Black Market in Hungary Thrives Due to Rising Poverty and Crime

IN Hungary, poverty and crime are up, real incomes are down, and the economy seems stuck in a rut. But one market is thriving: the black market.

As living standards tumble, more people buy goods on that illegal but less expensive market.

``The Hungarian standard of living is going down. If masses of people can buy goods cheaper on the black market, they won't go on strike, make demonstrations, or vote for fascists or communists,'' says Gyorgyi Kocsis, an editor of the prestigious economic weekly in Hungary, Heti Vilaggazdasag. ``All Hungarian governments, including the old communist government and the recent conservative government, have very ambivalent attitudes toward the black [market] economy, because it pacifies people. That includes the [current governing] Socialists, who simply want to be popular.''

Two-thirds of the population has seen its income shrink in the four years since the communists surrendered power, says Rudolf Andorka, rector of the Budapest University of Economics. Today, 30 percent lives below the poverty line.

Many of the poor manage by taking advantage of what research economist Andras Vertes calls the ``hidden economy'' - goods and services not declared to the tax authorities or the statistical office. A study by Mr. Vertes indicates this sector is about 30 percent of Hungary's total output - relatively equal to the hidden economy of Poland, but bigger than the Czech Republic's.

Forty percent of the 500,000 registered unemployed in Hungary work ``off the book'' for part-time wages that barely keep the wolf from the door. Another segment is the black marketeers. They assemble in open-air markets, terminals, and subway stations to hawk wares that could be smuggled, counterfeit, or stolen.

The government has effectively used a tax-stamp program to nearly eliminate selling cigarettes and coffee on the street. (In 1991, 37 percent of the coffee market was dominated by a mafia-organized black market.) But it seems to turn a blind eye to the thriving counterfeit clothing business. Tamas Kolosi, managing director of the Hungarian retail association, says the government will go to bat for those industries that yield abundant tax revenues (such as cigarettes). When it comes to clothing, government officials blandly remark that black markets benefit the poor.

A group of multinationals with household-name trademarks has organized an association to fight counterfeiting. Hardest hit among them is Levi Strauss & Co. based in San Francisco, whose officials estimate that 40 percent of jeans sold as Levis in Hungary are fakes, imported from China and Turkey. Other members include Adidas, Nike Inc., Reebok International Ltd., FILA , and Wilson Sporting Goods Company.

Patent lawyer Laszlo Berczes says a big part of the problem is that criminal provisions in the law are not very strict. Only if a counterfeiter sells a ``significant'' quantity of goods, is he or she subject to arrest and a maximum of three years in prison. However, complains Mr. Berczes, who represents Levi Strauss, ``significant'' is not defined. ``The police sometimes use 1 million forints ($9.34) as a measure.'' If counterfeit products are worth less, the police drop the investigation.

So far, Berczes has not succeeded in getting any counterfeiters prosecuted. Meanwhile, phony Levi 501s sell for $10 to $28 in open-air markets but cost about $78 in boutiques.

Rampant tax evasion is another problem in Hungary. Mr. Vertes believes it is worse than in nearly all of Europe. Some of the most skillful practitioners of tax evasion are not the poor. Ms. Kocsis of Heti Vilaggazdasag tells of Ivan Kelemen, the majority owner of Kordax, a trading company. It expects total revenues this year to exceed 20 billion forints ($181.8 million), making it the second biggest Hungarian-owned company based on earnings. Kordax imports crude oil from Ukraine and ships it to Slovakia where a refining company, Slovaft, turns it into gasoline and diesel oil and ships it back. Mr. Kelemen pays no customs duty. He found a loophole that enables him to classify the refined fuel as a ``service'' rather than a product. Imported services are not taxed.

Last summer, the Hungarian tax authority investigated Kelemen and demanded he pay 5 billion forints ($45.4 million) in back taxes. But in October, the new Socialist finance minister fired the head of the tax authority. Neither man will tell reporters why. Kocsis asked Kelemen about his earlier campaign donations to the Socialist and Free Democratic Parties. ``Sometimes,'' he answered, ``you must seek licenses and the government can make it very bureaucratic. A donation smooths the way.''