The Bokros package: pro and con

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.

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Mark
Guest
“Without making any judgment I’ll let my readers decide which economist to believe.” After a comment like that – I can’t really resist, I’m afraid !!!!!! Seriously though, I agree with different elements of both opinions. NWO and I have discussed the issue of Hungary’s reluctance to seek partial debt foregiveness and restructuring when it is fairly clear that such a deal would have been on offer in 1990 on this blog before. This meant that Hungary found itself in an effective debt trap, as its GDP fell, along with the value of HUF. I need to look up the figures, but my memory is that the Antall government was pretty successful in controlling spending in the face of extreme economic circumstances until – I guess because of the government’s political weakness – the summer of 1992. As the elections approached, the Boross government further relaxed spending controls (way too late to have any appreciable impact on their election chances). Servicing the debt imposed a huge burden on the budget; and if memory of the statistics serves, the burden of making debt repayment was at least as great as the value of the capital flowing into Hungary through FDI meaning… Read more »
NWO
Guest

Mark:
You will not be surprised to read that I think the Bokros package was crucial to Hungary avoiding bankruptcy. I also believe that the reason there has been no long term fruit borne from this sacrifice is that everyone in Hungary felt it was a one-off medicine, and once taken te Country was safe to pursue reckless policies again.
On the political side, the Bokros package may well have contributed to the demise of SzDSz and to rational liberal politics. It obviously served as a basis for Fidesz to move from the liberal, center to the populist, right. This, I think, more than anything has been devestating for Hungarian public policy because of the impact of MSZP which has since then attacked from a populist angle instead of a liberal one. The disaster of both parties effectively adopting a populist politics for more than a decade can be seen in the destruction around Hungary today.

Hank
Guest
“The roots of the extreme distrust of market reform that have underpinned recent popular reactions have their roots in the period between 1995 and 1998…” No doubt this played a part, but people would have been disappointed hugely anyway whatever whoever would have done, because expectations of what the rendszerváltás would bring were ridiculously high to begin with. In fact, I remember very well how people were already hugely disappointed in capitalism and politic elites in 1992-1993 because Hungary wasn’t as rich as Germany yet. See also the awful turn-out figures at elections at the time, or the short popularity of Fidesz in the polls when it was still a left liberal party of young kids not associated with the older elites. So I think it is far too easy to blame Bokros for this (although I do agree that implementing such a program now in the current social-political circumstances is impossible and foolish). And once again I’d like to add, that Hungary is not special at all in this huge antipathy against established politics. I’ve traveled extensively all over the region, from Poland to Romania, in the past two decades and mistrust in political elites (left and right) is… Read more »
Mark
Guest
Hank: “One more note about Slovakia: it had the luck that it had it’s Bokros package in a time (2000-2006) when the region was still booming.” Hungary too was lucky when the Bokros package was introduced that the continental European economy had moved out of the recession of 1992-3, and was firmly into a recovery phase. After the economic shock of the package wore off, the return of the European economy to growth made the export-led strategy viable. Two points follow from this. Had the package been implemented in different circumstances its impact on living standards, the domestic economy and on the social fabric would have been much more severe. Secondly, this pattern of growth was exhausted in 2001. Obviously, Hungary had to cope with the blowback from the collapse of the stock market and the general turn to recession globally. This, I think was exacerbated by the impact of the EU’s decision to go for a “big”, rather than a “small” enlargement in 2000, which meant that Hungary was forced to compete more fiercely for FDI given that many cheaper countries suddenly became more attractive to investors (the European Investment Monitor’s surveys show that CEE’s share of European FDI… Read more »
NWO
Guest

It is simple. By 2000 or 2001, Hungarians believed all the hard work was done. EU accession was on track, and income and lifestyles would inexorable converge with Austria and Germany. The politicians indulged the public in this lie. The lonely voices claiming this was not the case were sent to the sidelines or like Bokros sent out of the country. This attitude combined with the legacy of massive debt and sadly the era of east credit from 2005 on have left the country where it is.
Sadly, while Hungarians understand I think the trouble they are in. There is still almost no acknowledgement that it was this attitude of “we havemade it; no more hard work” that is responsible for the situation. Hungary is still the alcoholic that first needs to admit to the problem.

Mark
Guest
NWO: “It is simple.” Sadly nothing in life is simple, and especially nothing in the economic history of a country! The fact really has to be faced that as far as living standards were concerned, the 1990s were a lost decade. Per capita real income only reached its 1989 level in 2000, which meant that for the average the period of the transition was a pretty miserable one. The first half of the decade saw a sharp increase in income inequality, which meant that a signficant proportion of the population were worse off than in 1989. Serious problems of persistent unemployed had emerged. One in four Hungarian household found it difficult to purchase food, and/or have decent housing (a figure that is something like twice that of the OECD average) Hungary’s political system had become a competitive one organized around two poles in 1998. In democratic systems parties are supposed to compete by offering better government according to what citizens wanted. And there is no question that after the lost decade of the 1990s, they wanted improvement in the standard of living. In this situation, every textbook of democratic politics would tell you that the parties would compete to offer… Read more »
Mark
Guest
Hank: “So I think it is far too easy to blame Bokros for this” I don’t blame Bokros or his package for the disasters of the 1990s. I think that the real mistakes go back to the mistakes of the Németh and Antall governments in failing to secure debt relief/restructuring, insisting on too tight a monetary policy and too strong a Forint, implementing the bankruptcy laws too zealously in the depths of a recession and neglecting employment policy. I don’t though believe the neo-liberal mythology of Bokros as some kind of saviour either. In 1995 Hungary was forced to introduce an orthodox financial stabilization package as a consequence of pressure from the financial markets and western governments. Bokros was simply the instrument through which this was done; while he did achieve a short-term financial stabilization, he did so at enormous social costs, and in so doing contribute to the damage done to the real economy by earlier mistakes. The question of the political costs are important. I don’t deny that the population in 1989 had little idea of what it would be like to live in a free market economy, and that this would have a been a shock in… Read more »
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