Today Figyelonet.hu (Figyelő = Observer) published two opinions on the austerity program introduced by Lajos Bokros on March 12, 1995, fourteen years ago. They interviewed economists László Gazdag, associate professor of economics at the University of Pécs, and Mária Zita Petschnig, senior researcher of the Financial Research Institute in Budapest. Gazdag is not widely known from his appearances in the Hungarian media unlike Petschnig who seems to be a favorite of television stations. But Gazdag and Petschnig are the foremost representatives of the two schools: those who think that Bokros did more harm than good and those who think that without Bokros Hungary would have faced bankruptcy.
According to Gazdag in 1994 there was no economic crisis in Hungary but because of Bokros's austerity program by 1996 there was one. It is true, says Gazdag, that between 1989 and 1993 the Hungarian economy had drastically contracted, but by 1993 the country had reached "the bottom of the barrel." In 1994 there were signs of economic recovery: the GDP grew by 2.9% and exports by 16.6%. The benefits of foreign capital investment began to show. It seemed that the painful transition from a planned to a market economy was more or less over. But then came Lajos Bokros's austerity program. In 1995 economic growth stopped, inflation increased from 18 to 28%, and exports decreased by 50%. Domestic business activities slowed and many businesses went bankrupt. Because of the high inflation rate the Hungarian National Bank had to raise interest rates and because of the higher rates the economy lost about 160 billion forints. The unemployment rate went up. All in all, this was a situation economists normally call an "economic crisis." But, Gazdag continues, "in Hungary it was called 'side effects.' The only thing I don't know is what was the main effect." Gazdag claims that the real effect of the austerity program was widespread misery, with 1.5 million people beginning their journey toward poverty. As the result of Bokros's remedy real wages were only 75% of those in 1989 and pensions 79%. All in all, according to Gazdag, the Bokros package created a genuine economic crisis in 1995 and 1996 at a time when there was no longer any need for a drastic austerity program because in 1994 there were already hopeful signs of a recovery.
Mária Zita Petschnig is on the other side. According to her, the introduction of the austerity program was unavoidable. She admits that the results of the progam were painful but without it Hungary would have been unable to meet its foreign loan obligations. Petschnig goes a bit farther back in time than Gazdag. In 1993 the Hungarian national debt was 3 billion dollars. A year later it was 3.9 billion. These numbers are considered very high by any international comparison. The problem was noticed during the Boross government (1993-1994). Béla Kádár, minister responsible for foreign trade, and Iván Szabó, minister of finance, warned the government that without a drastic correction a complete meltdown might be approaching. Gyula Horn, the new socialist prime minister, also knew about the problem but was hoping to avoid the introduction of a painful austerity program. In August 1994 the government devalued the forint by 8% and quickly adopted a supplementary budget. At this point came the Mexican peso crisis that made investors even more cautious. László Békesi, Horn's minister of finance and today one of the architects of the Reform Alliance, resigned. So did the chairman of the central bank after the prime minister made his life miserable. (Péter Ákos Bod is today one of the supporters of Fidesz.) Gerhard Schröder, the German chancellor, told Gyula Horn that Germany no longer could finance the country. According to Petschnig, Bokros's program managed to pull the country from the abyss. It's true that the austerity program hurt large segments of society, but the planned devaluation of the forint over time and other changes in custom duties cushioned the economy as a whole. Yes, the GDP slowed somewhat but after the 1994 high (2.9%) in 1995 it grew by 1.5% and in 1996 by 1.3%. According to Petschnig it is an illusion to think that Hungary without Bokros's intervention could have grown out of its indebtedness, especially when the budget deficit was 8.6%.
Without making any judgment I'll let my readers decide which economist to believe.