Economic Policy, ed 14 April 1992. Cambridge University Press.

Tobin William Mulshine

Eve Dmochowska

upTobin Mulshine

"The Hungarian Government should advance step-by-step as far as possible, and only resort to "shock therapy" when it meets impenetrable barriers." The authors of this article obviously support a gradualist strategy and I am in agreement with them. They base their argument around three major points and substantiate them with recent history of the Hungarian government. The three points are as follows:

First and foremost is Hungary's massive external debt which exceeds 20 billion dollars. This debt of course, accrued during the time of the communist regime, and was a result of their decisions. Hungary has decided to continue to service it's debt and to fix it, although it will take time. Secondly, Trade has become a serious issue since the collapse of the CMEA and break-off of Soviet Union. Luckily enough, the trade "shock" has not been all that bad due to trade with western-markets. Lastly, is the importance of living standards. People have become used to a fairly comfortable style of living that has only risen. These factors show a need of time and careful guidance. "Big Bang" would not be the correct method for helping these processes and eventually achieving a "western Market"

I fully agree with these guys. A nations external debt must be chipped away at. You can't continue to run a government under reform with a 20 billion dollar debt. The answer is not "shock therapy," because there is no way of instantly paying it off without ruining the rest of the economy. As far as trade is concerned, it is impossible in one reform to pin-point where further growth is promising. It is equally impossible to see what obstacles you are going to have to adjust to in the expansion of your trade market. It is absurd to make those decision blind in the beginning. Also, throughout the eighties there has been something known as the "second economy," which has allowed some people to succeed in private or joint industries. These people have experienced a higher living standard, and even the regular people live in decent comfort. The "big bang," would throw all of these things up in the air, hoping to land in the right place. I for one would not be attracted to this immediate change and market of it dropped the standard of my living substantially.

Overall, as is mentioned in the article," big bang would jeopardize many of Hungary's achievements to date, a relatively high living standard, International banking credibility, political and personal freedom and at least partly functioning market institutions and enterprise." I agree that this is true, and that the "big bang" would only hurt these achievements. These are all steps in the gradualist reform. After all, most countries strive for bank credibility and high standards of living. Why shoot yourself in the foot and take a step back by taking too high of risks, build on what you have already.


up Eve Dmochowska:

In the paper "Hungary's transition to the market: the case against a 'big-bang'", the authors describe Hungary's economic position in 1992, and try to convince the reader that the best method for Hungary to convert to a market economy is by gradualism.

The arguments listed below are purely those of the authors' and are presented here with the justifications that they have provided in the full paper.

I. STANDARD OF LIVING WOULD DECLINE DRASTICALLY. Rapid structural change cannot occur without an accompanying increase in unemployment, and a general decline in living standards. The Hungarians' living standard continued to rise in the 1980s and they became accustomed to rising consumption. As a result, they would be far less willing than Poles etc. to tolerate substantial falls in living standards during the transition period. For the same reason, it would be difficult to convince them that a decline was a REQUIREMENT of transformation.

II. BIG BANG WOULD DISTURB THE EXPECTATIONS OF DOMESTIC AND FOREIGN INVESTORS. In 1992 Hungary had the biggest per capita debt in the world - nevertheless it was determined to not default on it. Due to the burden of this big debt, the best course of action for Hungary is to a) maintain trade with the West and b) Continue to attract foreign investors. It is argued that these conditions are best served by a gradual transition, because it is much more predictable and therefore "friendlier" to investors.

III. CREDIBILITY. In tune with the above argument, it is very important for Hungary to retain its credibility with foreign nations and thus maintain the debt payments. The Big Bang would be so chaotic that Hungary would have to default on the debt like Poland did, which would be detrimental to the economy.

IV. BIG BANG IS NOT NECESSARY. Hungary was the first country in the region to allow private businesses to be established. Thousand of these formed in the 1980s. By 1990 small private businesses were producing 10% of industrial output. People gained incentive and knowledge - an advantage for Hungary. It does not thus need to follow any drastic policies, because much of the market economy had already been established.

I found this paper to be very disappointing and confusing. The introductory paragraph clearly states the authors' bias for gradualism in Hungary, and yet most of the arguments provided seem to suggest that shock therapy would not be such a bad policy after all. Very few arguments for gradualism are actually given, and most are unjustified. After a close scrutiny of the facts presented in the paper. I was more convinced that Hungary should follow shock therapy rather than gradualism. My reasons are as follows:

1. As the authors pointed out, Hungary had a relatively vast experience in the market economy. People had incentive and knowledge. This seems to me to be the ideal situation under which to introduce rapid transition: the people would use their experience, and thus have a big advantage over other countries that were not accustomed to privatization.

2. It seems that the authors believe that one of the main advantages for gradualism lies in the fact that that is the best method to repay the debt. That may be true, but then even the authors admit that paying the debt should not be that important. It seems a bit futile then, to support gradualism for that reason at all. I also believe that investors will be more eager to invest in a country that has quick prospects of profit (shock therapy) rather than a two decade period (gradualism).

3. The authors admit that Hungary has a relatively well established tax system, and thus large scale privatization could be attempted without leaving the government revenues at risk.

4. Large monopolies enable many firms to exploit the market position to the disadvantage of customers (high prices) and employees (unemployment). This contradicts the authors' viewpoint that gradualism will maintain a high standard of living.

5. Lack of sufficient competition will not show which markets are effective and competitive. Only short term prospects will be considered when deciding on the profitability of the firm - a system that defies the purpose of transition.

6. And finally, the partially free market will have difficulty in functioning without total price liberalization. State companies will look for state paternalism to survive and private enterprises will suffer from the only partially free market.



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