Economic strategies of the Hungarian opposition

It's almost impossible to know what Viktor Orbán's economic strategy will be if he wins the 2010 election. His political opponents try their best to make him admit that under the present circumstances a Fidesz government couldn't do anything else but what the present administration is doing. For obvious reasons, no Fidesz politician will ever admit to that. After all, the party's popularity hinges at least in part on its promise that all the measures introduced by this bloodsucking government will be reversed. Young mothers will be able to stay at home at the government's expense for three years instead of two, a reduction imposed by the Bajnai government. The newly introduced property tax will be abolished. For a while there was even talk about the reintroduction of the extra month pension, but a couple of days ago Orbán said something very tentative to the effect that "perhaps one will have to be careful about its reintroduction" because that is a big item in the budget. The latest Orbán utterance on the deficit was revealing. According to him, the Hungarian deficit should be allowed to grow to the average of the European Union, which at the moment is 7%. It's no wonder that foreign financial analysts consider Orbán's rather irresponsible and obviously political statements a risk factor for Hungary. The latest warning came from Kai Stukenbrock at S&P Credit Research. He expressed his doubts about an Orbán-led Hungary's economic strategy.

However, one may make the same mistake I made in 1998 when Orbán and Fidesz campaigned on a populist, fiscally irresponsible platform. Everybody, including me, already saw the beneficial results of Lajos Bokros's belt tightening campaign disappearing. Squandering (osztogatás) will be continued. At the time Tina Rosenberg in an editorial in The New York Times (June 27, 1998)  talked about Orbán's "unrealistic economic promises." In response I wrote a letter to the editor (http://tinyurl.com/nxdxbq) in which I expressed the opinion that "we must hope that Mr. Orban's promises will remain only promises. Otherwise, the economic recovery of the last three years will come to naught." And indeed, they remained mere promises. The squandering started only two years later in anticipation of the 2002 elections. One head actually rolled because of indiscretion. László Urbán, the man who was picked to be Orbán's minister of finance, lost his bid for the post because he made the mistake of saying publicly that the "campaign program" and the "government program" are two different things. Orbán wasn't happy.

The situation is somewhat similar now, eight years later. "Unrealistic economic promises" are followed by cautionary statements made by economists close to Fidesz. Viktor Orbán is quite capable of making a speech at the time of the release of a hefty volume of essays by economists, some of whom are advisors to Orbán, and hail it as "our program." But when it turns out that in one of the essays an economist advocates the introduction of property tax, he then claims that, after all, the contents of the volume are only the personal opinions of the writers and not Fidesz's program. Strictly speaking, of course, he is right. One must say that it is a clever ploy.

The latest twist in the so-called economic strategy of the party is that György Szapáry, a close economic advisor to Orbán, gave an interview to HVG (July 16, 2009) in which he said certain things that contradict the "official" party line. First, let me say a few words about Szapáry. He is blue blood on both his father's and mother's sides. He is the grandson of a former Hungarian prime minister, Count Gyula Szapáry (1890-1892), and his father, also Gyula, was a wealthy landowner in eastern Hungary in Tiszabura, a village of about 2,000. He was born in 1938, and his aristocratic family didn't fare too well after 1945. In 1956 at the age of eighteen he left Hungary, ending up in Belgium. He received his degree in economics at the Catholic University at Louvain in 1961. In 1967 he went to Washington where he worked for the IMF until 1990. In that year he returned to Hungary as the representative of the IMF. Later he was one of the vice-chairmen of the Hungarian National Bank.  In 2008 Orbán asked him to be the unofficial ambassador of Fidesz within the international financial community that Szapáry knows well. He was supposed to allay the fears abroad about Viktor Orbán's intentions.

The first surprising announcement was that, as opposed to Orbán, Szapáry doesn't want to increase the budget deficit. "Increasing the budget deficit would eat away the trust that Hungary has slowly begun to regain, and that is something one must avoid at all cost." Hmm! As for what Fidesz is going to do after a possible victory, "we don't know, we have to wait until they form a government." However, Szapáry thinks that Hungary will need further loans from the IMF and the EU for at least two reasons. First, receiving more money from these sources would "increase the trust" of the international community; second, Hungary will not be able to obtain credit at such a low interest rate elsewhere. These loans would be accompanied by certain restrictions that would "force a certain discipline on the government."

Later in the interview Szapáry returned to the 7% budget deficit Orbán was talking about. He announced that he was almost certain that the IMF wouldn't never agree to a further loan on this basis, but he added that he didn't think that Fidesz had such intentions. But new loans will be necessary because the current agreement will expire in March. "The question is which government should conduct the negotiations." In Szapáry's opinion it should be the next one, although the elections will take place only in April and May. Of course, this is an impossible suggestion. No government two months before the elections will cede power to negotiate an international contract. It would be political suicide because it would be an admission of defeat before the elections were held. I don't know how good an economist Szapáry is, but he seems to be totally unfamiliar with political realities. I might add that just today the minister of finance announced that there might be no need for another IMF loan because today's sale of euro-denominated government bonds was a tremendous success. The Hungarian government could have sold three times as much as it offered. However, I can assure György Szapáry and Viktor Orbán that if Hungary needs a new loan from the IMF or the EU it will not be the Fidesz candidate for the post of minister of finance who will conduct the negotiations on behalf of Hungary. Moreover, who knows? He may lose his prospective job just as László Urbán did in 1998 when he told the truth.

Comments

[Mark]

"The latest Orbán utterance on the deficit was revealing. According to him, the Hungarian deficit should be allowed to grow to the average of the European Union, which at the moment is 7%".

I think this is one of the more - potentially at least - sensible things Orbán has said. The "real" economy in Hungary needs the support, if it is ever to return to a growth path. But, I say only potentially, because the extra expenditure has to be tied to a programme to promote growth, and it has to be backed up by a medium-term programme of sustained public expenditure reduction to kick in once growth is restored. Even if he gets his raised deficit the road will be rocky, and I don't there will be much room of populist measures (though at least it offers the chance of avoiding semi-permanent stagnation which is where current policies are leading).

" He announced that he was almost certain that the IMF wouldn't never agree to a further loan on this basis, but he added that he didn't think that Fidesz had such intentions."

No-one really knows what is going on as far as the international organizations are concerned. You may have noticed the situation in Latvia, which was rescued by a financial package put together jointly by the IMF and the EU last autumn. Well, as of today, the EU released the tranche of the money to be paid out in June, but the IMF hasn't - and the Latvian government is making it pretty clear that there is some difference of opinion between the two donors. No-one knows what this difference is: the Wall Street Journal thinks that the IMF is unhappy with cuts in social spending; others think the IMF wants faster deficit reduction. Many seem to think that the IMF wants an orderly devaluation before the whole edifice collapses a la Argentina. Of course, Latvia's underlying situation is worse than Hungary's. And much water will flow down the Danube before next March, but the international context is fluid.

Also there is something rather artificial about the economic situation. It is true that nerves on the financial markets have recovered, but it is far from clear that this reflects any real improvement in the economic fundamentals, particularly in the Eurozone, and especially in CEE, where the situation in some countries appears, if anything to be worsening. I can't help but think that by the autumn things will have changed again.

In such an uncertain climate, it may be responsible for FIDESZ to be vague, as the strategy that seems viable now may be redundant by early next year. The problem, of course, is that FIDESZ's past behavious doesn't inspire trust.

[Eva S. Balogh]

Mark, I have the feeling that you're quite alone with this position. 99% of all economists say the opposite. As long as there is no economic growth in countries where Hungarian exports go there won't be any great economic growth in Hungary. It would be money down the drain. Matolcsy tried to stimulate internal consumption after 2000 and it was an awful flop.

[NWO]

Eva

I think Mark is probably correct in his view that counter cyclical Government spending would for a short time improve the GDP and employment situation in Hungary. Look at the policy of the Government 2002-2006. The GDP growth in that period was driven largely by deficit spending, and it was enough to get the Govt. re-elected. The problem with the strategy, however, is that in Hungary it almost certainly will not contribute to long term economic growth and a sustainably healthy economy. First, Government spending in Hungary does not "flow through" to the real economy effectively (too much money is lost or wasted along the way) and is not invested/spent in areas that would lead to a longer term more competitive economy. Second, unlike the U.S., Hungary cannot finance the deficit spending. Moreover, the impact of high deficits and increased borrowing combined with a further loss of credibility would again have potentially devestating consequences on the currency and the banking system.

[Mark]

Éva: "I have the feeling that you're quite alone with this position."

I've never been one for following crowds.

NWO: "The problem with the strategy, however, is that in Hungary it almost certainly will not contribute to long term economic growth and a sustainably healthy economy"

A counter-cyclical stimulus is by definition a short-term measure. It will only work if it is combined with some depreciation of HUF to address some of the underlying competitiveness problems (in other cases failure to address these issues led to the failure of stimulus-based crisis management in the UK in 1974-6, and France in 1981-3, and lay behind some of the ineffectiveness of Matolcsy's measures). The point isn't that it is a substitute for long-term reform, but that it will make that process more sustainable. And given that a 7% GDP decline in 2009, followed by one of 2-3% next year, isn't a great environment in which to conduct reform, someone, sooner or later, is going to have step in to stabilize the situation if long-term reform is to suceed.

The real question of "strategy" is what that long-term reform process has to address. As Erzsébet Szalai has pointed out recently (http://www.hungary.indymedia.org/node/11266), leaving everything to "market forces" just won't wash. I think all those concerned about the future direction of the economy have to ask themselves some serious questions. Namely:

1. Given that the FDI, manufacturing-based model of growth is exhausted, at least for CEE, because of the likely changes in the world economy following this crisis, what will be Hungary's sources of growth in future?
2. How can Hungary manage the tensions created by its hugely unfavourable demographics? In this situation, how does it create a larger cake, while creating an equitable settlement regarding the division of that cake between young and old?
3. Given that the state will continue to be important for many people, no-one will be able to "roll it back" for the foreseeable future. Therefore, how can its operation, its accountability, and its efficiency be improved?
4. Because of the legacy of cheap Soviet gas and oil Hungary is very dependent on fossil fuel consumption. We know that despite the recession inspired price fluctuation the long-term trends in energy prices are upwards, and because of climate change the environmental costs of maintaining this model are severe. We also know that Hungary is less far down the road - and requires more investment - that western Europe to manage the transition to a low-carbon economy. How is this going to be done?
5. Given the value that the population places on economic security, how can a welfare net be created which is both sustainable and satisfied these demands?

I'd suggest that answering these questions suggests quite a major change in everyone's economic strategies.

[Eva S. Balogh]

NWO: "Look at the policy of the Government 2002-2006. The GDP growth in that period was driven largely by deficit spending, and it was enough to get the Govt. re-elected."

I remember differently. GDP was going down around 20002 and never substantially went up afterwards. At the time of tight budget (Horn government and the first two years of Orban government) economic growth was rapid.

[Mark]

Éva: " GDP was going down around 20002 and never substantially went up afterwards. At the time of tight budget (Horn government and the first two years of Orban government) economic growth was rapid."

According the United Nations Economic Commission for Europe Hungary recorded an annual average rate of GDP growth of 4% from 1996 to 2000, and 3.8% between 2001 and 2005 (www.unece.org/oes/disc_papers/ECE_DP_2006-1.pdf) Table 5

[Eva S. Balogh]

Mark: "According the United Nations Economic Commission for Europe Hungary recorded an annual average rate of GDP growth of 4% from 1996 to 2000, and 3.8% between 2001 and 2005"

I will look it up but I remember that when Orban took over the growth was over 5%. In 2002 it was 3.5%. Yesterday I looked up Tina Rosenberg's piece in NYT and there it is mentioned that when Orban won the Hungarian Stock Exchange dropped something like 8%. Eventually it recovered when people realized that Orban's promises were only promises never to be fulfilled. And when he went into high gear and tried to stimulate internal consumption by spending it was not a success story. It was the beginning of the slippery slope. For this attempt to be continued by Medgyessy Hungarians have been paying ever since.

[Leeflang]

Mark: "Given that the FDI, manufacturing-based model of growth is exhausted, at least for CEE...."

I really don't see why this should be the case. On the contrary, the current worldwide crisis might push more high-value added production (and R&D, back offices, outsourcing operations etc)in the CEE direction once things start picking up again in a half a year to a years time. There is no doubt that many companies shutting down production in Western Europe today will, once their stocks are depleted and they decide to start producing again, will not want cheaper and more flexible locations to build extra capacity.
True, recovery might be shallow and there might be a new dip (a W-shaped recession/recovery), but once Germany will start producing and consuming again, the Hungarian economy as it is might recover in as fast a pace as it has collapsed over the past half year. And thank god the Bajnai goverment is there to repair some of the most notorious consequences of the left-wing Orbán-Medgyesi populism of the past years.
Let's just hope a Fidesz government under president Orbán - once they ztake over - will be at least a little bit sensible in the financial/economic field (which is a huge thing to hope for).

Hank

[NWO]

Mark:

The irony is that if there is a politician in Hungary who articulates an economic policy most similar to what you have advocated, it is Orban.

On your specific points, I am not 100% sure the FDI driven manufacturing model is dead (business sees the risk of investing further into Eastern Europe, and do not want to rely on 100% outsourcing of production to the Far East), though I agree that there is an increasingly limited life expectancy to this strategy. Obviously, there is no easy answer to what can and should come next. Given Hungary cannot rely on tourism like Austria or Croatia, it must be some combination of lighter manufacturing, logistics, agriculture and services. Outsourcing, IT, medical tourism are all possibilities, but none are big enough to create the jobs lacking in this country and they all require a long term devalued currency to keep Hungary competitive. Regardless, successful investment in education is essential for the future.

Finally, I do not see any real way to close the gap between the different parts of the Country. The North East is destined to continue to be the Hungary's version of the Midwest in the U.S.--a post industrial wasteland. The SE (around Szeged) still has an opportunity if the local economy in the region can further integrate into the economies of Romania and Szerbia.

[Mark]

NWO: "The irony is that if there is a politician in Hungary who articulates an economic policy most similar to what you have advocated, it is Orban."

Yes, it is a bit worrying, isn't it?

Hank: "I really don't see why this should be the case."

I'm sure you are right about the thinking of individual firms and managers. If, however, they go down that route the cumulative economic effect will be to delay the return to growth. The issue, put very simply, is who is going to buy all of these cheaper products. While cost cutting in western Europe may be rational from the perspective of an individual firm, it will reduce aggregate demand. It is important to remember that over the last business cycle this strategy only made economic sense because a small number of rich economies were able to borrow huge sums against inflated house prices to solve the problem on the demand side. We must remember that it was the puncturing of this solution that is the immediate cause of the current global problems (though it is a shame that some people haven't focussed on the underlying issues). If one were very optimistic one could imagine - of these countries - that Australia might return to the levels of debt-financed spending seen before the crash. Undoubtedly, the USA and the UK will have to borrow less, save more, and export more. And that is not to mention Spain and Ireland. Therefore you have to ask who will buy these goods. And, though there are lots of new consumers in east and south Asia these do not have to sort of incomes that would be able to buy goods produced at European (even at CEE) wages.

I could believe that the model we have had returns for four to five years (and for that reason NWO scenario's of an "an increasingly limited life expectancy to this strategy" is a plausible one), but it is difficult then to see how the economy of the EU15 would be anything other than - at best - stagnant. And in the situation, even if Hungary was relatively successful, I don't think it would protect even its current living standard. And that's just not mention a range of other problems with the model to do with increases in transportation costs etc.

We know too that Hungary has been in something of an impasse with FDI since 2001, for good reasons that we've debated in depth before.

[Bob]

So FIDESZ is "fiscally irresponsible".

What would you call the Gyurcsany/Bajnai total disaster? Why would anyone want to hang onto the miserable failure called MSZP? Never mind Jobbik, the real extremists are Bajnai, Draskovics and the rest. They are the trouble-makers, not the Guard. Let's worry about how much more damage the current government is going to do before their time is up. We're on a speeding bus, and the driver is too drunk to realize that he's blind. And you guys are busy attacking the only person who's trying to stop this madness. Brilliant.

[International monetary fund IMF]

To achieve its goals, the IMF focuses and advises on the macroeconomic policies of a country, which affect its exchange rate and its government's budget, money and credit management.