At its interest rate decision meeting on 27 August 2024, the Magyar Nemzeti Bank left the policy interest rate unchanged. At the post-decision briefing and during questions from journalists, the question of why household demand is not picking up despite impressive real wage growth was raised. Barnabás Virág, vice-governor of the MNB, said that presently there are only estimates about the extent of the flow of demand abroad, but the MNB has statistics on card usage, and from these they can see how much of the purchases are made abroad. He says that this import consumption is one of the reasons why domestic demand is sluggish. This factor plays an important role in understanding the economy of respective countries. This post therefore looks at the issue of import consumption (and dependence) focusing on Hungary, but in a V4 context.
The consumption of imported goods and services has either a neutral or a clearly negative effect on gross domestic product (GDP), as it does not change GDP in the short term, or even reduces it. (Consumption increases, but imports reduce GDP). This essentially means that income produced in Hungary is consumed abroad and income flows out of the country. The volume can reach a level where we can talk about dependency. Import dependency exists when a country or organisation relies heavily on imports of goods, services or resources from other countries rather than producing them domestically.
The figure can be referenced here: https://infogram.com/engimports-hungary-1h984wvzjq5wd2p?live
Such exposure has a number of disadvantages, the first of which is economic vulnerability. These include the loss of domestic industrial capacity, exposure to exchange rate fluctuations and the emergence of trade imbalances. Besides economic vulnerability/vulnerabilities, there are also (geo)political and supply chain risks. Furthermore, the negative impacts on domestic innovation skills cannot be ignored, which are often coupled with a loss of expertise and skills. Import dependency can also be negative from a social point of view, as it can lead to job losses in domestic industries and high income inequalities. While imports can provide access to goods and services that are not available domestically, and in several cases can be more cost-effective, a high dependence on imports poses a number of risks and challenges that need to be managed carefully.
However, exposure to imports can also have benefits, chief among which is a spectacular increase in the supply of goods and services, with consumers benefiting the most. Buying from abroad can also be cost-effective, as production takes place at lower production costs and through economies of scale. It is also important to stress that better raw materials and access to technology can also promote the development of domestic industries. An economy that is open and buys from other countries can strengthen its international (economic) links and participate in global value chains. Imports can stabilize the supply available in the country and balance demand and the quantity of goods/services offered for sale. This can also play a role in controlling inflation. Imports also increase competition, with consumers benefiting the most from better quality and lower prices. A degree of dependence on imports can also reduce dependence on domestic resources, which is important when domestic production is costly or environmentally damaging. Finally, it should also be mentioned that imports can support domestic economic growth by exploiting export capacity and creating jobs.
Basically, all economies are import-dependent in some way. In the case of Hungary, the ratio of imports to GDP, which is also a kind of openness indicator, reached roughly 76% in 2023. The indicator is not outstanding in a V4 comparison: although it exceeds the Polish value of 51.7%, it is significantly lower than the highest Slovak indicator (90.1%). For these countries, it may be worth looking beyond the snapshot data of the last year to look at trends over the last decades:
The figure can be referenced here: https://public.flourish.studio/visualisation/20333146/
At the start of the millennium, the Hungarian economy had the highest import-to-GDP ratio, at around 70%. At the time, the Polish figure was less than half that. Subsequently, thanks largely to reform measures by the government led by Mikuláš Dzurinda, Slovakia was able to catch up relatively quickly and has been the most import-dependent country among the V4 countries for many years. The differences have basically stiffened and have not changed significantly in two decades.
From the above figure, at least two more conclusions can be drawn about import consumption and dependence. In the crises of 2009 and 2020, the import dependency ratio declined, mainly due to falling import consumption and deferred investment (but also due to falling economic output.) Thus, import performance typically responds to crises by falling. In contrast, the energy crisis of 2022 saw a sudden surge in all countries in the V4 region. It is striking that Slovakia’s import/GDP ratio crept towards 100%, a well-known phenomenon in some countries of the world economy. The domestic rate was close to 95%, but the initial differences between countries remained. With the easing of the energy crisis, the indicators have roughly returned to their trend lines of increasing integration of the V4 region in the world economy.
Szabolcs Pásztor is an associate professor at the Department of Economics and International Economics of the University of Public Service (Budapest, Hungary). Previously he worked at the Central Bank of Hungary and as an advisor for the Hungarian Banking Association. He joined the Oeconomus Economic Research Foundation in 2020. He has taught at various universities in Australia, China, Belgium, France, Czechia, Italy, Russia, Turkey, Republic of South Africa, Kenya, Ethiopia and other countries. His main research interests are related to the issues of economic and financial transformation in developing countries.
