Market reform and state paternalism in Hungary: a path-dependent approach

Hungary is one of the worst-hit countries of the current financial crisis in Central and Eastern Europe. The deteriorating economic performance of the country is, however, not a recent phenomenon. A relatively high ratio of redistribution, a high and persistent public deficit and accelerated indebtedness characterised the country not just in the last couple of years but also well before the transformation, which also continued in the postsocialist years. The gradualist success of the country – which dates back to at least 1968 – in the field of liberalisation, marketisation and privatisation was accompanied by a constant overspending in the general government. The paper attempts to explore the reasons behind policymakers’ impotence to reform public finances. By providing a path-dependent explanation, it argues that both communist and postcommunist governments used the general budget as a buffer to compensate losers of economic reforms, especially microeconomic restructuring. The ever-widening circle of net benefiters of welfare provisions paid from the general budget, however, has made it simply unrealistic to implement sizeable fiscal adjustment, putting the country onto a deteriorating path of economic development

Rules-based economic governance in the European Union: A reappraisal of national fiscal rules.

The economic and financial crisis of 2007/2009 has posed unexpected challenges on both the global and the regional level. Besides the US, the EU has been the most severely hit by the current economic crisis. The financial and banking crisis on the one hand and the sovereign debt crisis on the other hand have clearly shown that without a bold, constructive and systematic change of the economic governance structure of the Union, not just the sustainability of the monetary zone but also the viability of the whole European integration process can be seriously undermined. The current crisis is, however, only a symptom, which made all those contradictions overt that were already heavily embedded in the system. Right from the very beginning, the deficit and the debt rules of the Maastricht Treaty and the Stability and Growth Pact have proved to be controversial cornerstones in the fiscal governance framework of the European Economic and Monetary Union (EMU). Yet, member states of the EU (both within and outside of the EMU) have shown an immense interest in adopting numerical constraints on the domestic level without hesitation. The main argument for the introduction of national fiscal rules was mostly to strengthen the accountability and credibility of national fiscal policy-making. The paper, however, claims that a relatively large portion of national rules were adopted only after the start of deceleration of the debt-to-GDP ratios. Accordingly, national rules were hardly the sole triggering factors of maintaining fiscal discipline; rather, they served as the key elements of a comprehensive reform package of public budgeting. It can be safely argued, therefore, that countries decide to adopt fiscal rules because they want to explicitly signal their strong commitment to fiscal discipline. In other words, it is not fiscal rules per se what matter in delivering fiscal stability but a strong political commitment

Fiscal adjustment and economic growth in the European Union

The current world economic crisis induced countries to launch wide-scale spending programmes all over the world. Member states of the European Union have not been an exception to this trend. While deficit spending may increase the aggregate demand, it can also accelerate indebtedness and make the required spending cuts politically risky later on. However, deficit financing is not a new phenomenon in the EU; it has been widely practiced in the last couple of decades. As the crisis seems to come to an end, countries with huge deficits should adopt exit strategies now, thereby reducing deficit and debt and reintroducing fiscal discipline, a requirement laid down in the Stability and Growth Pact. Nevertheless, former adjustment processes can provide ample evidence for successful and politically viable fiscal consolidations. In certain cases, even economic activity started to accelerate as a response to the welldesigned adjustment measures. Based on the previous experiences of EU states, the aim of this paper is, therefore, to identify the conditions that may determine a fiscal consolidation to be successful in terms of a reduced debt ratio and a positive economic growth

The importance of institutions in expansionary fiscal consolidations. A critical assessment of non-Keynesian effects

The short-term effects of fiscal consolidation have attracted an increasing attention from both the academia and policy makers in the recent years. Authors in the literature on non- Keynesian effects usually put the emphasis on the need for the devaluation of the national currency, the accommodating reaction of the monetary authority and the favourable international economic conditions as the necessary accompanying tools of fiscal consolidation, in order to realise short-term expansionary effects. Some also add the necessity of large-scale adjustment; while others support the view that a high and increasing debt ratio or increasing government spending, by triggering an unavoidable adjustment, is the key to experiencing short-term expansionary effects. The composition of adjustment also became a crucial explanation for non-Keynesian effects. However, as the following critical assessment of the literature on expansionary fiscal consolidations will reveal, institutional conditions, such as the importance of the depth of financial intermediation and the influencing role of labour market structure, can prove to be crucial in the occurrence of the desired expansionary short-term effects

Market reform and fiscal laxity in Communist and post-Communist Hungary: A path-dependent approach

Purpose – The purpose of this paper is to present a conceptual framework in order to analyse and understand the twin developments of successful microeconomic reform on the one hand and failed macroeconomic stabilisation attempts on the other hand in Hungary. The case study also attempts to explore the reasons why Hungarian policymakers were willing to initiate reforms in the micro sphere, but were reluctant to initiate major changes in public finances both before and after the regime change of 1989/1990. Design/methodology/approach – The paper applies a path-dependent approach by carefully analysing Hungary's Communist and post-Communist economic development. The study restricts itself to a positive analysis but normative statements can also be drawn accordingly. Findings – The study demonstrates that the recent deteriorating economic performance of Hungary is not a recent phenomenon. By providing a path-dependent explanation, it argues that both Communist and post-Communist governments used the general budget as a buffer to compensate the losers of economic reforms, especially microeconomic restructuring. The gradualist success of the country – which dates back to at least 1968 – in the field of liberalisation, marketisation and privatisation was accompanied by a constant overspending in the general government. Practical implications – Hungary has been one of the worst-hit countries of the 2008/2009 financial crisis, not just in Central and Eastern Europe but in the whole world. The capacity and opportunity for strengthening international investors' confidence is, however, not without doubts. The current deterioration is deeply rooted in failed past macroeconomic management. The dissolution of fiscal laxity and state paternalism in a broader context requires, therefore, an all-encompassing reform of the general government, which may trigger serious challenges to the political regime as well. Originality/value – The study aims to show that a relatively high ratio of redistribution, a high and persistent public deficit and an accelerated indebtedness are not recent phenomena in Hungary. In fact, these trends characterised the country well before the transformation of 1989/1990, and have continued in the post-socialist years, too. To explain such a phenomenon, the study argues that in the last couple of decades the hardening of the budget constraint of firms have come at the cost of maintaining the soft budget constraint of the state

Az európai gazdasági kormányzás előtt álló kihívások. A hármas tagadás lehetetlensége (Challenges of European economic governance. The impossible trinity of denial.)

Az európai gazdasági integráció folyamata olyan kényszerhelyzetekben formálódott a múltban, amelyek a közgazdaságtudományban jól ismert lehetetlen háromság alapján is leírhatók. Az Európai Monetáris Rendszer a rögzített árfolyam-mechanizmusra és önálló jegybanki politikára épített, korlátozva a tőkemozgásokat. A Gazdasági és Monetáris Unió ugyanakkor a tőke szabad áramlásával és az árfolyamok visszavonhatatlan rögzítésével felszámolta a tagállami szintű jegybanki autonómiát. Az euróövezet működése egyszersmind arra a háromszoros tagadásra épül(t), hogy 1. nem lehetséges az euróövezetből való kilépés, 2. nem engedélyezett a kimentés és 3. nem kerülhet sor államcsődre. A 2008-ban Európát is elérő pénzügyi és gazdasági válság azonban elemi erővel mutatott rá e hármas tiltás tarthatatlanságára. A gazdasági kormányzás körül kibontakozott viták így jól közelíthetők a három tiltó szabály egyidejű érvényesülése lehetetlenségének bemutatásával, számba véve az egyes opciók költségeit és lehetséges hasznait. / === / The process of economic integration in the EU has been shaped by the well-known theorem of the impossible trinity. Accordingly, the European Monetary System was built upon a mix of a fixed exchange-rate regime and an autonomous monetary policy, thereby constraining capital mobility. In launching the EMU project, the EU countries decided to fix national currencies irrevocably and maintain full capital mobility, in exchange for delegating their monetary policy upwards to a supranational level. The introduction of the Euro zone, however, has simultaneously meant denial of the following three elements: (1) exit, (2) bail-out, and (3) default. Nevertheless, the 2008–9 financial and economic crisis has demonstrated mercilessly that these three pillars are incompatible with each other. So the current debates on reshaping economic governance in the EU can be modelled by introducing the “impossible trinity of denial”, concentrating on the benefits and the costs of each option

European economic governance through fiscal rules

The European Union has been one of the most enthusiastic proponents of fiscal rules. Following the European sovereign debt crisis, the EU did not embark on a wide-scale governance reform with the aim of creating a fiscal union; rather, it started to cement the original architecture that had been built upon fiscal rules. By applying the conceptual framework of liberal intergovernmentalism, the article argues that the choice between stronger rules on the one hand and deeper fiscal integration on the other hand has been basically determined by German preferences. With the help of the simple model of warof-attrition, the article shows that core countries managed to strengthen the rules-based economic policy framework of the EU to the extreme

„A „globalizált falu” viszont olyan kis, vidéki hely, amely fekvése és mérete ellenére benne van a globális vérkeringésben”. Interjú Palánkai Tiborral

Palánkai Tibor, akadémikus, a Világgazdasági Intézet professor emeritusa, március 1-jén ünnepelte 80. születésnapját. Ebből az alkalomból készítettünk vele interjút

Kormányzás és kormányozhatóság

Az euró magyarországi bevezetésének időzítéséről és mikéntjéről élénk szakmai vita folyt a kora kétezres években. Az utóbbi néhány esztendőben azonban az euróvitát kiszorította a magyar gazdaságpolitika lehetséges korrekciójának kérdése. Ezért is üdvözlendő Neményi Judit és Oblath Gábor tanulmánya, amely figyelmeztet: a rövid és középtávú nehézségek ellenére sem téveszthetjük szem elől az euróbevezetés célját. A szerzők egyszerre vizsgálják a magyar csatlakozás lehetőségeit és előfeltételeit, valamint magának az euróövezet intézményrendszerének az adósságválság hatására megindult reformját. Tanulmányuk terjedelme és mélysége sem teszi lehetővé, hogy minden felvetésükre érdemi reakció szülessen. Ezért a következőkben a gazdasági kormányzás kihívásaira koncentrálunk