Economic Processes
Economic Processes
Having been successfully stabilized in 1995 and 1996, the Hungarian economy experienced relatively high GDP growth of around 4-5% in the late 1990s, while its external and internal equilibrium positions did not deteriorate as sign of danger. On the contrary, they even suggested improvement occasionally. In other words, the stabilization program was accompanied by rapid modernization, which continued through 1999 and 2000, albeit at a slower pace.
The concentrated nature of this growth, however, remained along with the strengthening of the boom, and only a decline in the difference of rates prevailed at the most. The driving force behind the Hungarian economy undergoing consolidation was primarily made up of multinational firms active in the industrial sector – more specifically in the engineering industry – whose goods are produced for exportation, and which had sited themselves in the west of the country or in Budapest and its environs (in the “golden triangle” bound by the cities of Győr, Szombathely, Komárom, Székesfehérvár, and Budapest). Differences in production according to sector, sub-sector, ownership, corporate size, market orientation, and region began to manifest themselves in the population’s diverging stockpiling and consumption capabilities, and in strengthening differences in wealth. The one-third/two-thirds social divide that formed in the first half of the 1990s had stabilized, with income differences widening even in 2000 (when the highest growth rate was realized), so the government program aimed at compensating the losers failed in this regard.
Between 1998 and 2000, GDP growth originating in the industry was two or three times as much as the growth in the output of the rest of the sectors, as a result of which the industry’s share in the GDP rose to over 40%. This was attributed primarily to the processing industry, since mining fell back and the energy sector stagnated. This was essentially due to the driving force of the external markets, which exceptionally fostered the development of sectors producing for the export market. These sectors were in contrast with the ones producing for the internal market, in which the demand was not even close to the former. Agriculture could have also been considered in terms of exportability, however, this sector was unable to recover even in those years because of uncertain ownership and serious capital shortages. In 2000 the gross output of the agricultural sector was still at 1997 levels.
The results of the construction industry – having increased its output by approximately 30% over three years due to an active investment demand – and the dynamic development of telecommunications and commerce stood out from the sectors producing for the internal market.
The business cycles failed to coincide with the calendar in the survey period as well. The three years between 1998 and 2000 can essentially be divided into four stages. The differences between and duration of the stages were determined by changes in export market conditions, which is indicative of the markedly open nature of the Hungarian economy, and its striking dependence on the foreign market and investors. The first stage, which lasted until mid-1998, was characterized by the upward boom of 1997, when, in addition to exports, a rise in investments and consumption considerably impacted on GDP growth. Partly due to the Russian crisis and partly to unsettled sentiments because of the change in government, a lag followed this surge and lasted until mid-1999. Production growth then regained pace after the EU regained its prosperity. The fourth stage began in mid-2000, when both external and internal market demand weakened. Initially, the rate of decline was due to a high reference figure, though weakening net exports (balance of the export and import of goods and services) also made themselves felt by the end of the year.
While the GDP increased by approximately 15% between 1998 and 2000, the employment rate rose by only 5%. So, growth followed a very profound course – demanding of technology but not of labor. This suggested a major rise in productivity. The unemployment rate dropped from 7.8% in 1998 to around 6% in 2000, without any improvement in structure.
Throughout the period, the dynamics of real income constituted 50% of GDP growth, and fell short of the rise in the economic productivity rate. So, in terms of wages, no inflation was generated within the period surveyed.
Regarding inflation, the interval between 1998 and 2000 can be divided into two periods. In the first period, industrial price rises dropped to one quarter of the 1997 figure of 20% by 1999 (to 5.1%). The construction industry’s pressure on prices in 1999 was approximately half (10.7%) of the 1997 figure (20%). Regarding agricultural production prices, however, the inflation rate dropped even faster, with producer inflation falling to 1/5 its value in two years (from 13.4% to 2.6%), which was accompanied by a rather marked widening of the price gap between agricultural and industrial products in 1999. The growth rate of consumer prices also fell significantly, by 8.3 percentage points over 24 months. Powerful deflation - which contradicted the vital boom - was essentially the outcome of world market deflation stemming from the Asian, then the Latin American and Russian crises, which manifested itself primarily in a fall in oil and food prices. The cooling off of inflation was also aided by appreciative exchange-rate policy.
During 2000 - the second stage - however, adjustments took place, with factors formerly reducing inflation gaining momentum. The price pressure exerted by industrial producers more than doubled over the space of twelve months (from 5.1 percent to approximately 11.5 percent). Agricultural price pressure increased approximately eight-fold (from 2.6 percent to approximately 21 percent), and consumer inflation did not abate either; prices rose by approximately
10 percent, just as much as during the previous year. Core inflation also stared rising from the second semester of 2000.
10 percent, just as much as during the previous year. Core inflation also stared rising from the second semester of 2000.
The outward balance developed in accordance with the changes that growth factors had undergone: the deficit in the current balance of payments – measured as a proportion of the GDP – exhibited a marked decline following the institution of an economic stabilization policy, amounting to 2.1 percent in 1997. In 1998, however, it rose to 4.8 percent because of brisk imports, which was the result of increased internal demand and was accompanied by export demands receding due to the Russian financial crisis. In 1999 and 2000 strengthening exports and a gradual rollback of consumption improved the outward balance index (to 4.4 percent in 1999 and to 3.8 percent in 2000).
Deficit financing was variable during the surveyed period. While in 1997 the influx of foreign capital generously financed (over-financed) the country’s external resource demand, in 1998 it managed to cover only one third of the deficit in the current balance of payments. Namely, due to regional distrust appearing as a result of the change in government and the Russian financial crisis, USD 800 million less foreign capital was brought into Hungary, coupled with a dramatic rise in the exportation of domestic capital. Both operating capital investment and portfolio investments in stocks and bonds had lost momentum. As a result, the downward trend in the net outstanding total debt expressed as a percentage of the GDP - noticeable since 1995 - was broken.
In 1999 the situation changed with lower deficit being offset by a higher capital influx. Even though only EUR 300 million more operating capital flowed in, Hungarian capital export, however, dropped by nearly 50 percent. At the same time, advantageous interest premiums managed to attract portfolio investments again. So, the net outstanding total debt expressed as a percentage of the GDP fell to 24.8 percent from the previous year’s figure of 26.4 percent. The lower outward deficit in 2000, however, was again only partly financed by net capital injection this year, which is on the decrease primarily due to the outflow of portfolio capital. Thus, the country’s exchange debt is on the rise again.
Inbound working capital varied around EUR 1.2-1.5 billion per annum within the period surveyed in spite of the fact that privatization was mostly over. The majority of the investments had been green-field investments, whose bulk was implemented by the suppliers of multinational firms that had already settled in. Foreign capital investment increased, albeit through the reinvesting of profits and proprietary loans.
A change in the budget deficit relative to the GDP indicates changes in the equilibrium regarding internal processes. This index improved (from 8.6 percent in 1994 to 1.9 percent in 1997) following the adoption of an economic stabilization policy, then deteriorated as a result of loosening budget policy during the elections, rising to 4% percent. As a result of a unique economic policy adjustment in 1999 and 2000, it was possible to limit the budget deficit near the Maastricht requirement (3%). The proportion of the national debt relative to the GDP dropped thanks to a reduced deficit in the balance of current accounts, downward interest trends, and accelerating GDP dynamics, dropping below the 60% specified by the Maastricht requirements (it amounted to 64% in 1997 and 57% in 2000).
Of course, the government’s economic policy also played a major part in forming the key macroeconomic trends outlined above. There had been major expectations in respect of the Fidesz-led cabinet. Their new voter base expected the bold promises made during the election campaign to be fulfilled as soon as possible by the new young and dynamic Prime Minister who firmly believed in willpower. Those, however, who contemplated the country’s situation in the long term were worried that intolerable forespending would begin - reaping the success of the stabilization policy - which would quickly unsettle the country again. The investors lost confidence, and the stock market began to tumble. The question was whether the new cabinet should continue its predecessor’s balance-preserving economic policy or go in a new (old) direction.
With two and a half years elapsed, it can be judged that the Fidesz-led coalition essentially trod in the steps of its predecessor, while making major changes in the economic control structure. Apart from the decisions it had made, the cabinet can also be held negligent in may things. These three issues are examined briefly below.
In terms of its actual practice, economic policy exhibited no change. The communication which set the government’s economic policy to music in order to cover up the activity was entirely different. In its communicated economic policy, the cabinet overemphasized as much as it could its disgust at the stabilization package and all manner of austerity policy, while it claimed even the most trivial results to be its own and magnified them out of proportion. If none were to be found, for example in home and road building, it envisioned a better future. The cabinet considered this feat of communication hocus pocus as an alternative more valuable than open talk or the unity of action and words.
Such Janus-faced politics had to be discarded because the government had overestimated the 1999 budget in the ‘captivity’ of its promises made during the election campaign. In spite of stepping back (e.g., raising pensions), the actual budget contained considerable overexpenditure, which could have caused extreme problems had no interventions been made (both inflation and GDP growth had been overestimated, they relied too much on the inflow of tax revenues, etc.). The cabinet was averse to effecting an intervention throughout the first half of 1999, while the decisions on limiting expenditures and increasing revenues had already been made. For the benefit of maintaining an equilibrium, the government made a silent adjustment that year, whose nominal magnitude reached that of the so-called Bokros Package. In terms of content, though, it did not directly affect the population (the freezing of extraordinary reserves and central investments, the devotion of state assets to current expenditures, bookkeeping maneuvers, etc.). The means committed to silent adjustment, however, could only be used once, while the extent of the tasks they financed did not decrease. Moreover - in order to meet EU requirements - the budget deficit even had to be reduced by 2000. To make up for revenues lost, Fidesz initially tried to introduce a “tax reform”, which would have resulted in greater revenues by widening the taxable base. The coalition partner’s expert, however, did not accept such an idea contradictory to the government’s program, so the new tax plans had been dropped from the agenda.
So, in order to keep the 2000 budget at bay, the government resorted an instrument of economic policy called ‘underplanning the budget’. Because of significantly higher revenues than expected (cca. HUF 250 billion more ) and expenditures barely rising above the targets, the budget abounded in money that year. Consequently, invisible adjustment followed the principle of “global pillaging” resulting from higher inflation this time, which hit budget-financed entities the worst. Using the tricks employed in 1999 and 2000 - albeit communicating them in an entirely different way - they managed to maintain an internal equilibrium even in conjunction with a high growth rate, while the outward balance was kept healthy by a definitely favorable export demand from the second semester of 1999.
The revamping of control over the economy by the government is something that definitely caused significant changes. The government was made ‘double-headed’, and the Smallholders, being in an advantageous blackmailing position, were given uncontrolled omnipotence in the agricultural and environmental departments, where subsidization rates were said to be decided during private discussions between the Prime Minister and the Smallholder Party President.
The referee’s offices set up at the Prime Ministerial Office were intended to exercise control over the ministries in order to assert the interests of the overall economy against those of sectoral policy. Yet they were unable to fulfil their function because control over the economy had never been as political as then. The Ministry of Finance - representing financial control - was weakened, and they continued an incessant battle to bring discredit on the authority of the National Bank of Hungary. In spite of having incorporated the drafting of a socioeconomic strategy in the system at several points (the Prime Ministerial Office, the Ministry of Economy, and the Ministry of Finance), no effective economic strategy took form until late 2000.
Control over the economy again and increasingly reeks of centralization, the elimination of a system involving the consideration of interests, and the revival of paternalism. The principle of Social Security Local Governments was liquidated, privatization was frozen - moreover deprivatization even started, local government financing was considerably cut (while increasing their workload), and redistribution was then made party policy-based. The direct intervention in the economy by politics increased the political risks inherent in Hungarian stock investments, which - in spite of favorable macro-indices - threw the stock market index to unexpected depths in the early spring of 2000.
The passing of a two-year budget was certainly a novel achievement by the new government, embodying another major limitation of parliamentary democracy. Namely, for autumn 2001, the government is granted full authorization to adjust the 2002 budget - whose expenditure targets are already extremely limited - in accordance with unforeseeable developments. A two-year budget represents a predictable economic and political margin at least for the government.
The government’s economic policy was negligent in that it brought the process of economic change to a standstill. The considerable decline in inflation in 1998 and 1999 due to external causes (global economy) made the cabinet overly comfortable, so they failed to work out a the powerful anti-inflation package promised in the government’s program. Instead they generated increasing volumes of latent inflation through official price fixing.
During its governmental cycle, the administration took the job of transforming state finance off the agenda for good by passing the two-year budget. It is now certain that no balanced budget will be created, the state’s task will not be redefined, and the tax system - reinforcing EU conformity - will not change. No reforms are expected in public administration or health care either.
In summary: over the eighteen months elapsed between 1998 and 2000 the cabinet limited the operation of the market economy, while keeping the economy on a course of growth, and also failed to facilitate further high-rate, financeable development of the degree expected. Following the non-communicated economic adjustment of 1999 and 2000, an economic policy relying on marked internal expansion is expected from 2001, which will entail a deterioration of the equilibrium.
Mária Zita Petschnig
