The HungarianAmerica Foundation
in cooperation with the Comparative Economic Studies
Cordially Invites You to a
Lecture and Discussion
COMPETITION & SOLIDARITY
by Lajos Bokros, Ph.D.
[Article 1 |
6:30 pm, Friday, June 4, 2004
Kossuth House, Washington, D.C.
on the occasion of the publication of his article in the June 2004 issue of the Comparative Economic Studies journal.
Brian R. Pinto, Lead Economist, Economic Policy Division (PREM), World Bank
Vito Tanzi, Senior Consultant, Inter-American Development Bank
(former Director of Fiscal Affairs Department, International Monetary Fund)
This event is invitation-only.
* * *
Lajos Bokros is a prominent representative of the generation of Hungarian reform economists who built the intellectual foundations for transition in Hungary in the 1980s. When the time came to implement those reforms, he played a pivotal role in recreating the financial system a modern market economy required; he was the president and CEO of a large commercial bank and the head of the newly reopened Budapest stock exchange. Together with György Surányi, he was the architect of the immensely successful stabilization effort in Hungary in 1995–1996. After leaving the Hungarian government in 1996, he joined the World Bank and played an influential role in shaping the Bank’s activities, providing policy advice in the area of banking and financial reforms. During this period, he also served as advisor to the Polish and Croatian governments.
About the article:
This essay that was written for a wide audience in Hungary. It is a powerful writing with a very ambitious target – to convince the Hungarian public that the large and inefficient government political populism created in Hungary is neither socially just nor does it serve their longer-term interest. The author faces a formidable challenge, due to the lack of social dialogue and, thus, consensus about what the government should do and what the extent and form of social solidarity should be in Hungary. The author is a top-notch economist with world-wide experience with economic transition who remained an active participant in the ongoing debate on economic policy issues in Hungary. The fact that he feels it necessary to explain the very basic principles on which market economies are built shows the extent to which economic rational was taken over by political populism in Hungary. In doing so, he concentrates on what is, perhaps, at present the most difficult issue in Hungary: the relationship between market competition and social solidarity. He forcefully argues that there is no conflict between these two goals. In fact, his most important message is that the biggest enemy of equitable development is the loss of competitiveness an overgrown and inefficient government is likely to lead to. This essay is about Hungary but its message is for the whole region, and beyond.
After four years of rapid economic growth based on a spectacular surge of exports and fuelled by productive investments in 1997-2000, Hungary has experienced a marked slowdown in output performance coupled with a remarkable deterioration of both fiscal and external balances in the last three years. This negative development was a direct consequence of a much trumpeted turnaround in economic policy initiated at the turn of the century. Export–led growth was replaced by domestic demand stimulated by fiscal overspending and excessive wage increases. As a result, the international competitiveness of the Hungarian economy has been significantly eroded.
This essay intends to prove that in a small and open economy no sustainable growth is possible on the basis of fiscal overspending and loose incomes policy. There is a need for a quick return to the economic policies of the late nineties underpinned with fundamental reforms of Hungary’s public finances. It is not only the fiscal deficit and the once again growing public debt which constitutes a drain on the productive forces of the economy. The size and structure of the fiscal sector is also a formidable obstacle to higher growth.
Excessive centralization and ineffective redistribution of income does not represent societal solidarity either. Personal income taxation tainted with rebates and holidays tend to support the well-to-do. The same holds true for social subsidies based on universal entitlements as well as notionally free health care and higher education. A comprehensive reform of public finances in Hungary could thus enhance not only the growth potential of the economy but strengthen societal solidarity in a remarkable manner. Personal income taxation should be streamlined with lower and less graduated rates while eliminating all rebates and holidays. Social transfers are to be offered outside the tax system and targeted exclusively towards the needy. Reforming higher education and health care should improve quality and ensure equal access while striking a better balance between self-care and solidarity. That is the only hope to improve the quality of labor in the future and, thus, speed up real convergence.