László Csaba
Bad-Tempered Boom
A whole decade has passed since the
Hungarian government, sensing the unstoppable sinking of the Soviet Titanic, gave up experiments aimed at adding market elements to the socialist model and committed itself to a true market economy. The first two-day meeting of the reform committee was held in February 1988, at the holiday home of the Ministry of Finance at Pünkösdfürdoý, and the question where political constraints were to lie was decided: Miklós Németh, Secretary to the C.P. Central Committee, guaranteed the neutrality of state security organizations. August 1988 saw the creation of reform committees, and in November of the same year a reform programme was published, proclaiming a self-regulating market economy based on private ownership and a reorientation towards the West as its objectives.
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Over the space of a decade Hungary was to see the introduction of no fewer than three comprehensive, systemic reform packages, all of which amounted to shock therapies.
The liberalization of foreign trade was largely driven through in the 1989–91 period, ending six decades of isolationism. In the same period all markets for means of production and almost all prices were
liberalized, and firms in state ownership were transformed into companies and privatized en masse. The governing authorities played a crucial role in initiating these processes—including spontaneous privatization—while the end result was largely determined by organic social dynamics, independent of the government's intentions. However much certain lobbies and government forces attempted to stop these three elements, separately or as one, they simply lacked the necessary powers. In other words, the transformation was strongly rooted in real social conditions, rather than those perceived by certain political forces. This is supported by the visible defeat forces opposed to such measures suffered in 1991 and 1994 on all three fronts. Attempts to create price and wage cartels turned to dust. Steps demanding trade protection foundered in the face of a majority with opposed interests and of a newly-found press freedom. In the long run, through the various stages of privatization, it proved impossible to limit the determining role played by management and foreign interests.
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Throughout the decade, monetary policy has concentrated on supporting price stabilization and the balance of payments—two fundamental, albeit relative values. The only exceptional period was that of 1991–3, when the politician appointed as governor of the central bank decided to use an artificial squeeze on interest rates to serve the government's desire to stimulate the economy. In addition to disrupting the external balance—as a delayed effect—Hungarians had to pay heavily for this in those aspects of the Bokros package of March 1995 which targeted inflation and sought to put curbs on the domestic market.
One of the successes of monetary policy was that there was no adjustment inflation of the kind experienced in Poland, Romania or Russia, which in those countries destroyed the value of the life savings of millions. Fiscal policy, experience and not least the limited credibility of government institutions have meant that inflationary expectations have remained high. Today, lack of credibility is the main barrier to the success of an anti-inflationary policy (Vincze, 1997). This is in addition to the fact that the economy's smallness and openness and the convertibility of the forint mean that there is less and less room for manoeuvre for an independent monetary policy.
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The fundamental tool of transfer to private hands has been and will always be market sale. Hungary made little use of the various forms of mass or popular privatization methods which artificially widen the class of small investors. Though some of the political world holds the various governments to blame for this, studies of changes in property relations (Voszka, 1997; Mihályi, 1998) suggest that the various techniques used for preferential privatization became common without any particular announcement. These plans—made
in the name of social justice—in fact strengthened the existing dominant position of management, and changes to the balance of value and countervalue, over and above the general rules, were to the advantage of this group. In an indirect way this also went to show that deviations from the "British style" resulted in social and efficiency losses, while the slow pace that was held to blame only existed in the imaginations of those who ideologically opposed it. The Hungarian bank and public utility sectors have seen the removal of many taboos whose removal would be still unthinkable in certain Western European countries.
The openness of the foreign trade system survived repeated attacks. The existence of external competition was a key element in the development of Hungarian market relations. Thanks to the significant share of the market won by foreign capital, the unit price of Hungarian exports was 30-40 per cent higher than that of the other Visegrád countries. The 44 per cent proportion of Hungarian exports represented by machinery and equipment is twice that for Poland and the Czech Republic, indeed it exceeds that of Spain and Greece. Internationally, analysts tend to see this as evidence of successful microeconomic restructuring.
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In fact, Hungary is one of the small group of countries which, following the example of Eastern Asia or, in the nineties, of Latin America, simply lifted themselves out of debt without experimenting with risky "unconventional techniques" such as simply defaulting. In 1989 the national debt was $18bn, in 1992 $22bn, in 1994 $28bn, and at its height in 1995 it was $33bn, subsequently reduced to $27.6bn in 1996, and in 1997 to $22bn. Of this, Hungary's external debt—the component that has to be faced by the taxpayer—dropped from $16bn in 1995 to $5bn in 1997; hence half of the foreign debt is now private. As these loans are taken on for investment purposes, there is a greater probability ab ovo that they will generate the means of repayment, while the same cannot be expected of loans taken on to cover state budget deficits. The debt service ratio, the amount expended on debt repayments and on interest as a proportion of the value of exports, also peaked at 49.3 per cent in 1995 and was down to 18 per cent by 1997. The export level of around $6bn, typical in the Eighties, had more than tripled by 1997 to $19.7bn.
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It is not money from Brussels that will strengthen the country's ability to attract capital but the very fact of being in the Union; it would clearly not be prudent to lose the many dollars of private capital for the sake of a few cents from Brussels. Faster modernization requires capital, technology and leadership abilities and, of course, export markets. Both of these needs are essentially provided for by the market integration brought about by legal harmonization and the articles of partnership. It would in fact be worth joining even if we were not to receive a single Euro in subsidy, because, bearing the current level of attainment in mind, only full membership would generate a discernible surplus in our business and political life. On the political level this would be in the form of participation in the creation of collective regulations, and on the business level the cheaper and more easily accessible source of capital, as the cases of Spain, Ireland and Portugal show. As, by its own admission, Hungary's weak point in terms of economic policy is its battle against
inflation, the set of criteria associated with the prospect of financial union would strengthen exactly those elements the Hungarian economy most needs to work on, but which on its own it would not be able to realize adequately or in time.
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It is clear from this summary of results and weaknesses that Hungarian
economic policy has a list of new pro-blems to be solved on the long road to EU membership and eventual currency union. This will require more than regarding the maintaining of a financial balance as more important than anything else. More, because harmonizing the measures required for inflation-free sustainable growth and faster catching-up will be no small feat.
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The robustness of Hungarian economic development has become particularly evident in 1998. First, a change of government took place quite smoothly. While the centre-right parties adopted an election platform echoing the grievances of those not (yet) profiting from socio-economic restructuring, their actual policy decisions are, by and large, following the same path, with the correction of some trivial flaws of the outgoing government.
The elections of spring 1998 reflected the voters' rejection of the idea that
there were no alternatives and a desire on their part to cut the intertwinings between politics and business. Accordingly, the new government formed on 8 July contains
few professional full-time politicians as against technocrats, who have earned a name in their respective fields. Zsigmond Járai, the Minister of Finance, was one
of the founding fathers of the Budapest Stock Exchange in 1989, Kálmán Katona, Minister of Transport, has spent all his working life in this sector, Zoltán Pokorni, Minister of Education, is a secondary school teacher and was active in the teachers' union before entering national politics, János Martonyi, Minister of Foreign Affairs, worked as an investment consultant and private lawyer (he also served as Undersecretary in the Ministry of Foreign Affairs before 1994). Numbers and decisions are also in this direction. The draft budget for 1998 corrects for a disproportionate increase in pensions so as to make room for a 6 per cent cut in social security contributions paid by employers. The targeted deficit of 4 per cent against 4.5 per cent in 1998 represents an element of continuity, leaving little room for a populist spending spree.
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László Csaba,
is Senior Economist at the Kopint-Datorg Economic Research Institute and Professor of Economics at the Budapest University of Economics.
