A new Bokros "package": Not likely

Lajos Bokros is one of the leading economists in Hungary. He was minister of finance from March 1, 1995, to February 29, 1996, when he resigned. Apparently he had threatened to resign before; every time his advice was not taken his inclination was to step down. Just to give an idea of his mercurial temperament: in 1990 it took him only two months as a member of parliament to be fed up with politics. He resigned.

A brief summary of his career: He was born in Budapest in 1954. He studied at the Karl Marx University of Economics, graduating in 1978. Two years later, in 1980, he received his Ph.D. and became a research fellow at the Financial Research Institute of the Hungarian Ministry of Finance, where he served as Chief of the Public Finance Division in 1986. From 1987 he was Deputy General Manager and then from 1989, Managing Director of the Hungarian National Bank. In the first half of the 1990s his positions included Chairman and CEO of the Budapest Bank, Chairman of the Budapest Stock Exchange, and Director of the State Property Agency. After his short stint as minister of finance he worked for the International Bank of Reconstruction and Development (World Bank) and currently is a professor at the Central European University attached to the Department of Public Policy. In addition to his administrative duties he teaches one course: Macroeconomics and Public Finance.

The country's economic situation was disastrous in 1995. But Prime Minister Gyula Horn was loath to introduce an austerity program of the magnitude that seemed necessary. For eight months he did nothing while his first minister of finance, László Békesi, proclaimed the end of the world every second day. Hungary had fallen into the abyss, he said, but he couldn't convince Horn to allow him to introduce the necessary changes. He therefore resigned in January 1995, though his resignation took effect only on March 1. Meanwhile for two solid months Horn interviewed prospective candidates for the post, including Zsigmond Járai, later Viktor Orbán's minister of finance of decidedly right-wing political views. At last Lajos Bokros was named on March 1 and twelve days later came the cold shower: an unprecedentedly severe austerity program later to be known as the "Bokros package."

What was the situation at the time Lajos Bokros took over? From 1990 to 1993 the GDP had shrunk by more than 20%, industrial production by 35%, and agricultural production by 40%. Consumption that had already dropped prior to 1990 further shrank by 10%. In 1994 the value of real wages was 22-23% less than in 1989. Unemployment was 2% in 1990; by 1993 it was 13%. Between 1990 and 1994 1.4 million jobs disappeared. Inflation was more than 25%.

Bokros achieved what seemed to be a miracle: by 1997-98 the Hungarian economy was on the right track. The greatest beneficiary of this was Viktor Orbán and his government that took over the reins of government that year. Perhaps one day I will detail the remedies Bokros used, some of which turned out to be unconstitutional and had to be withdrawn. Among other things, social services were curtailed and public outcry was great.

Bokros has for some time been trying to sell a second "Bokros package," but there doesn't seem to be taker at the moment. His latest laundry list was published last Thursday in Élet és Irodalom. It is a lengthy essay of about 30 typed pages. The suggestions, perhaps economically sound, are politically unacceptable. No government can possibly follow Bokros's advice. Even if Gyurcsány and his economic team were willing to listen to Lajos Bokros, the fact is that today's political situation is in no way comparable to that in 1994-1996. Then the government had more than a 75% majority in parliament. The right-wing parties--Christian Democrats, MDF, and Smallholders--were weak and ineffectual. Fidesz was the smallest party and barely got into parliament. Orbán and his friends were not quite sure whether they were a liberal or a conservative party. Today they are very strong and their attitude has hardened. They refuse to cooperate with the government in anything, and they certainly would do their utmost to torpedo each and every one of Bokros's latest ideas.

Let's see what Bokros suggests. (1) Compulsory private insurers in healthcare. If you recall the Fidesz-initiated referendum killed that already. (2) Competition among healthcare facilities. (3) Every person over eighteen years must pay health insurance. Right now students and pensioners do not. (4) Change in pension policies that would include individual record keeping of amounts paid. (5) No more thirteenth month pension or salary. (5) Fewer but bigger schools because small village schools cannot provide high quality education. (6) Instead of 77 accredited colleges and universities, keep only 20-25 institutions. Close the rest. (7) These institutions would have governing boards. (8) Competition among high schools. (8) Four to five villages should share one local governmental structure. (9) Widen the number of taxpayers. (10) Taxes should be paid even on minimal wages. They should pay a tax rate of least 10%. (11) Exceptions should be abolished. (12) Real estate taxes based on value. (13) Abolish EVA, a simplified taxation system for freelancers with a lower rate. (14) Abolish the tax free status of small businessmen.

I'm sure that some of his suggestions would do a world of good for the Hungarian economy but I can't see how Bokros's ideas could possibly be introduced. The opposition would launch another referendum,  and hundreds of petitions would be sent to the Constitutional Court that, given its composition, would undoubtedly kill half of the proposals.

The Gyurcsány government, confronted with the country's own economic problems, compounded by the world economic crisis, will have to do something. But it can't try to shore up the budget by collecting health insurance from pensioners and students. Or, unless it wants to commit political suicide, by abolishing the thirteenth month pay of all public employees and 3.5 million pensioners. Or by introducing private health insurers when once a couple with the help of Fidesz managed to get more than 200,000 signatures to hold a referendum against the introduction of private insurers. The Constitutional Court only recently announced that real estate taxes based on property values are unconstitutional. So what are we left with? It seems to me that Bokros, whose policies were so instrumental in righting the economy in the mid 1990s, can no longer offer realistic proposals to the government under very different political circumstances.

Comments

[Ricsi]

Éva,
You summed it up yourself when you said 'perhaps economically sound but politically unacceptable '-perhaps it really is time for this incompetent gang to go so that some economic sense can again prevail ??

[Eva S. Balogh]

Ricsi: Éva, You summed it up yourself when you said 'perhaps economically sound but politically unacceptable '-perhaps it really is time for this incompetent gang to go so that some economic sense can again prevail ??""

No government could follow Bokros's advice. It has nothing to do with incompetence.

[Op]

Don't forget that we - having no other choice - have to trust the same corrupt, incompetent government to pull us out of the ditch, that drove us into it. Why is Gyurcsany still in power? Obviously because there is no way to legally remove him. More than half of the MPs are not elected by the public and don't represent the people. Parties are useless, not one of them is capable of offering real solutions, they are busy fighting each other. They are dividing the nation instead of uniting it.
No trust, no "can-do" attitude, no purpose, no flag to follow. How do you restart a country that lost its faith in itself?
Where there is no transparency and accountability, anything goes. Hungary needs major changes in its political system. No phony "summits" and empty Gyurcsany promises will make any difference. Where can we find a charismatic leader with credibility and healthy ideas?
Anyone?

[Odin's lost eye]

You have summarised what Mr Bokros suggests. Many of these are quite sensible. There are some which if the Government was cleaver could be seen as a positive benefit to all
You report in your piece that there are some 3.5 million pensioners. Is this correct? With a total population of some 10 millions what are the actual population demographics for Hungary?. I suspect that this would show up the nub of the problem.
Mr Borkros however does not suggest that Hungary has a look at other countries which have may be fairer tax regimes for both personal direct taxation and direct business taxation.
I will disagree with Mr Bokros in this sense that business taxation can be a very powerful tool in encouraging and giving incentives to those areas of the economy which need to be developed. A gentleman, your namesake and another Hungarian by the name of Kardor invented a useful method of encouraging manpower into various sectors of the economy. The money raised from Selective Employment Tax was supposed to be used to encourage just such mobility in the labour force, but as usual what the Treasury did not manage to grab, the Whitehall Mandarins spent on administration and empire building. The whole thing thereafter just ‘stunk’ and had to go.
Until someone takes the ‘bull by the horns’ and sorts out a more equitable method of direct taxation this country will get no where. I suspect if someone does those who want power for it's own sake would try to destroy the idea

[Eva S. Balogh]

Op: "Don't forget that we - having no other choice - have to trust the same corrupt, incompetent government to pull us out of the ditch, that drove us into it."

Unfortunately the other side is not offering any alternative. If it did I had perhaps a different opinion but for the time being I just have to hope that this government will handle the situation at least as well as they handled the gas crisis.

[Ricsi]

How did they handle the gas crisis ? It was beyond control of this gang . Now you 'hope' they will do as well ( ! ) in handling the current economic situation. Éva, you where once far better than this .I detect a realisation creeping in ,in that you know the time is really up for pseudo communism.It is just a pity that you always placed your faith in 'them'.

[Eva S. Balogh]

Ricsi: "How did they handle the gas crisis ?"

So well, that for almost two weeks Hungary had no shortage while others were freezing to death. Not only that they had enough gas to take care of the country but they were helping Serbia, Bosnia, and if it was necessary Slovakia. That's pretty good to me. The best performance in the region.

[Vladimir]

Prof. Balogh brings up a good point in that Hungarians should compare themselves more with their neighbors. In my time here, it seems that Hungarians are navel-gazers; only espousing normatives instead of having a good grasp of reality that bad things do happen in every political system. (Look at the sorry state of Illinois!) What matters really is how much, and does it stop business from getting done in an efficient manner. So far, Hungary has done quite well compared to most of its neighbors. But that is changing, and still there is seemingly huge gap of affluence when you compare Hungary to Austria. Hungary ought to be a bit more realistic and humble when it comes to their expectations socially and politically.

[Mark]

I have two sets of comments - one is on the proposals themselves; the other on their politics.

My first comment is on how little Bokros's proposals would achieve. Clearly they are not a diagnosis of Hungary's current economic woes, but instead are proposals to rationalize and improve the operation of the state. Even when read in this way they are rather questionable. On health - I suspect that privatization of the kind Bokros suggests would make little difference to the core problems of healthcare (this, after all, was the experience of the Netherlands which introduced similar changes). On pensions - well, in administrative terms the financial advantage of individual accounts only accrue if the funds in which the money is invested perform well (in the likely economic future this seems questionable). And without it, the burden of administering individual accounts would add administrative cost (this isn't to mention how the state budget would bear the transitional problem of financing a dual system for the 30 years or so before everyone was being paid from an individual account). The problem with pensions, which Bokros ducks, is that there are too few contributors paying in too little, and too many are taking too much out. And on higher education - well there might be a benefit to fewer institutions. But this again avoids the real questions. Firstly, about curriculum (can a country like Hungary really afford all those graduates in the Humanities?)Secondly, and how do you have world-class teaching and research when the state preserves the institutional split between an academy which has research institutes that do research - and the universities teach?

The politics, however, are interesting. I looked recently at FIDESZ's December 2007 programme (the English and Hungarian versions are on their website - I would read them both, as each version has been carefully prepared with its distinct audience in mind - I had the distinct impression that the populism has been removed from the English version). It is very short on specifics, but there is an approach there, and a set of priorities:

1. A balanced budget
2. Dynamic economic growth through improving competitiveness
3. Promotion of exports

FIDESZ don't say how they will implement it, but the logic of these priorities suggests to me that a FIDESZ government would actually pursue a Bokros-like policy, and the differences between them and the SZDSZ say, are not as great as leading politicians would have you believe (and this suggests that in power Orbán would very quickly meet with his own Gyurcsány moment and attendant political crisis).

The real problems are not so much the lack of agreement between the parties, but the ways in which the dynamic of political competition prevents this becoming apparent. The second problem is that - rightly or wrongly - the population does not accept the logic of these economic policies. Thus, there is something of a gulf between the public and the parties that is highly dangerous politically (and I say this as someone who doesn't accept the logic of Bokros's economic philosophy)

[Eva S. Balogh]

Mark: "but the logic of these priorities suggests to me that a FIDESZ government would actually pursue a Bokros-like policy, and the differences between them and the SZDSZ say, are not as great as leading politicians would have you believe"

In 1998 the Fidesz campaign promised the world and I was very much afraid that if they win the benefits of the Bokros-package would be gone. In fact, I wrote a letter to the editor of The New York Times to that effect right after the elections. But in fact between 1998 and 2000 Fidesz pursued a very prudent economic policy. What I was afraid of didn't materialize until 2000-2002 when they began to spend in order to win the elections. It didn't work out but the country began to slide into an irresponsible fiscal policy to be continued by the socialists under Péter Medgyessy.

[Mark]

Éva,

Of course, and this brings us back to questions of political honesty and legitimacy. In 2006, just as in 1998, they promised so much that I wondered whether they had Harry Potter lined up to be Finance Minister! And, in 2009, they look as if they will try and do the same thing again. I suspect though because of their - justified - attacks on Gyurcsány in this parliamentary term, and the straightened economic circumstances that Hungary will find itself in I think they will face a rapid loss of confidence if they win in 2010.

The problem of legitimacy is connected because the population feels that its politicians have promised them the earth and less has been delivered. Furthermore, they are very suspicious of any form of "market reform". And this brings us back to Bokros. I suspect we would disagree on whether the Bokros package brought real benefits - I think it brought a short-term financial stabilization at medium-term economic cost. What is very clear is that it discredited "market reform" in Hungary, and laid the basis for the policies pursued after 2000.

[Eva S. Balogh]

I have the feeling that Mark and I wouldn't disagree on the benefits of the Bokros package. For the time being: I managed to find my letter to the editor of The New York Times: http://query.nytimes.com/gst/fullpage.html?res=9801E1D8143EF937A35754C0A96E958260&&scp=1&sq=Eva%20S.%20Balogh&st=cse

[HaHa]

Let me just mention, being from the Netherlands, that the reforms in health care that have been introduced there over the past few years are overall being seen as positive by the majority of policy makers. Yes, there are some who want certain features changed, but nobody is advocating to go back to the old situation and there is definitely improvement on some of the core problems (waiting lists, quality of care etc.

The essence of the reform, by the way, is not "privatization" as such. Instead, it is a bigger role for private insurance and private initiative in hospitals besides the state and collective/semi-private organizations; better inspection of health care quality by a central office, and bigger accountability from hospitals and specialists towards the public (everybody can check on the Internet how well or how bad they perform, and then choose to stay or go elsewhere).

But then, this reform took the country about 30 years, and yes, all major parties on the left and right agreed that they needed to be done, so nobody blocked proposals just because they came from the government, even though some of these proposals were earlier part of their own program.

[Mark]

I don't believe that either the systems in the Netherlands, nor even the model proposed for Hungary by the SZDSZ constitutes privatization - though I'm not sure what this means, as all health insurance systems in the developed world (including the creaky US one, and even the theoretically taxpayer funded UK one)contain some mix of public and private provision. The Hungarian "debate" has been in this sense completely misleading, and has been marked by extreme disinformation (I might say here that not only has FIDESZ been guilty of this, but the supporters of reform have not been any better).

As I understand the scholarly consensus on the Dutch reforms, it is really impossible to draw conclusions on the improvement of care, and furthermore the situation is somewhat fluid. However, the model has some serious (potential) problems:

1. It is all very well givng people choices, but to be meaningful they have to be based on accurate information. This is a problem - how do I know if my doctor, hospital, dental surgery is really good? (I'm not arguing against choice per se - I think that openess of information about the performance of health care providers is essential to any reform of the Hungarian system).
2. Enforcement - in the Netherlands, as I understand it, though the payment of premiums is compulsory, around 1.5% of people are believed to have been able to avoid paying. In part this has been that in a multi-insurance system enforcement is a more complex business than in a single-payer model (and in Hungary that percentage is very likely to be substantially higher than that 1.5%). If someone gets sick who has no coverage, who pays for their care? Do they die on the street? And given that your insurers - whether for profit or not or commercial providers - who makes up the losses?
3. Competition - so far the liberalization of the insurance market has followed tendencies visible in a number of other previously controlled markets for services once they are de-regulated. As insurers jockey for position the costs of premiums fall back. We can predict, however, that as insurers compete with each other this process of cost cutting will end and the market will consolidate. The number of insurers will fall, and each will face similar cost constraints. Premium will then rise, and the benefits of competition will fade (because the absolute ammount of money in the system will not be great and the market will eliminate surplus capacity of provision eventually there will be no cost or quality benefit to competition). We've seen processes like this in a number of countries in energy and other product markets.
4. While insurers are required to provide insurance to everyone for a range of treatments laid down by the government, the system encourages people to take out additional insurance. This was a feature of the Hungarian law too. Insurers are allowed to refuse customers for supplementary insurance based on their credit rating or prior medical history. The key problem here is the boundary between the services that are guaranteed and those that are not. Let's suppose we have a financial crisis in which the margins of insurance companies come under pressure. In a consolidated market with little effective competition, those insurance companies will cut their costs by using their power over the market to bargain with the state to either (a) gain greater public subsidy for maintaining the safety net - thus creating pressures on the state budget, or (b) relaxing their obligations in law to cover certain conditions. In practice, I suspect that soon after the creation of a consolidated insurance market, the taxpayers' contribution to insurance companies' expenses would rise, bluting the commercial nature of the market, while what they are obliged to cover the citizens for would fall - creating a fairly unsatisfactory situation (a high state subsidy to profit-making companies, and the development of a "charity" sector for those refused cover for conditions that fall through the net at the bottom).

Having followed the Hungarian debate and think that most of the contributions to it "stink" I've thought quite a lot about this problem. And it is a lot more tricky than anyone admits .....

[Eva S. Balogh]

HaHa: "Let me just mention, being from the Netherlands, that the reforms in health care that have been introduced there over the past few years are overall being seen as positive by the majority of policy makers."

SZDSZ-led ministry advocated the Dutch model but as you know it was torpedoed by Fidesz initiated referendum.

[Ring Toy]

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