Hungary Pilots Special Economic Zones and a New Strategy to Weaken Orban’s Opposition

Nervous for a Samsung investment, the Orban administration used the COVID-19 pandemic to pass a decree and strip an opposition-led town of power and taxes. 

A half-hour drive away from Budapest in the direction of Slovakia is the small town of Göd. A nostalgic retreat of the workers’ movement before 1989, the town — once known mostly for Red Meteor, a training complex with a decent Communist-era soccer club — is now the site of a USD 1.15 billion investment plan by Samsung to build one of the largest electric vehicle battery plants in Europe. The project was to bring a windfall of tax income to the municipality, which elected a new anti-government mayor in the fall. That changed a month ago, when the Orban government passed a decree to designate Göd as Hungary’s first Special Economic Zone, removing the plant from the town’s jurisdiction. Now, Samsung will pay commercial taxes directly to the county, which is pro-government. 

At a glance:

• In a bid to become an accumulator superpower in Europe, Hungary pursued several Asian companies to build electric car battery plants in the country.
• In 2019, Samsung made a USD 1.15 billion investment to expand battery production in Göd, where it recently closed a TV manufacturing facility. 
• The Orban administration worked with Göd’s previous pro-government mayor to facilitate Samsung’s expansion by fast-tracking building permits, cutting out a forest, and purchasing land for the company. 
• The government also contributed USD 119 million to Samsung’s investment, which is currently under investigation by the European Commission’s antitrust authority.
• Local activists were exasperated with government disregard for the environmental implications of the Samsung expansion. 
• Community relations flared up in the aftermath of the 2019 municipal elections when locals found an ally in a new anti-government mayor.
• Nervous for the high-value Samsung investment, the government used the pandemic to pass a decree and strip the town of decision making power and tax collection rights. A new bill paves the way for many similar initiatives to follow.

Here is how it happened.

Two weeks after the Orban government was enabled to rule by decree, the government bypassed parliament to introduce Special Economic Zones in Hungary, allegedly to mitigate the risk of massive job loss and to stimulate the economy. The decree names three conditions: there is a development project of overriding national importance in the area; the development project’s total budget exceeds HUF 100 billion (USD 320 million); and it impacts the economy of the county in a significant way (left undefined). 

The first Special Economic Zone was introduced in Göd on the grounds that Samsung’s expansion was a cornerstone of economic recovery in the aftermath of the crisis, as the Minister of Foreign Affairs argued on his Facebook. The decree puts the Fidesz-led county in charge and discusses the jurisdiction of different parties, but no tax incentives or new regulations are mentioned with regards to what actually happens in the Special Economic Zone. The implication seems to be that Samsung’s revenues are safer in the hands of county officials in a recession. 

Special Economic Zones: a popular, but often ineffective government strategy to attract foreign investment to a country. 

Special Economic Zones are designated areas within a country where local laws and regulations do not apply, but special policies are put in place to favor large-scale investment in the form of eased regulations or tax exemptions. First introduced in Ireland in 1959, the idea gained global prominence in the 1980s after China’s initiative near Hong Kong took off and helped catalyze the liberalization of China. Special Economic Zones are popular with governments because they can be introduced with little paperwork (see the Hungarian decree), and they are popular with voters because they are associated with the promise of job growth. 

Today, there are over 5,000 Special Economic Zones around the world, and countries are opening them with increasing vigor. Three out of four countries have one, a remarkable stat given that according to the UN, they often fail to meet expectations, They often fail to attract or retain foreign investors, or generate enough jobs to offset a nation’s upfront costs. According to The Economist, they can also promote gift giving and other corrupt practices, and distort a country’s competitive landscape.

The costs of Special Economic Zones are highly localized. Local residents may be pressured to sell property to make room for the new investor, and local infrastructure may become overburdened by the water and electricity of large plants. There is a high risk that the giant foreign investor will crowd out local businesses. In the case of the accumulator factory, there are also environmental costs like air and water pollution, and deforestation. National governments need to consciously offset these costs by regulating newcomers and compensating locals where possible. To do this, local residents need to have negotiating power.

Instead of negotiating on behalf of locals, the Orban administration took the side of one specific company.

Hungary used the pandemic to create a Special Economic Zone just for Samsung. Why?

Years before the pandemic, the government had made a high stakes bet on Samsung’s expansion in the country, as part of an ambitious plan to become an electric car battery superpower in Europe. Samsung, which had closed a small TV part manufacturing facility in Hungary in 2014, was looking to build one of Europe’s largest electric vehicle battery manufacturing facilities. 

The global demand for electric batteries has skyrocketed in recent years after China announced a big push to subsidize electric cars in its 13th five-year plan. In 2019, all major manufacturers were looking to expand production, but many ran into trouble as communities are often unwilling to host a plant in their own backyard. Battery production is water intensive and poses significant risks to the environment, 

According to the World Economic Forum, producing an electric vehicle costs about twice as much energy as producing a regular combustion engine car, specifically because of battery production. The environmental harm is offset over the course of the car’s lifetime — but not necessarily in the country where it was produced. (Tesla, which is building a plant in the outskirts of Berlin, was recently criticized for cutting down trees, displacing an endangered species, and overwhelming public water supply in the city).

Asian battery manufacturers were particularly keen to move into Europe, and the Hungarian government saw an opportunity for the country to become a global leader in electric car battery production. The Orban government made deal after deal with South Korean and Japanese manufacturers to bring them to the country. Since 2017, eight different firms made investments in battery production in Hungary, including SK Innovation, Shinheung Sec, Inzi Controls, and GS Yuasa. The USD 1.15 billion Samsung investment would exceed them all by an order of magnitude. 

While German regulators stalled Tesla’s planning permits for environmental concerns, Hungary threw the full weight of the government behind making these companies happy. The government worked with pro-government local authorities to help Samsung buy up farmland at below-market rates, and made room for the expansion with the deforestation of 25 hectares of protected areas (the municipal government was financially compensated). In 2019, the Orban administration also added an estimated USD 119 million to aid Samsung’s expansion, a move currently investigated by EU antitrust regulators for concerns that it goes against state aid rules to support a single company in the European Union.

The COVID-19 crisis struck when locals were already exasperated with Samsung.

By early 2020, local activists were not happy about the Samsung project for a number of reasons. After the controversies surrounding local displacement and deforestation, Samsung planned a tenfold increase in their storage of hazardous materials, asking to store 666 tons of hazardous materials in a town hall meeting. The move was met by such outrage locally that the company stalled the process, but it also launched into the construction of a new plant with higher levels of hazardous materials from the start. Based on the company’s own planning documents, the plant’s daily water consumption would total 30 thousand metric tons a day, over three times as much as the Tesla plant in Berlin. In fact, the plant required so much water that Göd, a town located right along the Danube, was forced to pipe in water from another town.

On top of these environmental concerns, Göd’s infrastructure was struggling to keep up with rapid population growth. According to Samsung’s own town hall presentation, the factory currently employs 3,200 people, only 140 of whom are locals. The town’s population of 20,000 increased 15 percent in two years, adding significant pressure on its infrastructure. (Samsung plans to have over 6,500 employees by the time their expansion is complete, half of whom would be guest workers from neighboring countries.)

 A new mayor in Göd made the Orban administration nervous. 

With the municipal elections of October 2019, local government appeared as the Orban government’s weak point. The fall elections were a significant and unexpected electoral blow to Fidesz. A fractured opposition struck deals to stand behind a single candidate all over the country, which won them 11 of 23 major cities, including Budapest. Göd also elected an opposition candidate for mayor after 13 years of steady Fidesz rule, which could jeopardize the Samsung project, widely protested by local residents and investigated by EU antitrust regulators. 

Government fears were not unfounded: the new mayor sued Hungary’s disaster management authority for permitting the plant to move forward with construction of a highly dangerous plant without consulting the public. Meanwhile, Göd-ért, a local environmentalist group, launched a successful letter-writing campaign to bombard disaster prevention with a thousand letters with questions on the projected environmental impact of the plant.Then the pandemic struck, presenting the Orban government with an opportunity to take control of the situation. On April 17, vaguely justified by the crisis, the administration adopted a decree introducing Special Economic Zones in Hungary, in order to prevent job loss at a time when “massive job loss is at stake.” The test case: Göd.

Instead of Special Economic Zones, the decree piloted a government tactic to strip opposition-led towns of tax revenue and executive powers. 

On April 17, Göd’s residents learned that despite the strain on their resources and their infrastructure, they will not see revenue from Samsung’s commercial taxes. Instead, Samsung would pay taxes to the Fidesz-led county. In their mayor’s estimation, the town would lose as much as 20 percent of its projected revenue this year. More importantly, Samsung could charge forward with its expansion. Where Tesla’s Gigafactory in Berlin spans 300 hectares, Samsung could potentially expand to 410 hectares, and without consulting locals on contentious issues such as storage of hazardous materials, water consumption, and air and noise pollution. In fact, according to the new decree, authorities are not required to notify locals about their decisions on Samsung’s future plans.

The Orban administration drastically lowered the bar for future power grabs over local government. 
Göd was to be one of a series of Special Economic Zones. As mentioned earlier, one of the criteria for designating a special economic zone was that the project had to be valued at over 100 billion HUF (300 million USD). In a legislative plot twist that was very easy to miss, a Fidesz MP subsequently reduced that number by 20 times in a bill about future Special Economic Zones. The newly reduced 15 million USD  threshold allows the national government to arrogate control from municipalities much more easily. (For reference, a larger movie production in Hungary would meet that bar — far from a high scale investment that generates thousands of jobs).  At the same time, the administration confirmed that a nuclear power plant in the town of pro-government Paks, a similar-sized town, would not be in one of the new zones.

The likeliest reason for shifting decision making authority to counties is that every single county in Hungary is pro government. Due to the Hungarian electoral system, cities with more than 10,000 inhabitants do not vote for county representatives, and Fidesz is much more popular in rural areas. Counties also don’t have any authority at all, and currently, no infrastructure to make decisions about a billion dollar investment project. This will certainly change, because as the new entity in charge of Special Economic Zones, counties will be entitled to 5 percent of commercial taxes in the area.

By the time this makes it to Strasbourg, the plant will have been long built.

Zsuzsa Bodnár, President, Göd-ÉRT, Environmental and Urban Protection Association for Göd

In the month since the decree, the county has overtaken jurisdiction of an estimated 20 percent of the Göd’s territory. The mayor complained to the Constitutional Court, and an independent opposition MP complained to the ombudsman on the grounds that the decree denies the municipal government’s right to adequate resources govern responsibly, and that the plant might deny locals the right to a healthy environment. 

“At this point all we can hope for is that Samsung cares about its reputation,” said Zsuzsa Bodnár, president of the local environmental group Göd-ÉRT, Environmental and Urban Protection Association for Göd. Bodnár is a history teacher and former literature critic who took up environmental activism because she felt helpless dealing with pro-government authorities. For the past few years, she has been poring over purposefully convoluted impact studies and government regulation, producing one investigative piece after the other until she got the Hungarian media’s attention. 

She doesn’t expect the town to win the lawsuit against disaster management, and in the time the case will make it to the European Court of Human Rights in Strasbourg, the factory will have been built, its environmental impact cemented for decades. She believes the only positive scenario at this point is that for some reason, Samsung will care enough about its image to negotiate with locals and maybe move hazardous materials a few miles away.

If this was a Special Economic Zone, Hungary could become a textbook example of Special Economic Zones that don’t work. 

Special Economic Zones often never return all the upfront investment that countries pour into them. The Hungarian government has already spent over 119 million USD helping Samsung establish its presence in the country; the EU is already investigating Hungary for violating antitrust legislation. Even Samsung admits that at least half of the jobs at the plant will come from guest workers from neighboring countries — ironic, considering the government’s ongoing anti-migrant campaign. And while China’s push for more electric cars was once a sure bet, the country has been cutting industry subsidies in the COVID-19 crisis. In the meantime, environmental costs will be here to stay. 

The aspiration to become a battery superpower is also a risky long term strategy, because it can lead to a world in which Hungary is “exporting” scarce environmental resources and the health of its citizens, while importing unskilled labor from neighboring countries. Environmental studies suggest that the costs associated with electric car production are offset by how much less CO2 the cars burn over the long run. But if all the batteries are produced in Hungary, and the emissions are reduced outside the country, Hungary might still come out of this strategy a long term loser. Currently, Hungary ranks as one of the lowest among EU countries in use of electric cars, although the government has introduced significant subsidies to encourage a switch to more sustainable transportation. 

It is evident that Special Economic Zones have nothing to do with the pandemic, and moving a company from one jurisdiction to another hardly qualifies as a Special Economic Zone. Special Economic Zones are really broadly designed, but they do imply support or incentives to encourage productivity. The Hungarian Zone does none of that. The only thing that will change for Samsung is the recipient’s bank account on the checks they write. The move also seems useless as a means to preserve or create jobs, since the decree doesn’t include recovery measures, and Samsung struggles to fill positions locally.

If the Orban government is serious about making this investment pay off, they need to work with the community on such issues as disaster prevention, environmental protection, and economic planning to integrate the factory into the local economy. It’s not too late. So far, the administration has just used the pandemic to rationalize bypassing public debate while depriving local governments of power and revenue. And with the newly reduced 15 million USD threshold easing the way, we might expect many more similar initiatives to come. 

Contributed by Lili Török.
Illustration by István Gábor Takács.