Gábor Karsai
On the Long March to the EU
...
General crisis in the planned economy
Almost every country in Central and Eastern
Europe underwent a grave economic crisis at the end of the 1980s and the beginning
of the 1990s, with a concomitant and partly consequent political crisis as
well. The process was rooted in a general crisis of the planned economy, which
affected equilibrium, growth, structures and institutions, and extended to
the mentality and set of values, the stratification, relative incomes, development
goals, and education and motivation systems of society. This led up to a change
of system, conducted at speeds and in depths that varied from country to country
and region to region. (There is no attempt here to cover what prompted the
Soviet state authorities to accept the change of system to various extents
in the post-socialist and Soviet successor states, or what role the Western
powers or efforts towards national self-determination played in the changes.)
Despite initial high hopes, the changeover in the economic system precipitated
a recession. This was especially deep in most Soviet successor states and
in the Balkan post-socialist countries, where shortcomings in their change
of political systems - along with political chaos, tensions and even civil
warfare - curbed or thwarted the implementation (indeed even the introduction)
of essential economic reforms.
The recession was also severe, if less drastic in what became termed as the
Visegrád countries. GDP slumped not only in Hungary and Poland, heavily indebted
in the 1970s and 1980s, but also in Czechoslovakia (the Czech Republic and
Slovakia). Recession came where there had not been any reform before the change
of political system (Czechoslovakia) and where there had been many years of
reform (Hungary and Poland). Nor did it make any difference whether the economic
policy-makers adopted an express 'shock therapy' (Poland) or gradualism (Hungary).
The recession was closely related to the collapse of Comecon and the consequent
loss of export markets, coupled with the opening up of domestic markets. However,
the loss of markets did not simply pose quantitative problems, it also embodied
a comprehensive structural crisis. So the handling of the economic crisis
- above all keeping individual countries solvent, resolving the tensions in
their external and domestic balances, and curbing inflation - could not be
confined simply to stabilizing measures. This handling also had to be of a
modernizing character, in the classic sociological sense of assimilating the
country to the most advanced Western economic and social organization links
and formats. Without such assimilation, it would not be possible to ensure
the conditions for sustainable growth after the recession. But from that it
also follows that changing the system, developing a market economy and creating
the set of conditions for lasting growth is a time-consuming process; as it
involves major social conflicts, it only succeeds usually after setbacks and
diversions, through a specific learning process.
The conditions for lasting growth and the structures to meet the new demands
of a world economy can only arise through 'creative destruction'. Nor can
the destructive, conflict-inducing side of this be avoided. Although governments
try to put it off in the hope of avoiding social tensions, this deferment
only spreads the tensions and deteriorates the external and internal balances
that are damaging to the whole economy, before leading to a renewed rise in
inflation. The key, therefore, is to improve the interdependent abilities
of the economy to utilize, attract and accumulate capital. In Hungary, the
Németh government's moves to prepare for the changeover of the economic system
in 1989-90, the Kupa programme of stabilization and reform in 1991-92 (named
after a finance minister in the Antall government), and the Horn government's
1995 Bokros package can be seen as such measures. However, each of these programmes
was followed by a slackening of effort related to, among other things, electoral
politics, with policy-makers becoming redistributive in outlook and seeking
to avoid temporary infringements of vested interests. The Orbán government
of 1998-2002 had neither the incentive nor the will to continue the process
of reform. The Medgyessy government that took power in 2002 seems to be returning
to a line of reforms based on the evaluation of financial criteria.
...
Hungary has introduced all the essential constituents of a
European system of economic law and institutions and these are more or less
functional. There are still important reforms to be made in public finance,
especially in health and public administration. Still to be completed too
are the processes of liberalization, privatisation and EU legal harmonisation.
The gravest problems in legal security now lie in judicial implementation,
not in legislation.
The deregulation and liberalization of the early 1990s meant that economic
agents could decide freely and autonomously on almost all questions, including
prices, wages, employment, investments and market cooperation. The sphere
of state-controlled pricing was tightly restricted, and even in these cases,
successive administrations relied mainly on negotiation, for instance, in
the energy field. (However, that did not preclude the government in 2000 from
beginning to intervene directly in the operation and pricing of the energy
and pharmaceutical sectors. There are welcome signs that the Medgyessy government
wishes to break with this practice.) For the commercial sector, the Interest-Conciliation
Council formulates recommendations for pay increases, although these are not
binding. Imports and exports of products and services have been liberalised.
There are hardly any tariff barriers, and the movement of capital in or out
of the country is unimpeded.
There has been a significant development in the system of economic-policy
institutions over the last decade. The independence of the National Bank of
Hungary is legally guaranteed. The state budget is broken up into more-or-less
autonomous sub-systems and its deficit is financed on the market. The operation
of financial institutions has been completely transformed. Competition has
developed in commercial banking and in insurance, with large numbers of consultancy,
intermediary and brokerage firms appearing. The Competition Office is in operation.
There has been a substantive reform of the pension system. On the other hand,
efforts to transform the agricultural sector, the health services and public
education have achieved little.
The system of legal institutions for a market economy was built in Hungary
with a speed and consistency exceptional in this region, but accompanied by
widespread debate, essentially about whether 'excessive liberalisation' was
exacerbating economic problems that were clearly and objectively great. Postponing
legislation to impose financial transparency in government and the banking
system and financial discipline in the business sector would probably have
caused less destruction, but it would have meant less 'creation': much smaller
inward flow of foreign capital, and less efficiency in the use of existing
resources.
Meanwhile, the extremely serious problems in implementing the law are slow
to decrease. One reason is that the legislative process was the driving force
(probably inevitably), so that new institutions were often introduced before
their staff and the conditions for their operation were in place. For instance,
supervision of business associations by company courts was ordained at a time
when there were hardly any company courts in operation. Western-type accountancy
law (i.e. giving the valuer wide scope for appraisal but heavy responsibilities
as well) came into force before there were enough trained auditors and property
valuers. The upshot was a constant discrepancy between the law and day-to-day
practice.
Tax evasion became general across society. Contract infringement, value-added-tax
swindles, fraudulent bankruptcy and other abuses of the law became socially
acceptable. Legal security was further reduced by uncertainties surrounding
the land registry, which only recently has been become better equipped with
computers. Viktor Orbán's centre-right government (1998-2002) especially set
about evading the legal procedures for public procurement. Court proceedings
are protracted and judgements often impossible to enforce. (Where rights have
been infringed, the plaintiff cannot hope for commensurate compensation and
the defendant is not concerned by the prospective penalties.)
...
The performance of the economy
Not until 2000 did the GDP of the Hungarian economy
exceed its level before the change of system. A long time, but that performance
was still the best by any post-socialist country. A decisive factor was the
economic policy aimed at attracting capital, mainly foreign capital, through
privatisation and other means. That made it possible for the branch, corporate
and product structures of production and the sales market to undergo a fundamental
alteration.
Eliminating excessive uneconomical capacity in industry was a necessary process.
Suffering from a reduction in domestic and foreign demand for its products,
industry also lost ground through increased competition from imports on the
home market (while in other ways, the imports it employed were improving its
competitiveness). At the low point in 1992, industrial sales were a third
down on 1989. The decline in manufacturing (the key sector for economic development)
ceased in 1992-3 and gave way in 1994 to increasingly rapid expansion. The
export orientation of industry increased dramatically, so that half of industrial
production is being exported and more than three-quarters of the exports are
going to the EU. Solvent domestic demand is tying down a decreasing proportion
of domestic production. These developments show that the degree of autarky
in industry has declined significantly, with concomitant increases in cooperation
and participation in the international division of labour.
The growth rate of the Hungarian economy (and of industry) in recent years
has tended to follow the acceleration and deceleration of the world economy,
notably that of the EU and especially that of Germany. However, the level
of integration achieved through the multinational corporations and the competitiveness
that has extended to increasingly more sectors have allowed the Hungarian
economy to develop faster than the EU average, during the upward and downward
phases of the business cycle.
Agricultural output sank between 1989 and 1993 to an extent similar to industrial
output, after which only a slow increase began. The ratio of active wage earners
in the agricultural sector shrank from 13% in 1990 to 6% today. It is clear
that agriculture has been one of the big losers in the transformation in Hungary,
since the sector has attracted practically no new capital, either domestic
or foreign. The agricultural economy has still not emerged from its crisis
and the conditions for lasting and balanced growth are still absent. Agriculture
has hardly been touched at all by the huge energies that privatisation has
generally released in every other sector. The work of establishing and organising
the necessary market and semi-market institutions (information systems, buying,
processing, selling and servicing associations, land sales and credit institutions,
systems for asserting interests, etc.) has gone much more slowly than it should
have. This is for want of effective governmental support and because the rapid
emergence of transparent, predictable market conditions conflicts with the
interests of certain decisive groups.
There has been an explosive development in telecommunications and retailing,
where enormous development and modernisation have taken place. The number
of mobile phones in operation rose above 60 per cent in 2002, while the 20
per cent share of retail turnover held by large shopping malls and hypermarkets
was much higher than in Germany. Liberalisation has been slow to take
effect in telecommunications, but in retail trading there is strong competition
among the big chains, even by international standards.
The 1990s can be divided into two distinct stages in terms of exports. In
the first four years, the collapse of the former Comecon markets and difficulties
of the process of changing market directions led to a 20 per cent fall in
export volume, i.e. a slightly greater fall than in GDP. The period 1994-2000,
on the other hand, brought an extremely rapid increase of export volume, even
by international standards. The average export increment of over 18 per cent
a year far exceeded the rate of GDP growth. The growth of industry then slowed
markedly in 2001-2, in line with the international downturn. The foreign-trade
structure of the Hungarian economy underwent radical alteration in the 1990s,
as EU relations became the decisive factor in exports and imports (although
less in the latter case, due to the energy imports from Russia).
Employment in Hungary fell continually between 1990 and 1996, by almost 30
per cent (i.e. by 1.5 million, leaving some 4 million employees). Two-thirds
of this fall took place in the first three years. After 1996, employment rose
by about 1 per cent a year until stagnation, followed by a slight decline
ensued in 2002. The workforce in the competitive sector fell sharply under
market-economic conditions, while the number of those employed in the budget-financed
sector hardly changed.
The fall in employment is a good indicator of the speed of transformation.
In countries where the reduction is small, the earlier, less competitive enterprises
and many of the jobs in them have survived, and the transformation process
has hardly started. Where employment has fallen rapidly and this has been
accompanied by an increase in productivity (Hungary is a good example of this)
the transformation, privatisation and the accompanying structural and organisa-tional
changes have taken place faster.
Investment adjusted quite flexibly to the fall in GDP after 1990, but consumption
did so only after a long delay that translated into indebtedness. Hungary's
investment rate, having been 21.6 per cent in 1989, reached a trough of 18.9
per cent in 1993 before beginning to rise again and exceed 24 per cent in
2000. This is not a satisfactory rate by comparison with the modernisation
needs of the country. The volume of investment in 1992 was about 80 per cent
of what it had been in 1989, which was not reached again until 1997. (This
was about the same as the volume in 1980, due to the investment fluctuations
in the 1980s.)
Dilemmas in economic policy
To simplify matters somewhat, two main opinions have
been heard in recent years about the state of the Hungarian economy before
EU accession, the assumed effects of entry and the strategy that Hungary should
therefore be following.
One argument runs that it will benefit the underdeveloped Hungarian economy
to join because of the supports obtainable above all through EU membership.
On the other hand, the underdevelopment means that Hungary has to obtain as
many derogations - temporary waivers of the regulations - as possible during
the accession talks, because the structural backwardness of the Hungarian
economy would prevent it from competing in Europe in many fields. Advocates
of this would go so far as to slow down the accession to ensure that the transition
was painless. They would like to see some of the supports obtained before
accession, to assist in preparing for entry. This approach assigns a smaller
role in transforming the Hungarian economy to internal reforms and places
greater hopes on obtaining concessions and supports from the EU.
The other view regards EU accession as a matter of vital importance. It starts
from the proposition that adapting to the world economy (which for a country
Hungary's size and in Hungary's location in a globalising world means adjusting
to the multinationals and the EU) is the only realistic way to develop and
modernise. Advocates of this view see structural adaptation to world-market
demands and production systems as inescapable, irrespective of EU membership.
While EU membership provides extra assistance for this (political stability
and financial support), countries remaining outside will find the adaptation
harder and more costly (for instance, due to the Schengen Agreement). Those
arguing this case realise that the EU is also battling to retain its world-market
positions, so that reforms involving reductions can be expected in some fields
of EU and member-country activity, such as state ownership, welfare systems
and budget expenditure. Modernisation of the Hungarian economy depends mainly
on continuing to improve its ability to attract and accumulate capital, in
which the advantages of EU membership can play only an auxiliary role. Those
advancing this argument therefore advocate the earliest possible membership
on as equal a basis as possible.
These two opposing opinions on EU accession present some fundamental issues
that have plagued Hungarian economic policy for decades. Such dilemmas concern
equilibrium and growth, whether capitalism or the state should be the prime
organising force in the economy, whether growth should derive from market-economic
reforms or stimulation of demand, and the scale and speed at which adaptation
to the world market should occur. The debates are mainly in political and
economic-philosophy forms, but behind them, of course, lie decisive economic
and power-related interests.
Experience suggests that an economic policy of postponing reforms and stimulating
demand without foundation produces not growth, but successive external balance-of-payments
crises that lead to recurrent restrictive measures and major or minor reforms.
However, the unpopularity of these measures leads to a subsequent unfounded
loosening of economic policy and exacerbation of the balance-of-payments problems.
Hungarian economic policy-making at the turn of the millennium has progressed
beyond stabilisation. It has managed to establish the main institutional constituents
of a European market economy. Through these achievements, it has managed to
spread international confidence in the Hungarian economy. Yet economic events
in 2002 show that many see chances of expanding the room for economic manoeuvre
by returning to the policy based on giving a broader role to the state, arguing
that financial criteria and reforms no longer merit the same attention. These
ideas gained further currency because parliamentary and local-government elections
were held during the year. The facts demonstrate that there is still a strong
inclination in the Hungarian economy - and its still young democracy and market
economy - to apply policies that will damage the equilibrium of the economy.
(Not that more developed countries are immune to this either.) However, there
has been every sign since the 2002 autumn local-government elections that
the Medgyessy government - like the earlier Antall and Horn governments at
a similar stage in their terms - is intent on improving the financial equilibrium,
furthering the reform process and meeting the EU criteria.
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Gábor Karsai
is managing director of GKI Economic Research Co., Budapest. His fields of research are market-economic transformation and analysis and forecasting of macroeconomic
processes, on which he has published four books in Hungarian and one in English.
