wiiw Reality Check: Remembering transition

04 May 2016

wiiw Economist Gábor Hunya recaps 25 years of transition in Hungary and Romania and shares his personal as well as professional assessment of “New Hungary”

What transition meant for me

Reflections on the past are typically influenced by present circumstances. My current life takes place on the Austria-Hungary-Romania axis which is not much different from that of 25 years ago. Based in Hungary in the 1980s, I wrote on economic development issues in Romania and other East-Central European countries. I was aware of the deepening crisis of the centralised ‘planned’ economic systems. Also the results of the – mostly half-hearted – market reforms disappointed me. Still it was a lot more pleasant to live in Hungary than in most of its Eastern and Northern neighbours. I had ample opportunity to travel and experience the functioning of the Western system. By the late 1980s I became an enthusiastic supporter of deep systemic reforms which aimed at introducing market coordination in the economy and democratic institutions in politics. This was what transition meant to me: adopting the internationally dominating system of liberal capitalism and democracy.

On speed and sequencing

As to sequencing, I shared the overwhelming opinion among Hungarian economists that the liberalisation of market forces based on private property required a fast and coordinated change in the legal and institutional systems. But the various aspects of market reforms required different amounts of time, giving rise to transitory mixed systems. It took at least half a decade to set up the main institutions and make private property the dominant form of ownership. By all indicators, transition was faster and better implemented in Hungary, which essentially became a market economy by the mid-1990s, than in Romania with its gradualist policy and half-transformed state-owned enterprises (SOEs).

Romania muddled through the 1990s without having established a functioning market economy. Transformation was guided by foreign consultants with little success of transferring and embedding knowledge. Rent-seeking produced more destruction in public assets than what could be expected from straightforward privatisation. Hesitant transition promoted cronyism and legal uncertainty. Only after 2000, when EU accession was put on the agenda, did Romania implement the most important reforms. The privatisation of what had remained of the large SOEs was carried out. The country soon underwent a spectacular economic recovery. But cutting back corruption and improving the functioning of public institutions has been put on the agenda only in recent years. One may now have some hope in progress seeing the efforts of the current technocratic government and the anti-corruption agencies. I did not expect a decade ago to get more optimistic about Romania’s future than Hungary’s.

On privatisation and FDI

The privatisation of SOEs was in the focus of my research and publication activity in the 1990s. I argued for the sale of SOEs to strategic owners which had the knowledge and capital to restructure the companies, invest in technological upgrading and ensure access to new markets. Based on social (often populist) arguments in the early phase of transition, mass privatisation by coupons was widely introduced in several countries, giving away shares to the population at large. As expected, corporate governance was not established by this method and the concentration of ownership followed via the secondary market making the social argument obsolete.

Whatever way of privatisation was taken in the transition countries, most of the former state-owned enterprises did not prove viable. They lacked proper management, lost their former markets and were short of capital. Many former SOEs went out of business and their assets were taken over by new firms. In the whole privatisation process, foreign investors had an advantage over domestic ones in terms of market knowledge, management skills and access to capital. Those technologies which were relevant for growth were mainly in the possession of multinational corporations and could be accessed only through becoming subsidiaries. The sale of industries and banks to foreign investors proved successful in most cases, giving rise to a strong export sector and accessible banking services.

In retrospect, there was too much attention given to the privatisation of large enterprises in the 1990s and too little to the support of entrepreneurship. Small ventures mushroomed often as an escape from unemployment. They seldom grew beyond arm’s length. Domestic private capital thrived mainly in protected segments of the economy where connections to the authorities, favouritism and corruption supported the accumulation of fairly large fortunes. A partly different way of privatisation was pursued in Poland where the stock exchange mobilised capital for hundreds of domestic companies. As a result, the domestic private sector there has become larger and more competitive than in Hungary and in other countries of the region.

After privatisation had by and large been completed, my research interest turned to the study of greenfield FDI and its impact on economic development. Research has confirmed the expected positive effects of FDI on economic growth, but also problems were identified. The spill-over effects to the domestic economy were very limited, mainly because the domestic companies did not develop sufficiently to become attractive partners for foreign multinationals.

The access of foreign investors to former public monopolies and oligopoly markets resulted not only in better services to customers but also in relatively high prices and lack of competition. The authorities proved weak in building and safeguarding competition. Unfortunately, the debate on the role of the state went into the wrong direction, focusing on the size of public involvement in the economy instead of on its quality. The failures of some privatisations should not have resulted in questioning the idea itself but in stimulating the transformation of public institutions. The new roles of the state in shaping and guarding competition, providing framework conditions, regulation and public goods evolved too slowly and were often blurred by group interest and allowed for discretionary intervention.

On post-transition in Hungary

The newly gained freedom in 1990 and the relatively smooth political transition gave ground for optimism regarding Hungary’s political future as a democratic state. To my surprise, democratic values have not become deeply rooted in the society. Some were opportunistic, giving up ideals for personal benefits, while for the majority of people making both ends meet remained the main concern. Democratic control over the government diminished over time. The Fidesz party learned the use of the manipulating power of the media and has relied on populist slogans to gain a comfortable majority and re-write the democratic constitution.

To my disappointment, etatism has not lost its popular attractiveness and the idea of national control over large market segments has re-emerged. The Orbán regime has brought back some of the institutional solutions of the communist era in the form of state monopolies over utilities, or the standardised curricula in public education. What I had expected even less was the revival of the pre-WWII national conservative ideology and practices at the government level. I had been aware of the strong nationalist undercurrent in Hungarian popular thinking which contrasted with my liberal ideals. But I thought a compromise for progress was possible and did not expect that the nationalists would expand their control over the state and the society in the way they have done since 2010.

Arguably, the historical period called ‘transition’ came to an end at about the time when the respective countries joined the European Union under the condition of having a ‘functioning market economy’ and democratic institutions. Whatever changes the development path of a country has taken since then comes under the heading of ‘varieties of capitalism’. The current Hungarian variety moves away from the ideals of transition as illiberal political and economic solutions have come to the forefront. Poland has embarked on a similar road recently. Right-wing populism as well as its leftist counterparts has gained ground also in the rest of Europe. The trust in common European institutions has been shaken, partly due to their cumbersome operation and inability to provide common solution to pressing issues such as migration. Options for more and for less integration are both open now. While my preference is for more and smoother integration, I am worried about where we are heading to.