Pál Réti
Governing the New Economy
In Hungary's post-Communist history, 1998 was the first time when the incoming administration inherited a fully operating market economy. In 1990, with 90 per cent of the means of production owned by the state and a highly centralized economy, the first freely elected government set out to establish the legal framework of a market economy and launched massive and institutionalized privatization. In the meantime market forces and, most notably, the rapid collapse of established relations with the former Soviet bloc compelled swift adaptation to the new situation. By 1994 the coalition of Socialists and Free Democrats under Prime Minister Gyula Horn was still faced with the privatization of about half of the productive assets of an economy that was suffering serious instability after the second half of 1993, and was threatened with a slide into another debt spiral.
In June 1998, the Orbán administration took over a country that was not only equipped with the institutions of a market economy (the front runner among all the former Socialist countries) but had also gone through the macro-economic transformation required by the transition (see Table 1). The latter was achieved in some of the former Socialist countries (for example, Poland) by shock therapy; in Hungary the same was effected by what was called the Bokros Package,1 announced in March 1995. Although the parties of the centre-right coalition coming into power after the May 1998 elections (Fidesz-Hungarian Civic Party, Independent Smallholders' Party, Hungarian Democratic Forum) had all strongly criticized this macro-economical stabilization, as regards both its methods and the mode and extent of privatization, the government programme published in the summer of 1998 was nevertheless building on its results. "The foundations of a market economy have already been laid in Hungary, and the government can safely build on the established economic, legal and institutional systems", a document, "At the Threshold of the New Millennium", concluded. The same document also declared that "by 1998 the privatization process in Hungary had essentially been completed".2 Under the conditions specific to Hungary, the government's decision to introduce changes seemingly affecting governmental structure only (i.e. the defining of economic policies as the joint duty of a new Economic Ministry and the Ministry of Finance, in other words, ending the latter's economic primacy) amounted to an indirect admission of the stability of macro-economical foundations. Ever since the 1980s the Ministry of Finance had been effectively in control of a seriously indebted Hungarian economy, even though the idea of creating a Ministry of Economic Affairs with at least the same weight as the Ministry of Finance had tempted both the previous prime ministers, József Antall and Gyula Horn. They both had second thoughts, however, because of the dangers of slackening fiscal discipline.
The Fidesz government did "choose the future"-a chapter heading in the government programme-in other words, unlike its predecessors which had talked of managing the crisis and stabilization, this administration promised rapid growth, a rise in living standards and the creation of new jobs.
Although, as outlined above, the incoming administrations faced very different situations in 1994 and 1998, the continuation showed remarkable similarities as far as the uncertainties of economic strategies were concerned. For eight months, the Horn government's Minister of Finance, László Békesi, had been continuously complaining about the threat of economic instability, verging on a crisis, but the cabinet did absolutely nothing to stop the process. (There was a similar paralysis during the term of the Antall government's first Minister of Finance, Ferenc Rabár, largely owing to the fact that György Matolcsy, then secretary of state in the Prime Minister's office, Minister for Economic Affairs in the current government, was busy setting up a rival centre for economic policy.) Right from the formation of the Orbán Cabinet it was clear that the Minister of Finance would not be in charge of economic policies. The circumstances of Zsigmond Járai's selection for the post already indicated that much. In the first weeks following the election victory it was still far from certain how responsibility would be divided between the two ministries, as the nominees for both offices were economists and financial experts. The original candidate for Minister of Finance was László Urbán, who had been instrumental in shaping Fidesz economic policies from the start, and who had very definite ideas about the future. It turned out,within days, that his ideas were in fact a little too definite. That was when Viktor Orbán's choice fell on Zsigmond Járai, a man who did not belong to the Fidesz inner circles, and whose name had been considered as a possible candidate for Minister of Finance when the outgoing coalition had been in power. He made it clear from the start that he would be content with the role of a "budget minister". Once the government was formed, the departments devoted to analysis and policy-making within the Ministry of Finance were moved to the Ministry of Economic Affairs, then headed by Attila Chikán. As a former director of a Student Residence Hall, Chikán had been the spiritual mentor of several Fidesz economists, contributing personally to the party's economic programme for the 1994 elections. Chikán, whose professional qualifications the opposition did not dispute, had all the necessary qualities to turn his ministry into the centre for the government's economic policies, but he never grasped this opportunity. During his eighteen months of tenure he failed to come up with the new economic strategy he had promised before taking office.
The Orbán government introduced two spectacular and decisive measures in economic policy at the very beginning of its term, indicating that they were serious about controlling public spending, one of the main items on the party's election manifesto. One was the abolition of autonomous self-governing organizations in the social insurance sector-a move that had been pushed through Parliament before the formation of the new government. Fidesz was the only party in that, since 1990, had consistently argued against the idea of having one-third of the national budget removed from the effective control of the only fully democratic and functional institution, Parliament, and placed in the hands of a "self-government" of dubious legitimacy. The other spectacular measure was sacking the entire management of Postabank and restoring the state's proprietary rights. With the majority of its shares owned by the state, this bank had gone "independent", distributing large sums of money in areas alien to banking and had entangled itself in various impenetrable deals.
From the viewpoint of the economy, the first year of the new government's term of office was characterized by survival rather then creative construction. Starting with the summer of 1998, various crises brought on by external factors came in quick succession, and the relatively successful handling of these crises meant that the government had the appearance of being busy, even though as yet it came up with no economic strategy. In August 1998 Russia had serious liquidity problems. Although Hungarian exports to Russia only amounted to 4 per cent of total exports, in certain branches and in certain areas (tin and food industry, in Eastern Hungary) dozens of companies were threatened with bankruptcy, with large numbers facing unemployment. At the same time, the pulling out of large amounts of capital by Western investors (who tended to treat the entire East European market or even all emerging markets, uniformly) threatened to bring down the Budapest Stock Exchange, along with the exchanges in Warsaw, Prague, etc., and put the forint under great pressure. The government and the MNB, the Hungarian National Bank, did not panic at this flight of foreign capital and the temporary weakening of the forint. Against all expectations, the MNB reduced the monthly rate of the forint's crawling-peg devaluation; the MNB also intervened on the Western markets to protect the forint and raised the prime rate. It was partly due to these measures, carried out in consultation with the government,3 that the Hungarian economy survived the Russian crises with losses that were small in comparison to those suffered by other countries of the region.
In Autumn 1998 an unusually severe flood devastated Hungary, followed swiftly by another one in Spring 1999. The government spent tens of billions of forints on flood defence and reconstruction, monies mostly taken from development funds--road and railway construction-as well as by introducing uniform cuts in all sectors of the budget. Partly in consequence of this, in its first eighteen months in office, the Orbán administration did just the opposite of what the analysts and the opposition had been afraid they would do on the basis of the Fidesz' election promises. Instead of generous spending, an austerity approaching that of the the 1995 Bokros Package characterized the cabinet's fiscal policies, which was manifested in the reducing of or abandoning of infrastructural investments-such as the motorway construction programme-and also in the modesty of the increase of wages in the public sector. On the other hand, the government, in line with its election agenda, restored certain social benefits to families and abolished university tuition fees while keeping the budget balanced.
Unlike during the term of the previous administration, the lack of a coherent economic policy this time did not have painful and wide-scale consequences on the balance and growth of the economy. Ever since the second half of 1996, the Hungarian economy has been growing dynamically and at an increasing rate, primarily because of a double-digit increase in exports based on the foreign investments of previous years. In addition, thanks to a tightly planned central budget, the economic indicators continued in balance. In the meantime, continuing the trend set off by the Bokros Package, the share of central redistribution in the GDP continued to decline; in consequence, the role of the government's economic policies in influencing the economic process did, in fact, diminish.
As the economy stayed on the right track, the government was not compelled to carry through the promised structural reform. In other words, the Orbán Cabinet missed a unique opportunity to introduce the remaining crucial reforms that had been overdue since the political changes of 1989-90. This was the first administration that was in the enviable position throughout its first three years of office-and according to the economic forecasts, the same will also apply to its fourth year-to have an economy that was growing faster than the European average, while the deficit in both the budget and in the balance of payments was decreasing.
The Orbán government got as far as starting work on reforms in taxation and healthcare, but soon gave up on both counts. The transformation of the taxation system by cutting taxes and contributions substantially was one of the most potent election promises made by Fidesz, and most of it was even included in the government's programme. In preparation for the budget for the year 2000, the idea of tax reforms with substantial reductions was briefly considered, but the Prime Minister promptly blew the whistle on it-blaming the resistance of the employers' and employees' organizations-and announced that radical reforms in the taxation system should no longer be expected in the present term. The cabinet expended a little more energy on reforming the healthcare and social security system, which is generally regarded as both wasteful and inadequate. In the first year a separate secretary of state was appointed to supervise the preliminary work in the Prime Minister's Office. But when the Prime Minister decided to replace the Minister of Health eighteen months before the upcoming elections, he was in a way admitting that no real effort for change had been made. Now the government is essentially where it was at the time of taking office, as it had, by that time, already accomplished the first item on its agenda, which was the abolition of the "self-governments" in social security, and ever since then it has been vacillating as to what to do with the healthcare system-a hard nut to crack, no doubt-now directly under government control but just as inefficient.
The past two and a half years have intimated that important elements of the Orbán government's economic policies have often been subordinated to the objective of staying in and consolidating power. The strict fiscal policies employed in the first half of the term enabled the government to spread a little money about in the last year before the elections, without jeopardizing the economy's equilibrium. This also means that all the reforms that have long-term benefits but are inevitably accompanied by conflicts and public discontent in the short term will be cancelled.
In the second half of the cycle the government's economic politics took a spectacular turn. This was first heralded by Attila Chikán's replacement by György Matolcsy as Minister for Economic Affairs. Matolcsy's appearance in the government also had a symbolic message: he had written the chapter on economic policy in Fidesz's election programme, promising to keep growth at a stable 7 per cent, which was the rallying cry in the Fidesz campaign manifesto.4 At the same time, he drew a great deal of criticism for his contribution to the election campaign, most notably for his promise of 7 per cent annual growth, considered by most analysts as voluntaristic. His appointment as Minister for Economic Affairs could have signalled an early start of the next election campaign.
The second signal of an economic turn was perhaps even more symbolic, and it is not known how closely it will affect the economy. This was the announcement of a new strategy, called the Széchenyi Plan, evoking rapid modernization as it was named after István Széchenyi, the great 19th-century statesman and modernizer, which came just a few months after Matolcsy's appointment. The rhetorical character of the project was plain from the start: in preparing the first draft, Matolcsy simply took the recently approved budget and produced a listing of the government's goals along with the budgeted sums, all arranged according to a preconceived idea. Although much noise had been made about the plan in government circles-the Prime Minister himself centred his annual public address on the topic in February 2001-it has remained an ideological construction to the extent that no mention was made of it in the two-year budget for 2001 and 2002. At the same time, the Ministry of Economic Affairs has already announced tenders involving tens of billions of forints to be spent on designated projects (see Table 2).
At the moment it is not clear how the money distributed under the aegis of the Széchenyi Plan will help the small and medium enterprises' integration into the multinational division of labour, how it will lend an impetus to the tourist industry and how it will induce growth in the less developed regions. Indeed, how it will attract the necessary private capital also remains to be seen. The drab fiscal rigour of the first few years gradually yields to a more colourful governmental strategy-one that is evidently taking pains to preserve economic balance-involving infrastructural investments with the engagement of broad sections of Hungarian enterprises and the injection of government money into small and medium enterprises. And finally, the year directly preceding the general elections will probably see a substantial boost to consumer demand by raising the wages of public servants and public employees.
Table 1
Economic indices in the first year of the Horn and the Orbán governments and in 2000.
| |
1994 |
1998 |
2000 |
| Private sector share in GDP (per cent) |
55.0 |
85.0 |
85.0 |
| FDI stock by the end of the year (in billons of US dollars) |
7.0 |
16.4 |
19.4 |
| Current account deficit/GDP (in per cent) |
9.4 |
4.9 |
3.4 |
| General government expenditure (in per cent of GDP) |
58.7 |
49.4 |
44.8* |
| General government deficit (in per cent of GDP) |
8.4 |
5.6 |
3.6 |
| General government debt (in per cent of GDP) |
88.2 |
62.3 |
60.7* |
| External debt/GDP (in per cent) |
68.7 |
56.9 |
59.9* |
| Consumer prices (percentage change) |
18.8 |
14.3 |
9.8 |
| Unemployment (end-year, in per cent of labour force) |
10.7 |
7.8 |
5.7 |
| GDP (percentage change) |
2.9 |
4.9 |
5.3 |
*1999
Source: Transition Report 2000, EBRD; Central Office of Statistics.
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Table 2
State financing for the Széchenyi Plan 2001-2002
| Programmes |
2001 |
2002 |
| |
in billion forints |
| Strengthening entrepreneurship (encouraging SMEs bridging facilities, investment incentives) |
31.4 |
37.3 |
| Housing (adding to and modernizing the existing housing stock, modernizing home loans, facilitating home acquisition and boosting mobility, increasing rented housing, social aspects) |
69.9 |
72.6 |
| Tourism (incentives for therapeutic and spa holidays and for conference catering, theme parks, access to chateaux and castles, tourist information base, quality travel products) |
25.0 |
28.1 |
| Research, development and innovation (national R&D programmes, extending support for existing R&D institutions) |
17.5 |
37.0 |
| Development of an information society and economy (governmental sub-programme, setting in modern communication and information instruments and improving access, laying the foundations for an electronic economy improving the quality of life and awareness) |
15.0 |
28.9 |
| Construction of motorways and their infrastructure (M3 motorway from Füzesabony to Polgár, a Danube Bridge at Szekszárd with associated priority roads, modernizing and extending the M7 motorway, associated infrastructure: modernizing railway lines, regional airfields, flood protection) |
132.1 |
120.9 |
| Regional economic development (incentives for regional innovation systems, establishing regional clusters, incentives for regional electronic model markets, small area model programmes for economic development, incentives for the production and marketing of important specifically Hungarian products) |
5.0 |
6.0 |
| Total |
295.9 |
330.8 |
Source: Economic Ministry (www.go.hu).
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NOTES
1 The programme designed by the then Minister of Finance, Lajos Bokros, to stabilize the economy, which introduced substantial cuts in welfare spending and a crawling-peg devaluation of the forint, was vehemently criticized by the parties of the opposition. A good many of the welfare services cuts were, in fact, re-instated following a decision by the Constitutional Court. However, the Hungarian economy's foreign trade deficit started to improve after 1996; the country's credit rating continuously improved; and its foreign debt decreased, with the result that by the new millennium Hungary had completely escaped from the debt trap. Back
2 Az új évezred küszöbén (At the Threshold of the New Millennium), Bp. 1998. p. 16. Back
3 1999 Regular Report from the Comission on Hungary's Progress towards Accession. E. U. Back
4 Pál Réti: "Új hazai gazdaságfejlesztési terv - Hét magyar népmese" (New Plan for Domestic Economic Development - Seven Hungarian Folk Tales), HVG April 1, 2000. Back
Pál Réti
is on the staff of HVG, an economic weekly
