Digitalization can become the next growth engine for Central and Eastern Europe - McKinsey writes in a newly published report, highlighting Hungary’s potential role in this process.

According to the company’s findings, Hungary’s digitalization could be the next driver of sustained growth: its potential economic and developmental benefits can reach up to 9 billion in GDP by 2025. This, however, only applies if Hungary chooses what the report refers to as an “aspirational” scenario.

One of the 10 Digital Challenger markets based in the region, Hungary has lower digitalization rates than the so-called Digital Frontrunners including Germany and Denmark. Being a Digital Challenger means that for the time being, Hungary boasts lower digitalization rates than Digital Frontrunners, however, the country also has strong foundations on which to accelerate digitalization.

Similarly to other Central and Eastern European (CEE) markets, Hungary faces its own set of challenges regarding digitalization, such as the “brain drain” affecting the region or the need to resell workforce. Along with other CEE markets, Hungary is currently losing momentum. On the other hand, Hungary is praised by McKinsey for its high level of market openness.

The report enlists various factors which all contribute to digitalization, such as the value of the ICT (information and communication technology) sector, the e-commerce market and the offline consumer spending on digital equipment.

Should Hungary continue its digitalization process according to a “business as usual scenario”, it is likely to maintain its historical growth rate for the digital economy, which is likely to expand by 3 million dollars, reaching 7,4% of the country’s GDP by 2025.

However, a more “aspirational scenario” would aim to close the gap to the Digital Frontrunners in terms of per capita intensity, leading to a market growth of digital economy by 9 billion dollars, contributing 11,2% to Hungary’s GDP by 2025.

This level of development would require Hungary to increase its ICT levels to match that of the Digital Frontrunners, achieved by digital transformation, particularly in sectors that are still lagging behind, such as manufacturing, retail trade and agriculture.

According to McKinsey’s estimation, automation by purchasing and installing digital equipment could lead to the automation of 49% of work activities, meaning 2 million workplaces in Hungary could be automated by 2030, using already existing technology in use today. The application of investment in the field could take place through automation, particularly by purchasing and installing digital equipment to substitute inefficient and overly manual processes and consequently decreasing workforce for the given activity.

Another application of investment is digital enhancement, where funds are used to purchase and install digital equipment to broaden the work of the current workforce. Both automation and digital enhancement will cause significant shifts in the Hungarian labor market by 2030 as acquiring new skills becomes inevitable.

McKinsey’s report continues by enlisting the key areas of importance for digital transformation. Firstly, the adoption of digital tools should be increased by Hungary’s small, medium and large enterprises. This can happen via businesses boosting their revenue growth capabilities as well as increasing their efficiency through better resource allocation.

Another key enabler is increasing the adoption of digital skills and take-up of internet services by Hungary’s general population. Increasing the online availability of products and services will be an important driver for the growth of e-commerce, in which at the moment the country lags behind Digital Frontrunners.

While Hungary already has a vibrant and emerging digital ecosystem, extra stimulation is needed to catch up with the digital frontrunners. According to the report, there has already been rapid growth in digital economy, with numerous success stories, categorized by the report as software development players, mobility champions, traditional incumbents adapting and selected digital superstars. Stimulating the ecosystem could also lead to positive ripple effects, for example by combating brain drain in the region.

Further key points include promoting e-government solutions in Hungary’s public sectors as well as improving the country’s physical digital infrastructure including mobile networks and maintaining internet availability through continuous improvements.

Improving PISA test results, which are currently 6-7% lower than in Digital Frontrunner countries, is likewise inevitable to maintain an ICT specialist pool in the labor force. Another important aim is improving and standardizing the country’s regulatory environment to ensure investment attractiveness. Lastly, the pace of digitalization should be accelerated by fostering entrepreneurship in Hungary to stimulate the start-up ecosystem. Currently, entrepreneurial activity in the country is significantly lower than in both the larger CEE region and Digital Frontrunner countries.

McKinsey then names further arguments for the benefit of collaboration between digital challengers: firstly, to build skills sets for the future, given that in Hungary, more can be done to stimulate lifelong learning by focusing on skills which will become more relevant in tomorrow’s labor market. This is especially important because the brain drain for well-educated members of the Hungarian population is almost two and the half times higher than the average for Digital Frontrunners.

The second important factor is to support the adaptation of technology. Even though Hungarian enterprises exhibit a relatively high adoption rate for digital tools, there are still gaps for both SMEs and large enterprises compared to their Digital Frontrunner peers. It’s likewise crucial to improve the ecosystem for start-ups. Currently, risk acceptance in Hungary is much lower than both the region and Digital Frontrunners, inhibiting entrepreneurship. The number of startups per million citizens in Hungary, at 37, is less than half the average of 58 for the CEE region – and far behind the Digital Frontrunner average of 215.

Also, it’s inevitable to strengthen cross-border digital collaboration to capture the full potential of digitization by cooperating closely with other CEE economies. Hungary, like other CEE markets, exhibits high levels of market openness and similar levels of digitization, besides cultural and historic commonalities. Hungary has developed different strengths related to the digital economy compared with other CEE markets and sharing best practices can accelerate digitization. Finally, actively adopting technology and innovation to close the gap to digital leaders requires formal employee training for ICT skill development since the share of companies conducting such activities is significantly lower than the Digital Frontrunner average.