The Social Issue in the Era of Transition
János Kornai in Conversation with Mihály Laki
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In the Stalinist era, welfare institutions in Hungary operated only at an elementary level. Unemployment existed. So the elements that now evoke nostalgia had yet to emerge. Later, in the Kádár era, a welfare system began to appear, together with a half-hearted reform of the economic mechanism. Important steps forward were taken yearly or every other year. Take the mid-eighties, for example. The situation then was one of full employment, indeed of a chronic labour shortage, and even, due to the soft budget constraint, of the guaranteed survival of firms. This was accompanied not only by the security of employment, but by the security of the specific job the employee was holding. So long as people accepted the unwritten rules and showed loyalty towards the place they worked in, they were entitled to a wide range of benefits sanctioned by law. The range of cash benefits was wide. These included social security provisions related to retirement, child rearing and sickness benefits, and there was also a broad spectrum of entitlements associated with studying or old age. The great majority of cash benefits were linked to wages. This was complemented by a price subsidy system on commodities and services, as well as by subsidies for housing construction, as part of the central redistribution of incomes. All this made up a social welfare policy which, in its scope, its performance, and in its sheer comprehensiveness, exceeded that in all the other socialist countries. [...]
[...] The Hungarian leadership of the time was thinking along the following lines: "We do not want demonstrations or strikes. We will ensure this first by tough retaliation after 1956, and then by reducing the level of public discontent." There were several possible safety valves to pre-empt potential discontent. One was developing a system of entitlements, welfare, assistance and support. Alongside the redistribution via the social welfare system there was the soft budget constraint. It was unacceptable for a region or firm to be in a state of crisis, for they would then be unable to carry out their social functions and local unemployment would be the result. Paternalism built into the legal system and the soft budget constraint complemented one another. All this was in the political interest of those who held power. In other words, it was not brought about by a step-by-step struggle by the people, but rather by a political leadership that kept one step ahead. Those who demanded and insisted that the state play such a role, that is the pressure group advocating higher standard of living and the pressure group for more paternalism (to large extent overlapping two groups) did not have great difficulty in attaining their goal. It was not necessary to call on the people to go out and demonstrate.
The other major means of reducing public discontent was the expansion of the grey or second economy, allowing those who wanted to make money to do so. The resourceful were given the chance to make money and the less resourceful were granted the security of paternalistic care and a guaranteed job. The job in the first economy guaranteed for everyone paternalistic care; furthermore, the income earned there was likewise secure. The more resourceful, the shrewder, could supplement this with income earned in the second economy.
Naturally, there were losers too, but even they lost less than when a society becomes a full-fledged market economy. [...]
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[...] Hungary boosted consumption above the level its productive resources allowed. This applies primarily to collective consumption subject to redistribution by the state. The growth in Hungary's GDP and in production had already slowed by the late 1970s, slowed all the more into the 1980s, then approached stagnation and, from 1991, fell into steep decline. Yet consumption (and within it particular elements of the welfare system) continued to grow; other elements of the benefits provided by the welfare system may have declined, but not in line with the drop in production. From this perspective Hungary is a striking contrast to Poland, where the change of system began with quite a sharp decline in the standard of living.
Was Hungary's communist leadership there-fore the most irresponsible?
As regards its serious disregard of macroeconomic discipline, it was indeed far more irresponsible than numerous other East European communist parties. These disequilibria continued to manifest themselves at the time of the first post-communist government and in the first ten months of the government that came to power in 1994. Let us not concern ourselves now with determining the degree of responsibility of the successive governments; what is certain is that the austerity programme approved on March 12, 1995 asked Hungarians to pay the bill. Indeed, this bill was such a size simply because it had not been submitted earlier. [...]
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The fundamental disparity in Hungary's economy is the striking injustice in how the burden is divided between those who can evade taxes and those who cannot. According to tax returns, the average annual income of those registered as independent businessmen was 110,000 forints in 1994. This is, I believe, less than the minimum wage, which leads me to wonder why they remain in business; why they don't simply go and get a job, for they would certainly earn more. The other factor that contributes to the inequality is the divergence in the ability of various strata and groups in society to articulate and enforce their interests. This ability can be expressed at two levels. One is through extra-parliamentary means. A few hundred engine drivers or power plant workers who are easily organizible - due to the concentration in their industry - and who control production that is indispensable even for a few days, can bring an entire nation to a halt. Cab drivers, able to communicate with each other by radio, can stage a blockade and paralyse the capital city, as in fact they did in October 1990. It is understandable that such groups can give effect to their interests more forcefully using extra-parliamentary means than can, say, day labourers in the construction industry, who would certainly be unable to paralyse the country through any strike action. On the other level it involves the use of parliamentary means. In a parliamentary democracy those relatively homogeneous interest groups which represent large voting blocs carry a good deal of influence. Pensioners especially constitute such an interest group, since one voter in every three is retired. They need not even take to the streets. To a large degree, the way they vote can determine the composition of Parliament. This factor, that strength through sheer weight of votes is complemented by various other ways pressure can be applied in a parliamentary demo-cracy: delegations, pressure brought to bear on the local representative, open or secret lobbying of politicians. If therefore we carefully consider the operational
rules of parliamentary democracies, including our young democracy and semi-mature market economy, we might offer the following prognosis: the above two factors, the opportunity to avoid taxes
and the ability to enforce interest, are by far the most decisive in how burdens are divided amongst different groups in
society.
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[...] The state should support the establishment of institutions which allow for retirement savings and the building up of reserves. Various non-profit insurance organizations, funds as well as profit-motivated insurance companies can serve this purpose. Both are necessary. The state should grant tax allowances or deferred payment of taxes to certain kinds of saving. For pensions, for example, it should allow the citizen to deduct his pension contribution from their taxable income in line with rationally (yet generously) set upper limits. I think, the principle of tax deferment is appropriate here: one should not be required to pay taxes on such payments, while the services themselves should not be tax exempt, i.e., the pension, once received, would be taxable. Tax deferment and some other allowances would serve as enormous incentives. A rather large proportion of the public is willing to put aside a significant part of their income once aware that it is imperative to do so - that they will need this later - and provided that this can be written off taxes. And yet another important condition: the state must also lay the groundwork so that these payments are largely protected against misappropriation. The role of the state is to create the framework and the supervisory institutions for a decentralized insurance system and offer state guarantees within certain limits and on certain conditions; the state thus assures that no swindler can make off with the public's savings and that savings do not melt away in the heat of inflation. If a swindler does make off with the money, the state takes it upon itself to compensate the public. Thus the role of the state in this regard can be summed up as establishing civilized, reassuring institutional forms for non-state voluntary insurance.
The state has yet another task: to provide at least minimal assistance to those who have failed to accumulate adequate savings whether through misfortune, or simply through their own mistakes. No one would wish that those who have failed to provide for savings they can draw on in old age, for whatever the reason, should spend the final years of their lives in poverty. Thus at least a minimum pension must be paid on the basis of the solidarity principle, to the debit of taxpayers, even to those who committed one foolishness after another, who took their lives or careers down an unsound path, or who suffered plain bad luck. At the same time, I certainly do not suggest that in such circumstances the state should disburse more than a minimum, humanely determined, level to the debit of other taxpayers, given that such assistance, in fact, expropriates money from those who are ready to reduce their present level of consumption in order to accumulate savings.
The state thus plays a dual role: it must throw life-belts to those who have ended up in disastrous circumstances through their own mistakes or through misfortune, at the expense of other taxpayers; and it must see to it that those who wish to look after themselves do not make an effort in vain.
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Mihály Laki
teaches Economics at the Department of Political Science of the Central European University. He has published widely on post-socialist enterprises.
