Publications

On the Political Economy of Policy Reform By László Csaba

ABSTRACT: Having experienced several decades of successful and unsuccessful economic reforms, Hungary serves as an excellent laboratory to test theories of institutional change. While generalizations based on a single case are always limited by nature, it may still contribute to the better understanding of general conditions of policy and institutional changes for the better as well as impediments to them. 

On Long Waves of Institutional Change

Nearly a quarter of a century ago this author attempted to summarize the achievements and limits of the socialist market economy in Hungary for much of the same audience /Csaba, 1989/. The bottom line of the paper, which I think remains valid, is that the individual case shows the relevance of the political constraints on how far any reform attempt may go, while it remains socialist in nature.

Nowadays Hungary is one of the least successful cases of the countries that acceded to the European Union in its northern and eastward enlargements following the collapse of the Soviet Empire. Why has such an early bird become a laggard in terms of performance, whilst not having experienced any major cataclysm over the past 25 years?

In this paper we continue and extend this analysis. For one, if we constrain our analysis to transition to the market proper, Hungary still counts among the  unquestionable success stories in  managing this historic process, even if we put  her development in a broad global comparative perspective/cf Fosu,ed, 2012/. However, if we posit that transition, narrowly understood, is introducing institutions of a market economy, this task must have been accomplished before entering the EU. If for no other reasons, but the Copenhagen criteria for have explicitly required this task be mastered prior to accession. Furthermore the EU – represented by the Commission – undertook a thorough checking on the ground, if transposition of its rules actually happened in the process of acquis screening. Only after the performance was deemed satisfactory, first by the Commission and later by the Council and Parliament, accession could materialize in 2004, i.e 15 years after transition began. This was among the longest processes recorded to date, if we disregard that of Turkey, which still continues.

Therefore, it was only legitimate to expect that joining the Community of stability, security and prosperity would foster internal changes and improve long term performance of the country. First, membership was conditional upon introducing more time-consuming reforms. These included environmental, social and other changes, but most importantly an obligation to join the Eurozone “in a foreseeable period of time” - usually estimated at 4-6 years at worst. Secondly, it was hoped that improving the strategic position of the country would trigger a major inflow of new foreign direct investment, outpacing the already increasing outward FDI from Hungary to the east and the south. Thirdly, it was also postulated that convergence to the policies of the core EU countries would improve the quality of overall macroeconomic management. Fourthly, it was widely believed that membership in a currency bloc, or even the prospect of joining in, would ward off any major external shocks that may originate in the global economy. Finally, the synergy among the above listed was taken for granted and thus credit was given to the conventional models of economic integration postulating a steady convergence to the countries with a higher level of development.

It is all the more surprising to observe that catching up started to ebb well before the eruption of the global financial crisis in 2008-9. Moreover, Hungary, having been accustomed to a leader position in terms of systemic reforms ever since the late 1960s, had lost momentum by 2002-2003. It happened just at the time of EU entry would have called for – and allowed for – radicalizing structural reforms. Ever since  the slowdown of growth, the increase in unemployment, the stagnant international competitiveness,  explosion of public and private debt and sustaining high inflation  indicate the cumulative costs of doing nothing .

Thus we come to one of the more unpleasant insights of policy reform literature. Namely that the position- and the edge - of the ‘early bird’ can easily be lost. Furthermore, that performance must always be seen in comparative perspective. If Hungary’s peers outperformed her, even a per se sufficient delivery qualifies as inadequate. For instance, the 16.2 thousand euro per capita GDP in purchasing power parity, where Hungary stood at the end of 2010 was about the same, 66.3% of the EU average a decade ago. However, in the same period countries that historically fell behind Hungary approached and even overtook her. Poland, always significantly poorer than Hungary in the past century, reached exactly 16.0 thousand euros per capita. Even more strikingly, Estonia, coming from the  internal Soviet Empire, overtook Hungary with 16.5 thousand euros, despite the 3.7 pc contraction in 2008 and the even steeper fall of 14.3 per cent in 2009,  hardly made up by the growth of a mere 2.3 pc in 2010. Similarly Slovakia, which tended to be the poorest part of the historical Hungarian Kingdom – the Highlands – took over by 19.0 thousand euros per capita, and even being able to adopt the single currency since 2007.  In short, the country’s relative performance was indeed dismal and in need of explanation.

We attempt to paint the broad picture in uncovering the reasons behind the derailment. We leave analysis of the nitty-gritty to other papers and continue the broad comparative theoretical endeavour started a quarter of a century ago. We therefore purposefully omit the analysis of individual measures and non-measures of various governments, which is the task of an economic historian, or of current commentary. Instead we stick to what may be relevant for other countries and for broader economic theory from our interpretation of both success, in 1989-2002, and derailment, in the following decade. This is not to belittle the significance of studying bits and pieces, but we are opting for a different genre.  We are interested not in the immediate background, but in what is the mover behind the mover, i.e. those factors which may explain the long run tendencies, not the individual policy moves. Lessons are formulated, albeit in a tentative manner.

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