The hidden miracle

Hungary: Towards a Market Economy - The Political Economy of Protest and Patience
May 14, 1999

These books examine the issue of political and economic transition in Eastern Europe. One is written by economists for economists. The other by a political scientist for a lay audience. The main subject of both is Hungary.

Bela Greskovits tries to explain, in The Political Economy of Protest and Patience , why there has been no breakdown in democracy in Hungary. A number of authors have suggested that an inevitable result of the radical changes would be destabilisation, violence and a breakdown of democracy resulting in authoritarian or dictatorial regimes.

He suggests three reasons why this has not occurred. First, some who suggested breakdown used South American transition as their main analogy. This is inappropriate as different conditions prevailed. Second, some employed a simplistic economic determinism and universalism that led to ideological bias and incorrect analysis. Third, there was a failure to carry out in-depth studies of the factor conditions in the different countries of Eastern Europe that determined the survivability of the new democratic regimes.

Greskovits maintains that the legacies of communism encouraged the stability of the new regimes in the early days. The main elements that contributed to passivity included a culture of non-violence, a lack of income inequalities and large numbers of poor pensioners and rural workers.

This was a relatively conservative and immobile population. Many people were likely to be hard hit by the transition, but many had the ability to shift into the informal sector to gain income and survive harsh times. Later, neo-liberal reforms took root and provided structures and institutions that sustained the new systems. But Greskovits considers that democracy and a market economy could be introduced simultaneously only because neither had been fully implemented.

In Hungary and other countries there is a democratic deficit, and Greskovits suggests they are poor democracies in which decisions are made behind closed doors by influential elites. There is some evidence that large numbers of citizens are disenchanted, demotivated and play no role in the new politics. Pressure groups are not heard and the media often appears to have a biased agenda. Political parties have acted on behalf of discontented sections of the community, but have not had the power to make significant changes.

Some may see his conclusion as sanguine, believing that the threat of a return to authoritarianism is very low. He feels that as long as the neo-liberal transformation strategy continues, the structural changes will demobilise the capacity for collective action of those in opposition, especially labour and low-income groups. To some this may seem a short-sighted and depressing judgement on the lack of real progress towards democracy.

A quite different view emerges from Hungary: Towards a Market Economy , edited by Laszlo Halpern and Charles Wyplosz. It contains a wealth of empirical evidence on the state of economic development in Hungary. While the authors find that economic mistakes have been made they show how successful Hungary has been in adapting to a market economy over the past decade.

They suggest that Hungary is unique in several ways: first, its openness to foreign investment and the rapid development of skills in accurate market valuation of assets; second, rapid development of a stable banking sector; third, implementation of a strict bankruptcy procedure; fourth, the restructuring of welfare, health and pensions.

Hungary is seen as the most favourable location for many foreign investors. The irony is that these positive factors have not led to the one thing that the country craves: superior economic growth.

While Greskovits seeks explanations for this in terms of the link between economic and political development, Halpern and Wyplosz use an economic frame of reference and take no explicit account of the role of politics. The book provides some reasons for poor performance through an analysis of the economic changes that have taken place. Some would argue that a much longer-term view needs to be taken.

In many ways the economic and social revolution that has taken place in Eastern Europe can be compared to the economic and social problems faced by Germany after the second world war. To expect to see results when some of the important structures have been in place for only five years is overly optimistic. Indeed it is suggested that policy errors in 1993 and 1994, and the following tough stabilisation package, stifled growth in Hungary, postponing the expected improvement in economic performance.

The one interesting explanation for the apparently lower-than-expected level of economic growth is provided by Maria Lack. She suggests that there may be a significant hidden economy (equivalent to between 26 and 36 per cent of gross domestic product).

The method of estimation is interesting and is well discussed by Michael Landesmann. If these estimations are accurate, they may provide some sort of answer to the questions raised in both books. Unless political institutions deal with these issues, inequalities may increase and could lead to protest and reaction. Whether this could encourage the development of authoritarianism is debatable.

The reality of poor democracy has meant a lack of political leadership and a vacuum in public management. The hidden economy provides an indication of the size of economic misconduct that threatens both political and economic stability. Such problems cannot be contained within the borders of one country. The G8 meeting of leading industrialised countries and Russia in July 1997 witnessed the recognition that economic transformation was also associated with economic misconduct that poses a threat to the international community.

The work of Halpern and Wyplosz is a useful contribution to the literature on transitional economies. It provides carefully researched and detailed evidence of economic change. It also contains very interesting commentaries on each chapter by other economists. These, together with the introductory chapter, will be particularly helpful for the lay reader in understanding what they call the hidden Hungarian miracle. From a quite different approach, Greskovits provides a compelling insight on the relationship between the economic and political aspects of change and why protest has been so muted. Both books deserve a wide readership among those interested in the economic transition of Eastern Europe.

Simon Booth is senior lecturer in management, University of Reading.

Hungary: Towards a Market Economy

Editor - Laszlo Halpern and Charles Wyplosz
ISBN - 0 521 63068 1
Publisher - Cambridge University Press
Price - £45.00
Pages - 390

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