Managing the Economic TransitionPosted by John on Mar 17, 2014 in Blog, Eastern Europe, Featured, Uncategorized | 2 comments
For most countries in East-Central Europe, capitalism didn’t arrive overnight in 1989 or 1990. Even in the more controlled environments like Romania, people could get a taste of capitalism by buying or trading on the black market. Hungary, on the other hand, was far ahead of its neighbors in this respect. It had been experimenting with a mixed economy since 1968 and the New Economic Mechanism. Following a push for recentralization in the early 1970s, another round of liberalization opened up the economy after 1979. By the early 1980s, the government was even permitting small-scale private enterprise in the retail sector and for services like taxis.
By 1988, with Ceausescu squeezing the Romanian economy to pay back its foreign debt and Albania as isolated as ever, Hungary was beginning to train its first Western-style managers. Zsuzsanna Ranki was a pivotal person behind the training of a new managerial elite. She’d started out in foreign trade marketing and eventually acquired a PhD in economics from a Hungarian university. And in 1983, she was the first Hungarian to receive an MBA — at Indiana University.
After receiving her MBA in the United States, she returned to Budapest and worked with the Hungarian businessman Sandor Demjan, U.S. ambassador to Hungary Mark Palmer, and Hungarian-born financier George Soros to set up the first Western-style management training school in the region, the International Management Center. This all happened before the fall of the Berlin Wall and the change of political system in Hungary. When I talked with Ranki in 1990, the program was no longer unique in its approach. By that time, there were already over 100 management training programs in Hungary alone. The International Management Center eventually became the business school for the Central European University in Budapest.
Today, Ranki is at the International Business School, where she heads up the business network center, the career office, and alumni relations. She has watched Hungary, once at the head of the region in terms of economic change, slip from its position as frontrunner.
“When I was traveling more, during my days at the executive search company, I thought that Hungary was special and an ideal location for companies,” she told me in an interview at her office last May. “For many years, we were the leading country in attracting foreign direct investment. But soon, I started to think that Poland was a big competitor — it’s a much bigger country. Many companies went there to set up manufacturing centers. Then I saw Slovaks introducing more preferential tax rates, and the cost of operations is more privileged there. So, slowly, you feel that the ground is moving out from under your feet because other markets are picking up and can offer preferential advantages for international investors. It’s very sad to see Hungary losing its ‘leading position’ in the region and how FDI is not coming in so much any more.”
The current political situation in Hungary doesn’t seem to be helping in this regard. “There are tremendous disputes about how the country is operating,” Ranki reports. “It’s not so good to hear these harsh criticisms. While I myself am fortunately not directly influenced by these changes — at the moment at least, although I have many friends who are — it’s not too good to feel that you are losing your attractiveness as a country. Before we were talking about Hungary as the frontrunner and the pioneer and now we keep getting phone calls from international friends asking, ‘So, what is happening in your country?’”
Do you remember where you were and what you were thinking when you heard about the fall of the Berlin Wall?
Two things from that time caused me some serious thinking and excitement — one was the Berlin Wall and the other was Ceausescu. I’m not much involved in politics, probably for self-protection. I’m the type of person who doesn’t like to be involved in things where you can’t have an effect. I see many bad sides of politics and politicians, and I don’t like wheeling and dealing. I like to be direct. And I don’t see that in politics. So, I try to keep a little distance from political events.
But the Berlin Wall was certainly something significant – “significant” is an understatement. It was an incredible event from our perspective. At that time, we probably didn’t know what effect it would have on our lives. Retrospectively we value this event more than when it really happened.
And why Ceausescu?
I don’t know why. They televised his trial. I was extremely scared and shocked. I had very mixed feelings. Ceausescu symbolized for me everything bad that a statesman can be. That was an event when I said, “Oh, wow, now something good will happen — we’re going in a better direction.”
Tell me how you first became involved in business and management.
The answer is easy. I am an economist, with a PhD from here in Budapest. I got an MBA at Indiana University at Bloomington. At that time, I was the first Hungarian ever to get an MBA.
When was that?
In 1983. When I studied in the United States, I enjoyed my business studies so much that I was determined to do something with this in Hungary. So I came home. I didn’t stay in America. Fortunately, that was the year when Sandor Demjan, at that time and even now a leading entrepreneur and businessman in Hungary, started to set up a special in-house management program. At that time he was heading up the Skala department stores, a retail company something like Sears. This management program was designed despite and against the typical management and selection process at the time, which was primarily based on political associations. They would consider skills, personality, and fit, but the main basis for promotion was affiliation with the Party. Mr. Demjan decided to go against that with a Western-style management training program. He would publicly advertise this program and recruit 20-some young people whom he would then train. Then they would become mid-level and later on top-level managers of his company.
When he set that up, he had no idea what Western-style management training was. He didn’t have adequate training for it. Somehow he heard about me. Since I was the only one at that time who knew anything about Western-style management training, he contacted me and recruited me for the job. For two years, we managed this unique Skala management training program. George Soros was financing part of it, mostly the computers and technical facilities.
Parallel with this, the U.S. Ambassador Mark Palmer, who was then the very innovative and courageous ambassador here in Hungary, was determined to help the country. A World Bank study was prepared about Hungary’s economic issues. The study highlighted a strong need for Western-style managers, and this was where the U.S. government could help Hungary. So Mark Palmer decided to set up a business school. It was primarily his idea. He heard about the Skala management program and about me. He contacted me and said, “Let’s set up a Harvard business school in Budapest.” This tireless ambassador set up an office within the embassy, and USAID sent some consultants to work with me. So, the U.S. government was very deeply involved in supporting this project. George Soros was one of the the main financiers while Demjan put up the money for the building and employed me for the project. For the next year and a half, we were basically designing a business school, which became the International Management Center and which is now the Central European University business school. This is how I got into it: through my business education and my determination to bring this kind of education to Hungary.
When you were studying economics at university, did you have any idea that you might be interested in doing a business degree?
No. I had no idea. When I graduated, I specialized in foreign trade marketing. At that time, I thought I might be interested in business, in trading and commercial activities. Actually, my first job was at a foreign trading company, working as a salesperson for one of the leading Hungarian trading company. I was responsible for selling Hungarian-made X-ray equipment to French African countries. It was a very challenging job: Chad, Togo, Benin, Mali. They had no money even to pay for the custom fees to let the Red Cross supplies into their countries. And I was trying to sell $10,000 X-ray equipment! You can imagine what kind of work that was. Then I went to the Foreign Trade Bank, and I was working there before I went to the United States to do business studies. The idea for the MBA came up because my father was appointed to set up the Hungarian chair at Indiana University, and this was an opportunity to go with my parents to the United States. It was natural that I’d be interested in business. That’s how it came about.
In 1983, when you were doing the MBA, did you ever think that your training would be difficult to apply in Hungary?
I wasn’t looking at the content of what I was studying, but rather it was the method and the approach that excited me. The method was very case-oriented, interactive, and focused on very practical knowledge. I was not thinking that I would teach capitalist business or economics to the people. Rather, what excited me was the fact that finally I was studying something I thought I could do something with. It was real life, real cases. The approach was not memorizing pages of material but rather solution-oriented and creative. I didn’t think that the textbooks should be brought into the country. But I was excited about the approach of business education compared to the way that university education was done at that time in Hungary.
What did you imagine the situation would be in Hungary ten years later? Did you expect that Hungary would evolve in the way that China has evolved: a one-party state with a capitalist economic order? Or did you expect the political and economic transformation of the country?
Hungarian economists since 1968 were frontrunners in economics among the so-called Communist countries. I didn’t have doubts that something would happen, and we would move toward changes because we were already in a special place in Eastern Europe. We were innovative, more courageous. We already showed that we wanted to have changes. Probably, thinking back now, I just wanted to be part of it somehow, with certain constraints of course such as not wanting to be involved in politics.
When you first set up the management training within the Skala company and later when you set up the International Management Center, did you encounter any political challenges?
Yes. I did. We had some problems. When you are so much in the limelight of what’s happening, when people are looking at what you are doing, when you claim you are bringing in something Western and that you are representing “a vision of change” – that was our motto and that’s what we represented — when you want to change something like that, some people are happy and ready to go ahead with you and some people question your motives and your means. There were many attacks: that we were bringing in capitalism, that we were bringing in the CIA, that the faculty members should be checked more thoroughly. I responded that everything was publicly available about the school and the faculty members and our motives and what we want to achieve were totally transparent. We did represent a vision of change, and we were preparing our graduates as a tool for this change. Yes, there were many people who were not so convinced that this was the right direction. But that’s natural. In life, if you want to change something, you have skeptics and you have supporters. In this case, it was a double twist: they were not only skeptical but they wanted to make a political issue of it. So it was more sensitive.
Were their challenges largely private, or did it also spill over into the public realm?
I didn’t feel it in public. It was more individual. I was contacted a few times by the Hungarian Home Office. But there was no public and open attack on the school. Don’t forget: Mark Palmer did whatever he could, both among Hungarian politicians and also among the international community of ambassadors. And Sandor Demjan was always very skillful in dealing with politicians. So, officially, we had high-level support.
When we talked in 1990, you mentioned that there was a proliferation of management schools and business training centers. I was surprised. I thought that you were the one and only. What was it like to operate in such a situation in which all these schools were popping up, some legitimate, some illegitimate.
This is natural. This was a business undertaking. For instance, if you set up a language school where there is a demand, others will set up their own language school. In our case, there was tremendous international interest and not only local interest. Locally, we didn’t really have a significant competitor. We had an affiliation with an American university, we gave an American degree, and we had tremendous international support. The concept of business training should have been developed, and that’s what we did. We had many visitors from neighboring countries where they also started management training programs parallel to ours. I didn’t have any problem with that. If you set up the Harvard business school in Hungary, which caters to a small elite of students, then you should also have other similar schools with wider access to the public.
Your affiliation was with Harvard?
No, actually, it was with Pittsburgh. The “Harvard” was actually a joke. We visited Harvard with Mark Palmer. But at that time, Harvard was not interested in affiliating with us. We just said that we were the Harvard of programs. And there was an article in Der Spiegel that called us “the Harvard on the Danube.” That was the title of the article.
Did you see an increase in the number of students?
I was there for two years and then I switched to another project of George Soros. During the two years I was there, there was an increase in numbers. But at that time we ran only one program, and we kept it at around 20 students each year.
Now it’s huge. It became the CEU business school. I don’t know when it merged exactly. Now they have many many programs, not just the one MBA program. It’s very different now — it’s a real business school. When I set it up and managed it, we foresaw that it would be a business school. But at that time it was just in the baby stage.
What did you do after you left?
For two years, I managed the East-West management institute, a $1 million foundation set up by George Soros to support management training — not classroom training but in-house training. It was a novel approach. I managed the Budapest office but was also responsible for going around Central Europe. We had someone working on this in the Soros Foundation offices in New York and throughout the region, so I often went there as well. The concept was to get as many international companies as possible to host East European mid-level managers for an in-house training of a few weeks. At that time these international companies rarely let managers from other companies visit their operations much less train them for a few weeks. Several hundred mid-level managers basically shadowed the managers at these international companies. After two years I was approached by an international executive search company, and I set up their offices here in Budapest.
A headhunting firm?
Yes. But we called it executive search or management consulting. This was, at the time, one of the top executive search companies. I managed the office for six or seven years. It was also very exciting. Then I joined the International Business School where I head up the business network center, the career office, and alumni relations.
When you think back to 1989-90, with the establishment of the business school and the state of business here in Hungary today, would you say that you reached 95 percent of what you imagined the business climate would be — in terms of transparency, efficiency, best practices — or 50 percent or only 5 percent?
I think we achieved a pretty good result. Whatever problems we have — transparency problems, issues of corruption, problems with discrimination — can happen in any country. The question is the extent and how you deal with this. We have come a long, long way. We have achieved what we wanted to. We have seen incredible changes, a transformation of this country. The economic thinking and approach to economic issues or social issues have changed significantly. But there are still places to grow and develop, especially concerning transparency and corruption and best practices.
Besides the business school and the International Management Center, I was the founder of the Hungarian Business Leaders Forum, which is still associated with the Prince of Wales International Business leaders forum. The main message of this forum is to enhance and support corporate social responsibility and awareness of and sensitivity toward different stakeholders. That program started when I was at the management center, and we hosted the inauguration event with the Prince of Wales in Budapest. With this and similar initiatives, society is growing and learning and changing. You have to be patient and also evaluate that at certain times and situations priorities might change.
Are there any success stories that jump out for you?
It’s probably not fair to highlight one example over the others. It depends on your priorities. If someone was interested in setting up his own business and achieved extremely good results as an entrepreneur, how do you compare that to someone who joined a large multinational company and is now the CEO? They are both success stories.
I know someone who is a CEO of a large pharmaceutical company in Hungary. Another person is managing a group of private retail and financial advisory companies. A third is a representative of the IMF and also an ambassador for Hungary. And unfortunately there are also examples of people who didn’t excel as much as the others. There is an alumni association for the IMC. They meet regularly and they stick together and they are very proud of the fact that they were among the first who went through the school and graduated. This is basically what I wanted. I wanted to bring the MBA to Hungary, and the business school is here. It is changing people’s lives, and that is great. What they do with it, that’s beyond me. That’s their responsibility.
When you think back to the transition and the early years in Hungary between 1988 and 1992 and the transformation of the economy, is there anything that you think should have been done differently to yield better results today?
That’s a good question, and I haven’t thought about it. It’s a difficult question. I look at it more from the human side than from the economic side, not the economic measures so much as the maturity of the people. I’m sure that someone more involved in the economic issue could give you a different answer. But I fear that the changes we achieved were not solidly based, primarily because we were impatient. We always want to do something different. We don’t have the political and economic maturity that allows us to grow into the issues and changes. Every four years, we have to elect a new party. There is no trust or patience among the people, no understanding that certain processes need time to achieve the results you expect from them.
When you say “maturity,” are you thinking about the people making the policies or the population as a whole?
Both. And one comes from the other. When you have confidence in your politicians and the examples they set, then you become confident as well. Then you can respect and rely on whatever they do. If their actions are not what you think they should be, then you are not so confident. There is an interaction between the two things.
How do you think Hungary compares economically in terms of the region, for instance, to Poland or to Bulgaria?
It’s difficult to make a comparison because I don’t live there. I live here. And I don’t travel so much any more. When I was traveling more, during my days at the executive search company, I thought that Hungary was special and an ideal location for companies. For many years, we were the leading country in attracting foreign direct investment. But soon, I started to think that Poland was a big competitor — it’s a much bigger country. Many companies went there to set up manufacturing centers. Then I saw Slovaks introducing more preferential tax rates, and the cost of operations is more privileged there. So, slowly, you feel that the ground is moving out from under your feet because other markets are picking up and can offer preferential advantages for international investors. It’s very sad to see Hungary losing its “leading position” in the region and how FDI is not coming in so much any more.
There are tremendous disputes about how the country is operating. It’s not so good to hear these harsh criticisms. While I myself am fortunately not directly influenced by these changes — at the moment at least, although I have many friends who are — it’s not too good to feel that you are losing your attractiveness as a country. Before we were talking about Hungary as the frontrunner and the pioneer and now we keep getting phone calls from international friends asking, “So, what is happening in your country?”
You already said that you like to stay away from politics. But you’ve been hearing international criticism of Hungarian government conduct. There have even been proposals that the EU should stop transfer payments to Hungary. First of all, do you think there is truth to these criticisms? And should the government respond in any way to improve the business climate and ensure that the EU maintains the flow of structural funds?
I am hopeful that being part of the EU will help. I am dreading the minute when this country decides to leave the EU — I hope that never happens. Although I understand that there are many economic limitations, I also hope that EU membership represents a kind of control over the many things that could happen in this country. Many of the allegations and disputes are unfortunately true. I also don’t doubt that there are many economic measures being introduced that are needed. I’m more concerned about how our politicians are doing it. I fear that there is a kind of two-facedness in our politicians. They say they want to stay in the EU, and they pretend that everything is fine in this country. On the other hand, they are encouraging a kind of nationalism, which is frightening. This is the main problem.
When you start hearing that we don’t need the EU, that we don’t need so many Westerners here – this is totally against what I have represented for 20 years. I’m not saying that we should implement everything the Western countries advocate. We have to understand what is important and adapt that to our environment. We don’t have to take for granted everything the so-called West represents. But if you are a politician or you’re heading a country or you’re one of the government ministers, then you have to make rational judgments and understand how you should implement these judgments.
The problem is that we are not saying the same thing here as we are abroad. What our politicians are presenting now is a more chauvinistic and nationalistic approach. Every day I am perplexed by this. It’s very sad. I’m not directly involved, fortunately, but I see the effects on people around me. People are getting more and more disillusioned. They’re losing their jobs. For me there is no right answer for it. I don’t understand why this should happen. Companies are going bankrupt. The only reason some banks are not being closed is that their money is tied up in real estate, or else they would pack up and leave. I would never have thought that this would happen after 25 years.
Why is this happening? Is it the result of the decisions made here or the international financial crisis?
I think it’s both. Obviously we can’t separate ourselves from international financial and economic issues. Hungary was always an open market. But it’s much more than that. It’s the lack of transparency, the lack of consistent and reliable economic policy, the incredibly high corruption.
I think I’m in a protected environment. I’m working for a private business school. We have an accreditation, and while the new educational law is idiotic, hopefully we will keep our Hungarian accreditation.
When you think back to 1990 and your view of the world, your weltanschauung, have you rethought any of your assumptions from those days?
On the one hand, yes, because I was 25 years younger. I owe a lot to my education at business school in America. That changed my life in many senses. The school itself — what I learned, how I learned it, what they taught me, the spirit of the business school and the incredibly competitive environment — was instrumental in my life. Since then, my priorities have changed. At that time, I was in my own way a fighter. I wanted to see changes. I was going around to meetings and events all the time and representing this vision and this totally novel and exciting and challenging project that I was doing. At that time, I was going with the wave. I was a fighter, but I was a fighter in my own environment. I was never a public figure. I never wanted to become a public figure in any other sense than in my own work and my own profession.
Then I sat back and said, “I did what I wanted. I’m not sorry that I came back from America. I had a mission and I’ve fulfilled it.” The only way I changed my way of life now is that I’m not so much of a fighter any more. I’m more concerned with the peace of my environment, that things should be in order. I want to find a proper balance between work and private life. I don’t want to be a public figure any more. I want to find the right balance between my friends, my family, my workplace, my hobbies, and private life. I want to live peacefully in my own country, and this is exactly why it bothers me that things are not going in the way that I would describe as peaceful.
Do you think that the fact that things are not going peacefully in this country will provoke you into becoming a fighter again?
No. Surely not. I still continue my nonprofit activities although much much less. If anyone contacts me and needs my help, I try to contribute. But I don’t want to be a fighter now. Now I’m even more frustrated. I wasn’t frustrated 25 years ago. That’s the key word: frustrated. Twenty-five years ago I felt that there was a need for change, but I didn’t feel frustrated. Now I feel frustrated, and I want to protect myself from this frustration. I certainly don’t want to leave the country. But every year I go back to America for a month. It’s great: I enjoy being there. But my friends and family are here. Everything ties me to this country. And I just hope that we will be able to make changes. But I am not going to be a fighter for that.
The last three questions are quantitative. When you look back to 1989 and everything that has changed or not changed in Hungary from then until now, how would you evaluate that on a scale of 1 to 10, with 1 most dissatisfied and 10 most satisfied?
If you had asked me a few years ago, I would have said 10. But since you ask me now, I would say 7.
Same period of time, same scale; your own personal life?
Looking into the near future and evaluating the prospects for Hungary over the next two or three years, how would your rate those prospects on a scale of 1 to 10, with 1 being most pessimistic and 10 most optimistic?
I’m an optimist by birth. So, just because I’m an optimist, I will say 5.5.
Budapest, May7, 2013
On the outskirts of Budapest, in the industrial districts, a turn-of-the-century estate houses the first and so far the largest management training institute in Eastern Europe. The Saccellary Chateau, appropriated by the Communists and turned into a hospital, became two years ago an exceptionally well-funded school, the brainchild of then-U.S. ambassador Mark Palmer. Zsuzsanna Ranki explained to me the various services the Center offers.
The Center was set up in 1988 as a joint venture between three Hungarian firms (the Hungarian Credit Bank, the Hungarian Chamber of Economics, the Szenzor Management Consulting Company) and three foreign partners (Soros Foundation, Milan Chamber of Commerce, San Paolo Bank of Torino). The purpose was to “transfer business know-how to Eastern Europe.” The members of the Advisory Board are impressive: Aganbegyan (USSR), Berend and Nyers (Hungary), Lauder and Moody (U.S.). Money has come in from governments (Canada, Netherlands, England, and the United States) as well as from private people and foundations (Rockefellers Brothers: $250,000 off the bat; Ford: $100,000 for the library). USIA has helped out with scholarships.
It offers management training at three levels: senior management, middle management, and short courses of 3-5 days. Many of the lecturers come from abroad. One foreign and one Hungarian lecturer are paired for all classes and they develop the materials together, The executive level program, meanwhile, has seen 1,000 people pass through in one-and-a-half years. The Center also does consulting. Brought in by a company, the consultants diagnose the problems and then prepare a corrective program. Thus far, 15 large state-run companies have taken advantage of these services.
The most extensive program is for middle management: the “Young Manager Program.” It is 10 months long, provides more than ½ of an MBA (in an arrangement with the University of Pittsburgh). All students in this last year, the first year, were given scholarships, should they want them, to finish their MBAs at Pitt. 28 students graduated this past year. The price of the program is quite prohibitive: 750,000 forints ($12,000). Most students are sponsored by companies, though some enterprising ones pay out-of-pocket. Most of the participants have been Hungarian, but this September there will also be one American, a German, and several Romanians. The most popular courses deal with finance and accounting.
Since the Center is unique in the region, are students from other countries eager to attend? “Other countries are not so exited,” Ranki replied. “They want to have their own schools.” Was there any opposition to the Center among Communist party members in the Hungarian government? None, she reported. U.S. Ambassador Palmer handled the public relations. I asked her what she thought about the present wave of economic reform. “I actually don’t see any economic reform yet. There has been nothing significant in the last months except price increases.” What would she suggest if the government came to her asking for a “diagnostic.”? “Fortunately,” she said, “they don’t ask me.” The government has to deal with its budget deficit and its loss-making enterprises. There would probably have to be another price increase, but wages would have to be compensated. She thought that privatization shouldn’t be viewed as either rapid or gradual but controlled or not controlled.
Have the courses changed because of the accelerated political and economic reform in the country? “We do exactly the same thing as before. A year ago, we taught exactly the same things as now.” What has changed however is that a year ago, the Center was unique. “Now everyone talks about market-oriented principles and systems. We lost the novelty of all this.” There are roughly 400,000 managers in the country (4 percent of the population) and the Center only works with a small fraction of this number. It never aimed at “mass production” but in training an elite. Now, however, there are over 100 management training programs in Hungary.