The Cohesion Reef: Hungary’s Struggle to Catch Up

This article is part of our special report EUYou – Europe is you.

Hungary’s integration into the European Union (EU) has brought significant progress in its socio-economic development, largely through the EU Cohesion Policy. However, persistent and deep-seated regional inequalities highlight the policy’s challenges and limitations, as reflected in the EU’s 9th Cohesion Report and recent analyses from the International Monetary Fund (IMF). While Hungary’s average income level has approached EU standards, stark disparities remain between the country’s regions, particularly in employment, education, and income.

Since the early 2000s, the EU has sought to build a more inclusive society by focusing on employment growth, skills development, and poverty reduction. These priorities have translated into measurable improvements across Hungary, especially in labour market resilience during crises, employment rates, and access to education. For instance, Hungary’s employment rate for people aged 20-64 reached 80% in 2022, with several regions seeing an increase of over 15 percentage points. However, substantial regional variations remain, with the southern and northeastern areas lagging behind.

Poverty risk remains disproportionately high in some Hungarian regions. In 2022, the AROPE (at risk of poverty or social exclusion) rate for Hungary was lower than in previous years, yet still alarmingly high in areas like the Southern Transdanubia, Eastern, and Northern Hungary regions, where 22-26% of residents face poverty risk. Meanwhile, urban areas, notably Budapest, have attracted a concentration of higher-income, highly educated individuals, further exacerbating the urban-rural divide.

Nationwide, the employment gap between genders was around 11% in 2022, with women benefiting from better childcare, flexible work arrangements, and higher educational attainment. This progress, however, has been unevenly distributed, with underdeveloped regions seeing gender employment gaps of up to 16%.

An even more divided country

Hungary’s overall GDP per capita has risen significantly, from 66% of the EU average in 2010 to 76% in 2022, partly due to foreign direct investment (FDI), especially in high-tech industries like electric vehicle manufacturing and battery production. Yet, this national growth masks severe regional disparities. Hungary’s capital, Budapest, has outpaced other regions, achieving levels of GDP per capita far exceeding those of southern and eastern areas, where growth has stagnated. According to the IMF, such inequalities, if unaddressed, could widen further as green and digital transitions advance.

Regions with higher initial productivity and workforce participation, such as Pest and Győr-Moson-Sopron, have seen faster economic growth than underdeveloped areas like Somogy and Borsod-Abaúj-Zemplén. These findings underscore a persistent challenge: regions starting from a disadvantaged position struggle to catch up economically, suggesting structural barriers that inhibit convergence.

A strong focus of the EU’s Cohesion Policy has been on improving education and workforce skills, which are crucial for long-term productivity and economic resilience. In Budapest, the share of adults aged 25-34 with tertiary qualifications reached around 58% in 2022, which stands in stark contrast to the national average of about 30%. Across many rural regions in Hungary, the proportion of individuals with higher education is considerably lower, ranging between 20% and 25%. This urban-rural divide in educational attainment places Hungary among EU countries with the most pronounced regional educational disparities, with only a few other nations, like Romania and the Czech Republic, showing comparable differences between their capital and rural areas.

EU-wide, about 42% of people aged 25-34 held a tertiary degree in 2022, making Hungary's rural regions trail behind this target by 10 to 15 percentage points. Such discrepancies underscore the need for targeted support in educational infrastructure and accessibility in Hungary’s rural areas to close the gap, foster equal opportunities, and bolster economic resilience across all regions.

This educational divide is not unique to Hungary; however, the national average falls short of the EU's target, which aims for 45% of young adults to hold a tertiary degree. Increasing this figure is critical for the EU’s green and digital transitions, as a skilled workforce will be essential to support industries undergoing technological advancements.

Digital and green transitions are double-edged swords

The digital and green transitions present both opportunities and risks for Hungary. On the one hand, digitalization offers pathways for economic growth. However, Hungary’s preparedness for artificial intelligence (AI) integration is one of the lowest in the EU, especially in underdeveloped regions. The IMF has highlighted that Hungary’s AI-readiness index hovers around 0.50, with a 45% employment rate in high-exposure occupations, underscoring the need for significant improvement in digital skills and infrastructure, particularly outside Budapest.

In terms of green transition, the IMF warns that a lack of targeted policies could deepen regional inequalities. Wealthier regions like Central Hungary have a higher share of “green jobs,” while less affluent areas may face challenges in adapting to carbon-neutral industries. The IMF estimates that Budapest could see productivity growth of up to 1.5% from AI and green investments, while other regions, such as the Northern and Southern Great Plains, might experience only modest growth. Targeted investments in digital and green infrastructure could help mitigate these inequalities, making the transition more inclusive.

Bad governance may harm growth

Good governance and institutional quality play a vital role in reducing regional disparities. The IMF’s research indicates that governance quality—characterized by low corruption, well-functioning public institutions, and impartial public services—is statistically significant in promoting regional income convergence. These findings align with broader EU cohesion goals, which advocate for robust governance at all levels to foster a favourable business environment and stimulate private investment.

In Hungary, regional disparities in governance quality contribute to the unequal economic landscape. For instance, Budapest benefits from high institutional quality and low levels of perceived corruption, whereas rural areas struggle with governance challenges. By improving governance structures and implementing anti-corruption measures, Hungary can create a more balanced economic environment that supports private sector growth and reduces income inequality across regions.

Balancing Progress and Equality

Hungary’s case highlights the need for targeted policy interventions to address structural disparities. Investments in digital infrastructure and education, particularly in lagging regions, are essential for equipping the workforce with the skills needed in the evolving job market. Likewise, fostering private-sector research and development (R&D) could accelerate regional income convergence by creating high-value jobs.

The EU and IMF findings emphasize that improving cohesion in Hungary will require a nuanced approach to economic development. The EU is already considering reforms to its Cohesion Policy framework to focus more on performance than regional allocation alone, a shift expected to begin around 2028. This evolution reflects a growing recognition that while aggregate national statistics may show progress, sub-national disparities often tell a different story. For Hungary, a combination of well-designed national and EU-level policies can help close these gaps, creating a more inclusive and resilient economic landscape for the future.