1 convergence turned into divergence and decline the example of hungary lajos bokros professor of...
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Convergence turned into Convergence turned into Divergence and DeclineDivergence and Decline
The Example of HungaryThe Example of Hungary
Lajos BokrosLajos Bokros
Professor of economics and public policyProfessor of economics and public policy
Central European UniversityCentral European University
Member of the European ParliamentMember of the European Parliament
Washington, DC, April 5, 2012Washington, DC, April 5, 2012
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Lessons from transitionLessons from transition
Development of transition countries is Development of transition countries is cyclicalcyclical Cycles are Cycles are not synchronizednot synchronized among countries among countries Primarily explained by Primarily explained by domestic factorsdomestic factors Predominantly Predominantly economic,economic, political,political, culturalcultural Institutions are weak, reforms are reversibleInstitutions are weak, reforms are reversible Transition is about Transition is about institution buildinginstitution building by by ReformsReforms leading to growth and convergence leading to growth and convergence Reversing reforms and destroying institutions result Reversing reforms and destroying institutions result
in divergence and declinein divergence and decline
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Hungary & SlovakiaHungary & Slovakiadiametrically oppositesdiametrically opposites
ConvergenceConvergence based on based on groundbreaking groundbreaking reforms:reforms:
Hungary 1990-1999Hungary 1990-1999 Slovakia 1999-2009Slovakia 1999-2009
Divergence and declineDivergence and decline based on postponement based on postponement or reversal of reformsor reversal of reforms
Slovakia 1990-1998Slovakia 1990-1998 Hungary 2000-2012Hungary 2000-2012
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Reforms in HungaryReforms in Hungary1990-19941990-1994
Establishment of the State Property Agency to Establishment of the State Property Agency to drive drive privatizationprivatization in a transparent way in a transparent way
Successful privatization of thousands of SOEs Successful privatization of thousands of SOEs by traditional methods of auction and tenderby traditional methods of auction and tender
Huge Huge injection of FDIinjection of FDI into the real economy into the real economy Groundbreaking Groundbreaking legislationlegislation in banking, stock in banking, stock
markets, bankruptcy, liquidation, accountingmarkets, bankruptcy, liquidation, accounting Support to fast organic development of SMEsSupport to fast organic development of SMEs
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Reforms in HungaryReforms in Hungary1994-19981994-1998
Stabilization without recession started in 1995Stabilization without recession started in 1995 Optimal mix of monetary, fiscal and income Optimal mix of monetary, fiscal and income
policies leading to rapid, export-led growthpolicies leading to rapid, export-led growth Social policy reform: shift from entitlements to Social policy reform: shift from entitlements to
need-based targeting of financial supportneed-based targeting of financial support Higher education reform: tuition feeHigher education reform: tuition fee Pension reform: mandatory private fundsPension reform: mandatory private funds Treasury management for the fiscal sectorTreasury management for the fiscal sector Successful privatization of a number of banksSuccessful privatization of a number of banks
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U-turn in economic policy in 2000U-turn in economic policy in 2000
Instead of continuingInstead of continuing
Export-ledExport-led Investment-drivenInvestment-driven Fiscally neutralFiscally neutral hence financially hence financially
sustainablesustainable growth growth
The only rational policy in a The only rational policy in a small, open, poor, transition small, open, poor, transition economyeconomy
Growth was based on Growth was based on
DomesticDomestic demand demand Driven by Driven by consumption consumption
and importsand imports Fuelled by huge Fuelled by huge fiscal fiscal
overspendingoverspending, hence , hence unsustainable, becauseunsustainable, because
It was supported by foreign It was supported by foreign
borrowingborrowing
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Reform reversals Reform reversals 1998-20021998-2002
Reducing considerably the contribution rate to the new Reducing considerably the contribution rate to the new mandatory private pension pillarmandatory private pension pillar
Opening up the opt-out option (back to PAYG)Opening up the opt-out option (back to PAYG) 70% salary increase to civil servants, law enforcement 70% salary increase to civil servants, law enforcement
officers and military personnelofficers and military personnel Subsidies and tax credit to mortgage loansSubsidies and tax credit to mortgage loans Eliminating the tuition fee in higher educationEliminating the tuition fee in higher education Eliminating means testing in family supportEliminating means testing in family support Significant increase of the minimum wageSignificant increase of the minimum wage
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Fiscal profligacy with no reformsFiscal profligacy with no reforms2002-20062002-2006
50% salary increase for all government 50% salary increase for all government employees (3 times more than civil servants)employees (3 times more than civil servants)
1313thth month salary to government employees month salary to government employees 1313thth month pension; increase of survivor pens month pension; increase of survivor pens 20% increase of family allowances20% increase of family allowances 30% raise of stipends in higher education 30% raise of stipends in higher education Full tax exemption to minimum wage earnersFull tax exemption to minimum wage earners VAT rate reduction without curbing expensesVAT rate reduction without curbing expenses Further increase of mortgage loan subsidiesFurther increase of mortgage loan subsidies
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Fiscal tightening & reforms blockedFiscal tightening & reforms blocked2006-20102006-2010
Tax increases (VAT, PIT, excises, witholding)Tax increases (VAT, PIT, excises, witholding) Reducing price subsidies to energy and drugsReducing price subsidies to energy and drugs First, wage & hire freeze in civil serviceFirst, wage & hire freeze in civil service Reducing the number of budgetary institutionsReducing the number of budgetary institutions Introduction of tuition fee, co-payment in HCIntroduction of tuition fee, co-payment in HC Elimination of all the above after referendumElimination of all the above after referendum Attempts to introduce real estate tax blocked by Attempts to introduce real estate tax blocked by
the Constitutional Court in 2010the Constitutional Court in 2010 Elimination of the 13Elimination of the 13thth month wage & pension month wage & pension
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Wholesale reform reversal I.Wholesale reform reversal I.2010-20122010-2012
Nationalization of the mandatory private pension Nationalization of the mandatory private pension system and confiscation of its assetssystem and confiscation of its assets
Members of the mandatory private pension funds Members of the mandatory private pension funds forced to return to PAYG by government blackmailforced to return to PAYG by government blackmail
Regressive changes in tax & benefit systems (OECD)Regressive changes in tax & benefit systems (OECD) Minimum wage rise with selective subsidies to firmsMinimum wage rise with selective subsidies to firms Direct government intervention into labor relationsDirect government intervention into labor relations Increasing state shareholding in selected enterprisesIncreasing state shareholding in selected enterprises Central bank independence severely curtailedCentral bank independence severely curtailed
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Wholesale reform reversal II. Wholesale reform reversal II. 2010-20122010-2012
Fiscal council with no resources but excessive Fiscal council with no resources but excessive political power (superimposed on parliament)political power (superimposed on parliament)
Tax obligation on severance payments by retroactive Tax obligation on severance payments by retroactive legislation (legal uncertainty)legislation (legal uncertainty)
Huge and highly distortionary sectoral taxes in Huge and highly distortionary sectoral taxes in banking, telecom, energy and retail tradebanking, telecom, energy and retail trade
Large number of public providers of education and Large number of public providers of education and health care taken from local to central governmenthealth care taken from local to central government
Mortgage loan amortization scheme tailored to help Mortgage loan amortization scheme tailored to help only affluent borrowers and destroying bank capital only affluent borrowers and destroying bank capital
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Omnipotent, omniscient stateOmnipotent, omniscient statedistorting and replacing marketsdistorting and replacing markets
Size does matter: general government absorbs Size does matter: general government absorbs and redistributes close to 50% of GDPand redistributes close to 50% of GDP
Predatory and invasive government behavior Predatory and invasive government behavior not respecting private property and contractsnot respecting private property and contracts
Competition rules ignored and/or breachedCompetition rules ignored and/or breached Public procurement rules tailored to favor well Public procurement rules tailored to favor well
connected insiders and special interests connected insiders and special interests Rise in corruption in all levels of government Rise in corruption in all levels of government
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Negative results:Negative results:divergence and declinedivergence and decline
Maximum vulnerability: Maximum vulnerability: twin deficit & debttwin deficit & debt Sovereign credit rating declined to Sovereign credit rating declined to junkjunk level level Extremely high bond yields in secondary marketsExtremely high bond yields in secondary markets Protracted Protracted stagnationstagnation despite marked e/r decline despite marked e/r decline UnemploymentUnemployment at 11.6%; on the rise again at 11.6%; on the rise again Credit crunchCredit crunch, negative FDI-flow, capital flight, negative FDI-flow, capital flight DivergenceDivergence from V4 in per capita GDP terms from V4 in per capita GDP terms Destruction of credibilityDestruction of credibility with erratic policies with erratic policies Irrational “freedom fight” against the IMF & EU Irrational “freedom fight” against the IMF & EU
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0
10
20
30
40
50
60
70
80
90
100
110
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
0
10
20
30
40
50
60
70
80
90
100
110
BG CZ HU RO SI PL SK
% %
General Government Gross Debt
15
-20
-10
0
10
20
30
40
50
60
70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-20
-10
0
10
20
30
40
50
60
70
BG CZ PL RO SI SK HU
% %
Net External Debt
16
-7
-6
-5
-4
-3
-2
-1
0
1
-8 -7 -6 -5 -4 -3 -2 -1 0 1
-7
-6
-5
-4
-3
-2
-1
0
1
SI
CZ
PLSK
HU
RO
BG
aver
age
budg
et d
efic
it
(199
5-20
10)
%
average current account deficit (1995-2010)
%
Twin Deficit
17
0
10
20
30
40
50
60
70
80
90
0 10 20 30 40 50 60 70
0
10
20
30
40
50
60
70
80
90
SICZ
PL
SK
HU
RO
BG
% %
net external debt (2010)
gros
s go
vern
men
t deb
t (2
010)
Twin Debt
18
Credit Rating of V4 by Moody’s
10
11
12
13
14
15
16
17
18
19
Jan-
89
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
10
11
12
13
14
15
16
17
18
19
CZ PL SK HU
Baa2
Baa1
A3
A2
A1
Aaa
Baa3
Ba1
Ba2
Ba3
Credit Rating of the Visegrad Countries (Moody's)
Baa2
Baa1
A3
A2
A1
Aaa
Baa3
Ba1
Ba2
Ba3
junk level
19
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
2000
4000
6000
8000
10000
12000
14000
BG CZ HU PL RO SI SK
euro euro
GDP per capita
20
89
91
93
95
97
99
101
103
max min 2011Q4
89
91
93
95
97
99
101
103
SK
CZ
BGHURO
SI
Crisis and recovery