3 percent of GDP a major achievement in macroeconomic stabilisation. Labour market: The number of employed rose to an all-time high and unemployment rate dropped to an all-time low in (European Commission 2015b) Along with substantial gains in productivity, in particular in manufacturing, average monthly earnings before taxes were up by 16.2 percent on Also, the real adjusted gross disposable income of households per capita improved between 2010 and It does not mean that Hungarian wages are high in international comparison. On the contrary, one of the crucial challenges in the coming years will be related to the much-needed expansion of incomes. We may expect that growing purchasing power provides excellent opportunities for foreign firms to export to or invest in Hungary in an effort to satisfy growing domestic demand. 3 See the current global debate on the role of state in the economy and the design of the best economic policy. Neoliberal mainstream theory lost its credibility in recent years, but no new, effective, economic theoretical framework has yet crystallised.

33 32 Investments: The Hungarian property market began recovering in 2014, but continues to remain an undervalued sector in comparison to the Western European ones. The same is true for the very liquid Hungarian stock market, which lists most strategically important Hungarian firms. Due to investments in manufacturing, Hungarian industry is highly competitive. Skilled labour, modern infrastructure (the network of motorways is fully built up) and the central location in Central Europe have been very strong incentives for foreign investors to show interest in the Hungarian economy. The deregulation of the labour market and the joint efforts of higher education and industry, the new tax schemes and tax reductions also invite investors in the Hungarian economy. The European Union plays an important role in financing public investment projects in Hungary, and this will continue over the next five years. As a result, the country s infrastructural network is expected to further improve in the coming years along with the overall competitiveness. Table 3 Economic indicators (percent of GDP) Real GDP growth (percent) Investments General government gross debt annual data General government deficit/surplus Source: Eurostat Bibliography Euler Hermes Economic Research 2015: The Recovery has Gained Momentum. Country Report Hungary. European Commission 2015a: Macroeconomic Imbalances. Country Report Hungary Occasional Papers 220 June occasional_paper/2015/pdf/ocp220_en.pdf European Commission, 2015b: Country Report Hungary 2015 Including an In-Depth Review on the Prevention and Correction on Macroeconomic Balances. europe2020/pdf/csr2015/cr2015_hungary_en.pdf

34 33 GKI 2015: Forecast of GKI for Ministry for National Economy 2015: Dynamic employment growth continues in Hungary, the employment rate of those aged hits 69.5 percent. ministry-for-national-economy/hungarian-outlook/dynamic-employment-growthcontinues-in-hungary-the-employment-rate-of-those-aged hits-69-5-percent OECD 2015: Hungary Economic forecast summary. June

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36 II. DOING BUSINESS

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38 Doing Business in Hungary and Indonesia An Intercultural Approach Judit Hidasi Business is business world over and in every country, but the way it is conducted differs widely. Too often, business men assume that their partners have the same business values as themselves but that is wrong. One of the biggest challenges of doing business in a foreign country is learning how to operate in a different cultural setting. For those who wish to take advantage of the rapid economic growth taking place in Indonesia and for professionals who wish to develop successful partnerships with Indonesians, this brief overview of the differences between Hungarian and Indonesian business cultures, values and expectations might be of some assistance. Vica versa, Indonesians and Indonesian professionals who wish to develop relations with Hungarian partners may they be engaged in education, science or industry will hopefully find this comparison of cultural values and characteristics veru useful in minimizing misunderstandings, miscommunication or clashes, which would otherwise result in loss of time, energy and relations. The imperative of understanding cultural traits The largest archipelago and the fourth most populous nation (254 million) in the world, Indonesia is comprised of approximately 17,000 islands. It has the world s largest Muslim population (over 200 million). It is an extremely diverse country where ethnic groups are united through the national language, Bahasa Indonesia (Jones et al.1977), and the country s motto, Unity in Diversity. Business opportunities continue to expand as Indonesia has made major progress in recent years to transform itself into a major player in the world s markets. Doing business successfully in Indonesia, however, requires a comprehensive understanding of Indonesia s unique fundamental beliefs and values that affect daily life and business practices. Indonesia has a rapidly changing cultural landscape. Behaviours are dependent upon age, exposure to global ideas, region of origin as well as education and socio-economic background.

39 38 The Indonesian business culture is diverse and heterogeneous depending upon region, industry, and the ownership structure of the company, but business is always personal, motivations are strongly tied to personal factors unlike in western European countries. The axiom for successful business in Indonesia is never write when you can call and never call when you can visit. When compared, Hungary is in between, but is still relatively more relation-oriented than transaction-oriented. Hungary s (10 million inhabitants) location on the crossroads of East and West, North and South positions the country in the virtual focus of cultural influences. For many centuries, Hungarians were forced to cope with an ever-changing environment (geographically, politically and culturally); hence ingenuity and resourcefulness were imperative to survival. This ability to adjust to contingencies may be summed up, somewhat tongue-in-cheek, in the colloquial adage: A Hungarian is one who enters the revolving door after you and emerges in front of you. This saying also implies that the ability to circumvent the rules might be used for bad as well as good things. Hungarians traditionally are good fighters but less successful strategists. In communication and in business relations this attitude might sometimes lead to surprisingly frank utterances that may lack tactfulness. In educational and academic settings, students do not fear direct and outspoken confrontation with their superiors once they are convinced they are right. Pride prevents Hungarians from compromising they look with equal disdain to servility or to adulation. In response, they expect respect from others: respect for the honest display of their feelings and respect for what they have achieved. In historical perspective, this attitude has not proved very helpful in attaining their goals, either in diplomacy or in business. Hungarians often exhibit an ambivalent relationship toward their international partners. They are apprehensive of failure, averse to openly saying no, but condescension irritates them to no end. Understanding cultural dimensions for business purposes What are our business partners likely to be if they are Indonesians (Hirata 2009) and what are they likely to be if they are Hungarians (Bart 1999)? For comparison we turn to the 6-dimension model of the Dutch intercultural management scholar Geert Hofstede (Hofstede et al. 2010). He identified 6 cultural dimensions that mainly affect the way people behave and act in business situations.

40 39 Indonesia in comparison with Hungary Power Distance Individualism Masculinity Uncertainty Avoidance Long Term Orientation Indulgence Indonesia Hungary Source: Power distance Power distance index shows the extent to which the less powerful members of organisations expect and accept that power is distributed unequally. Indonesia scores high in this dimension (78) meaning that people accept dependence on hierarchy and acknowledge unequal rights between power holders and non-power holders. Power is centralized and managers count on the obedience of their team members. Employees or inferiors expect to be told what to do and when. An example from the educational domain: Three students from Indonesia have come to their Hungarian professor to request that he spend more time lecturing and less on class discussion. They prefer to be told what to know and how to understand things instead of being involved in speculating on certain issues. Indonesians respect hierarchical relationships (status, position, and age) that are also part of the business culture, where managers often take on a patriarchal role. They are the decision makers and their orders are never directly questioned. Superiors are

41 40 often called bapak or ibu, the equivalent of father or mother, sir or madam. Titles tell Indonesians where to place their partner relative to themselves, which is vital in a culture where status is important. The partner s title should be readily understood and unambiguously displayed on their business card. In comparison, Hungary scores relatively low on this dimension (46). People prefer to act independently; hierarchy is used for convenience only. Management facilitate and empower, the ideal is the coaching leader. Employees expect to be consulted. Control is disliked and attitude towards managers is informal: they might more often than not be addressed on first name basis. Communication is participative. Individualism This dimension refers to the degree of interdependence a society maintains among its members. Depending on whether people s self-image is defined in terms of I or We, cultures can be classified as individualist or collectivist. With a low score of 14, Indonesia is a collectivist society. This means there is a high preference for a strongly defined social framework in which individuals are expected to conform to the ideals of the society and the in-groups to which they belong. Indonesians see themselves as members of a group first and as individuals second. Hungarians in contrast (score of 80) see themselves as individuals first and as members of a group (family, organization, nation, etc.) second. Employees in Indonesia are rewarded in groups; promotions will draw heavily on seniority, relationships, and experience, not necessarily performance and achievement. Decision making may be a slow process, as many individuals across the organization will need to be consulted. However, once consensus is reached, implementation may be surprisingly rapid. In Hungary, as in most individualist societies, the employer/employee relationship relies on a contract, based on mutual advantage: hiring and promotion decisions are supposed to be decided on merit only. Indonesians are careful to show respect and to avoid situations that would embarrass their partner as this would cause the person in question to lose face, which would also bring shame to the individual s group (family, department, etc.). This concept in Indonesian business culture is called malu, literally translated as embarrassment or shyness, but in business context it also means loss of face or social shame. The idea of loss of face is external; it is how one believes others perceive him or her. The idea of social shame is internal; it is how one perceives himself or herself. It is the inner

42 41 feeling that one is ashamed of one s actions and that one really did do something wrong to let the group down. In Hungarian violation of the business culture causes guilt and a loss of self-esteem, but does not lead to loss of face in front of others. Hence, individuals tend to act less carefully to protect face. This might manifest itself in less tactfulness and a more direct communication style. Masculinity High score countries (masculine) on this dimension are driven by competition, achievement and success, with success being defined as being the best in a given field a value system that starts in school and continues throughout employment. The motivation of wanting to be the best is driving people forward. Hungary with its sore of 88 highly stands out amongst most European countries. Low score countries (feminine) on this dimension care for others and for the quality of life. For them the motivation to like what you do is the main driving force. Indonesia with its score (46) on this dimension can be considered low masculine, particularly when compared to some other Asian countries like Japan, China and India. Indonesia displays traits of masculine societies but to a lesser degree. In Indonesia status and visible symbols of success are important but it is not always material gain that is the motivating force, but rather the position that a person may be holding. This gengsi (outward appearance) is part of status and dignity so important to Indonesians. Uncertainty avoidance This dimension has to do with the way a society deals with the concept of the unknown : can we try to control the future or shall we just let it take shape? This index shows the extent to which members of a culture feel threatened by ambiguous or unknown situations and have created beliefs and institutions in an effort to avoid them. Indonesia scores 48 on this dimension and thus has a low preference for avoiding uncertainty. This means that maintaining workplace and harmony in a relationship is very important in Indonesia, and no one wishes to be the transmitter of bad or negative news or feedback. Subordinates go out of their way to present only good news to the manager, if possible. This practice is referred to as keeping father happy. Bad news is generally conveyed in private, often by a trusted advisor. If a manager tells a subordinate that something must

43 42 be done by a certain time, the subordinate does not tell the manager that the timing is impossible since doing so would be disrespectful. Instead, the subordinate agrees and trusts that the manager will understand that other matters prevented him/ her from achieving the agreed-upon deadline. Hungary scores 82 on this dimension and thus has a strong preference for avoiding uncertainty. There is an emotional need for rules even if the rules oftentimes seem not to work and people feel safe and secure only if they know the rules. Bitter historical experiences have taught Hungarians to stay alert so as not to be cheated or let down by outer forces. Contracts and written agreements are considered to be of increasing importance in the globalizing business environment. Another aspect of this dimension can be seen in conflict resolution. Direct communication as a method of conflict resolution is often seen in Indonesia as threatening and disrespectful. Instead, a well-established method of conflict resolution is to take the safer route of using a third party intermediary, which permits the exchange of views without loss of face as well as to maintain the appearance of harmony in the workplace. Long-term orientation This dimension describes how a society cherishes its own past while dealing with the challenges of the present and the future. Normative societies, which score low on this dimension, prefer to maintain tested traditions and norms while view societal change with suspicion. Cultures with high scores, on the other hand, take a more pragmatic approach: they encourage thrift and put efforts in education as a way to invest for the future. Indonesia s relatively high score of 62 indicates that it has a pragmatic culture. In societies with a pragmatic orientation, people believe that reality depends very much on situation, context and time (high context culture Falkné 2008: ). They show an ability to easily adapt traditions to altered conditions, a strong propensity to save and invest, and perseverance in achieving results. This is a dimension that Hungary is nearest to Indonesia in terms of scores (58), which is largely attributable to having strong inherent agricultural traditions in mentality, which presupposes the ability to think ahead.

44 43 Indulgence This dimension is defined as the extent to which people try to control their desires and impulses based on the way they have been socialized. Relatively weak control is called indulgence and relatively strong control is called restraint. The low score of 38 in this dimension indicates that Indonesia has a culture of restraint. In contrast to indulgent societies, restrained societies do not put much emphasis on leisure time and control the gratification of their desires. People of this orientation have the perception that their actions are restrained by social norms and feel that indulging themselves is somewhat wrong. Hungary scores even lower (31), but this refers only to the official domain where people do, in fact, behave. In private, Hungarians give up their restraints: they love to eat, sing and dance, and pride themselves on the quality of their food and drinks. Cultural tourism and wellness tourism owing to the high number of excellent spas attract many visitors from abroad, who enjoy themselves and also enjoy what Hungary has to offer. Visitors appreciate the somewhat easy-going lifestyle in Hungary; the number of foreigners purchasing apartments and country-cottages is growing rapidly. Hungarians often tend to spend more than what they can afford. They may be tempted to spend a fortune on a wedding or on holiday travel. This mentality is best summed up in a quip by a Hungarian comic genius of the 20 th century: I wish I had the standard of life I affect. To sum up: when comparing Indonesia and Hungary along the 6 cultural dimensions, scores in 2 (Long-Term Orientation and Indulgence) domains are similar, but in the other 4, they differ considerably. The greatest divide is evident on the individualist-collectivist scale, followed closely by the masculinity, power distance and uncertainty avoidance dimensions. These are the areas that partners might experience the greatest differences in values, approaches and judgements. These differences might also affect decision-making, negotiation-style, and management practices. Therefore being aware of them, understanding their nature, and expecting them may be of great value in successful interactions. Conclusions Much could be and should be said about non-verbal communication as well. Indonesia is a high context culture where the tone of voice, body language, eye contact, and

45 44 facial expressions can be just as important as spoken words. To some extent this is true for Hungary as well, but Hungarians might have difficulty in hiding their emotions. Indonesians strive to maintain an outer appearance of calm control regardless of what they may be feeling. They use an indirect communication style that includes figurative forms of speech, gestures, and other forms of body language. They prefer a quiet and subdued tone of voice and shun loud laughter. Hungarians are more direct both in their use of language and behaviour. Indonesians will do almost anything to avoid confrontation and risk the loss of face. To this aim and out of politeness, they may tell you what they think you want to hear. If you offend them, they will mask their feelings and maintain a veil of civility. Hungarians on the other hand might not intend to be that indirect they might appear even uncontrolled in the eyes of Indonesians. For Hungarians frank and honest communication is more vital than politeness or harmony. Due to volume limitations this short overview could not provide an in-depth investigation of Indonesian or Hungarian cultures and business approaches in order to ensure the development of successful working relationships with Indonesian/ Hungarian counterparts. We still assume that awareness raising to intercultural sensitivity might be a first and necessary step in making partnerships and working relations smoother between our cultures. Bibliography Bart, I. (ed.) 1999: Hungary and the Hungarians (The keywords). Corvina Kiadó, Budapest Falkné Bánó, K. 2008: Cultural aspects of doing business in Hungary. In: Kultúraközi Kommunikáció, Perfekt, Budapest, pp Hirata, A. 2009: Laskar Pelangi. Bentang Pustaka, Jakarta Johns, J. Sokes, R. 1977: Bahasa Indonesia. Yogjakarta Richmond, Y. 1995: From Da to Yes. Understanding the East Europeans. Intercultural Press, Yarmouth Main.

46 45 Civil Society and NGOs: A Possible Field for Joint Actions and Program between Indonesia and Hungary Cungki Kusdarjito The role of NGOs in Indonesia is very important since not all aspects of development can be managed solely by the government. Although many NGOs are already doing lots of work with positive impacts, some people in Indonesia are still looking at NGOs with suspicion. NGOs have been perceived as opportunist agents of foreign countries and nihilists, which reject all development programs from the government, rather than as agents of change. This might be due to the fact that Indonesia has a long history of functioning under oppressive and later corrupt regimes. Therefore, some NGOs, mostly small ones, are still positioning themselves in opposition even if their action may hurt other people in the current situation, which is more democratic. The newly elected Government under President Joko Widodo uses a different model of development, which emphasizes rural and maritime development. Basically, there are nine priority programs called Nawacita comprising the following key aims: state presence, clean and effective government; development from the periphery; law enforcement; reducing corruption; improving the quality of life; increasing people s productivity and competitiveness in international markets; strengthening economic sovereignty in the strategic sector of domestic economy; national character building; advancing pluralism and national restoration especially in regions that had been subjected to sectarian conflict. These new development paradigms definitely require NGO involvement since the number of villages in Indonesia is greater than 72,000 some with special privileges located across more than 13,000 islands and widely varying in infrastructure facilities. Introduction Since the 1970s, NGOs have played an important role in development because of their capacities and innovative capabilities in handling grass-root organizations using participatory and people centered approaches. In addition, NGOs were deemed capable of penetrating un- or underdeveloped areas, particularly in the poorest regions. Yet, until the end of the 70s, the role of NGOs had been limited to emergency work, short term relief and service provision (Banks and Hulme 2012: 5). Since 1980, NGOs are

47 46 seen to have a key role in developing countries. Donor countries perceive NGOs as agents that can address the inefficiency and ineffectiveness of governments in developing countries. Therefore, considerable aid is flowing into NGOs to enhance capacity including participatory, empowerment, gender and people centered approaches. The decade of the 1990s was the golden era of NGOs in many countries. Nevertheless, the limitation of NGOs in promoting long-term structural changes had demonstrated that NGOs were merely a part of civil society organization (CSO) within the good governance agenda (Banks Hulme 2012: 5). By now, the idea that NGOs would help reorient and advance development efforts has faded into oblivion. In the media, NGOs no longer make the headlines the way they used to and NGOs are being increasingly criticized as ineffectual do-gooders, over professionalized, large business corporations or self-serving interest groups (Lewis Kanji 2009:21). NGOs are no longer seen as the magic bullet or panacea for all the problems relating to development. Donor countries are more focused on governance and institutional stability rather than on the development of CSOs. Consequently, following the diminishing role of NGOs, the political space for CSOs and NGOs has become ever so narrow. The concept of the three generations of NGO development strategies was proposed by Korten (1987: ). According to the notion, the first generation focused on delivering welfare service to the poor. Therefore, the focus of the first generation of NGOs was on meeting immediate needs of individuals and families. This kind of assistance was short term and contributed little to the improvement of opportunities for the poor. The second generation of NGOs focused on small-scale, self-reliant local developments such as preventive healthcare, farming practices, local infrastructure and other community development. Sometimes, the work conducted by second generation NGOs ran parallel with government programs; the difference being that NGOs would often work in fields the government has no access to. Third generation NGOs focus on sustainable system-development. Their work is more comprehensive and involve all public and private institutions but their engagement on village level is certainly less intense. The success of third generation NGOs depends on their networks and their abilities to collaborate with other institutions in identifying systems such as the healthcare system, agricultural marketing system, and the credit system, etc. In the future, it is expected that NGO funding will not only stem from western countries but also from other developing countries and even from domestic or regional funds. They may differ from western sources and may deliberately seek to dilute the hegemony of western aid. It is possible that they will help establish a new model of

48 47 NGOs replacing the current one, which is based on the western example. This will also pave the way for cooperation between CSOs and NGOs in Hungary and in Indonesia for the fourth generation of NGOs. Problems of NGOs in Indonesia and Hungary In some respect, Indonesia and Hungary share similar histories in that both countries have experienced long periods of centralized government control. In the mid-90s, both countries underwent a major political and economic shift followed by a series of crises. The role of civil society has since gained momentum. Although Indonesia and Hungary have made tremendous progress in terms of democratization, Act-alliance (2011: 42) pointed out that CSOs and NGOs in Indonesia still experience limitations in implementing their programs. The stigma that NGOs are mere puppets of the donor countries is a major issue faced by Indonesian NGOs (Act-alliance 2011:45). To exacerbate the situation, the implementation of pluralism sometimes faces resistance from leaders of religious organizations. For example, in Aceh, Sumatera, the concept of pluralism and gender issues is considered a western value and is strongly opposed in Aceh (Act-alliance 2011: 45). Moreover, the involvement of NGOs that have affiliations with donor countries has at times been seen as a way of implementing neoliberalism in Indonesia. In addition, some small NGOs still behave as nihilists when they continue to insist that all government development programs should be rejected. This may be explained by Indonesia s long history of oppressive regimes followed by corrupt ones. Therefore, certain, mainly small NGOs, are still positioning themselves in opposition of the incumbent government. Another problem faced by many NGOs in Indonesia is related to limitations of funding. This is due to the dependence on funding from external donor countries as domestic funds are hard to access. Act-alliance (2011: 43) also highlighted that one of the difficulties of obtaining domestic funding is linked to the absence of a tradition of philanthropy in Indonesia. Moreover, no tax deduction may be claimed for donations made by middle income earners. However, this claim may only be partially true as many local NGOs that are engaged in welfare activities receive sufficient funds from domestic sources. The work of NGOs funded by western countries sometimes do not fit in with the existing system, either socially or culturally, which in turn affects the political and economic systems leading to social tension. The western world considers civil society as an independent force opposing the government, whereas most social analysts in Indonesia view civil society as a balancing power which does not necessarily seek

49 48 confrontation with the government. Civil society is considered complementary to the government therefore the use of a less confrontational term, i.e. Self-organizing Civil Society (Lembaga Swadaya Masyarakat) is preferred to the term NGO (Act-alliance 2011: 43). It is also in line with Indonesia s ideology of deliberation when making group decisions and placing social justice before personal interest. The aforementioned problems arise due to the differences in the social circumstances prevalent in the donor and the recipient countries. Some NGOs that are affiliated with the donor countries tend to focus on the individual placing human rights issues in the limelight more often than not. The work conducted by Kusdarjito (2008: 114) demonstrates that the application of individualism in a collectivist society characterized by bonding horizontal-social-capital leads to the formation of exclusive small groups, and to nihilism when applied in bridging horizontal-social-capital. This may be the case when the role of the state as vertical social capital is weak or neglected. This indicates that the application of individualism in a collectivist society can lead to rejection and, even worse, to social tension. Moreover, this study also indicated that democracy coupled with a strong state can ensure more solid foundations for development. Internationally, NGOs have also been subjected to criticism, the main criticism being that NGOs undermine the central role of governments in developing countries. NGOs shift the focus of development away from state institutions towards the private sector. Moreover, NGOs are also viewed as agents of neoliberalism as they support privatization whilst ignoring the role of government public service. The other criticism NGOs face today is that they place their own agendas and self-interests before the people they in theory should be supporting (Lewis Kanji 2009: 206). In Hungary, there have also been recent tensions between the government and international NGOs. NGO and civil society in Indonesia The role of civil society in Indonesia can be traced back to the beginning of the twentieth century. Budi Utomo is the first formally declared civil society established in May 20, 1908 in Batavia (now Jakarta) which focused on education and socio-cultural activities such as advancing education for native people, advancing agriculture and trade, engineering, industry and lastly, the revival of indigenous culture. Three years after the establishment of Budi Utomo, in 1911 Sarekat Dagang Islam (SDI, Islamic Trader Association) was established by H. Samanhoedi, a batik merchant in Solo with the aim of strengthening the members of SDI. On the initiative of H.O.S. Tjokroaminoto,

50 49 the name of Sarekat Dagang Islam was changed to Sarekat Islam (SI) with the aim of expanding membership to include others beside merchants. The aims of SI include the advancement of trade and the provision of assistance to members in the running and management of their businesses. In addition to economic objectives, SI also places emphasis on the desirability of a mutual assistance framework between members. It was these objectives that had swiftly turned the SI into the first successful mass organization in Indonesia. In November 18, 1912, Muhammadiyah was established by Kiai Haji Ahmad Dahlan in Yogyakarta. Muhammadiyah is a non-political organization engaged in religious, social, and educational activities. To achieve its goals, Muhammadiyah establishes schools based on the religion of Islam (from kindergarten to college); funds clinics, hospitals, orphanages, and mosques; and organizes religious activities. Muhammadiyah has also been paying attention to the education of women named Aisyiah, and scouts called Hizbul Wathon (HW). Today, Muhammadiyah has become the second largest civil society organization in Indonesia. Nadhatul Ulama (NU), the largest CSO in Indonesia with more than 40 million members, is a traditionalist Sunni Islam movement in Indonesia. The NU was established in January 31, 1926 in Surabaya as a response to the rise of Wahabism in Saudi Arabia and Islamic modernism in Indonesia. The NU also functions as a charitable body helping to fill many of the shortcomings of the Indonesian government in society funding schools and hospitals, and organizing communities into more coherent groups in order to reduce poverty. Civil society and NGOs: a possible field for joint action and program between Indonesia and Hungary The newly elected president has set up vision, mission and priority programs. The government s vision includes political sovereignty, economic independence and cultural dignity. Further to this, it has the mission of (i) building national security which can protect Indonesian territory and guard Indonesia s economy based on maritime natural resources, (ii) building society based on law and order, (iii) promoting an independent foreign policy unaffiliated to all blocks, countries or ideologies, (iv) improving the quality of life for Indonesian people, (v) increasing Indonesia s competitiveness, (vi) actualizing Indonesia as a maritime country and (vii) increasing people s dignity based on Indonesian culture. Besides, President Joko Widodo for his presidency proposed nine priority programs, known as Nawacita. (See page 45.) These new development paradigms definitely require NGO involvement since the number of villages in Indonesia is greater than 72,000 some with special privileges

51 50 located across more than 13,000 islands and widely varying in infrastructure facilities. Hence, in order to boost development in rural, peripheral and frontier areas, the central government allocates large amounts of developmental funds directly to villages in the first place and helps build infrastructure such as roads and broadband internet. In line with government programs, many NGOs in Indonesia are working in close cooperation with the central or local governments, universities and CSOs, other NGOs and also with the parliament. Since not every village is ready to manage such substantial funds, it is feared that misallocation may occur. Therefore, NGOs focus mainly on providing training in legal drafting on village level; improving data quality so that data on the village level can be integrated with data on national level and that excluded groups may be identified sooner; promoting green knowledge for sustainable development and planning on village level. Further, these efforts can make a difference at the micro level by, for example, establishing micro enterprises and funding, improving market chanelling, family empowerment, improving farmer income, improving public health, etc. Hence, this new paradigm provides an opportunity for CSOs and NGOs in Indonesia and Hungary to build a broader cooperation. It is also possible that cooperation between the two countries may lead to the creation of a new model of development, in which the role of NGOs in development might take up a new shape in the restructuring of institutions and provision of infrastructure (electricity, telecommunication, health facilities), software development based on open source for village information system and conflict resolution. Conclusion At present, the role of NGOs and CSOs in Indonesia and Hungary differ from that prevelant in the 90s. With wider scale and more democratic society, NGOs and CSOs should collaborate with multiple parties including governments, other CSOs, business institutions, and universities. The model of development initiated by the Indonesian Government has opened the door for collaboration between CSOs (NGOs) in Hungary and Indonesia.

52 51 Bibliography Act-alliance 2011: Changing Political Spaces of Civil Society Organisations. Geneva Banks, N. Hulme, D. 2012: The Role of NGOs and Civil Society in Development and Poverty Reduction. Brooks World Poverty Institute Working Paper June. pp Korten, D. C. 1987: Third Generation NGO Strategies: A Key to People-centered Development. World Development. Vol. 15 Supplement, London, Pergamon Journals Ltd, pp Kusdarjito, C. 2008: Membangun Masyarakat yang Memiliki Mutual Trust melalui Model Kepeminpinan berbasis Budaya Indonesia. The Ary Suta Center Series on Strategic Management. Vol 1, Jakarta, The Ary Suta Center, July, pp Lewis, D. Kanji, N. 2009: Non-Governmental Organization and Development. London, Routledge

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54 III. SPECIAL ISSUES

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