Report on the paper
Political and Economic Obstacles Inhibiting Comprehensive Reform in Hungary
In this article James Angresano an economist at the University of economics in Varna expresses his views of transformation in Hungary. He puts the goals of transformation into two categories: the first is ultimate goals--greater economic freedom and higher living standards--the second category is instrumental goals--macroeconomic stabilization and a reduced role of the state. Obviously the ultimate goal can only be achieved through the instrumental goal, and this is where the problems lie in Hungary.
Macroeconomic stabilization depends on a number of variables including employment, inflation, interest rates, savings, investment and imports-exports. Angresano believes that there is a vicious circle in Hungary's economy. First there is high inflation, but people's salaries and pensions are only indexed to a 2% increase in inflation (actual inflation is 10 times higher). Because wage rates are not able to keep pace with inflation savings rates will fall and there will be less money available for investment. At the same time workers are increasing they pressure on wages which causes the second major problem for state owned enterprises (SOE). Demand for higher wages forces the government to subsidies these SOE with more money, which the government must supply. Increased supply of money makes the "wage rate spiral" continue, with no end in sight.
The third problem for the government is that by privatizing SOEs government creates massive unemployment, since the state owned enterprises are overstaffed. With unemployment comes social unrest and hardship which any government must handle carefully. And finally with the influx of superior foreign goods, consumers in Hungary are able to purchase better quality goods then those produced by domestic industries. This creates even more problems and the vicious circle continues.
Angresano believes that these problems stem from an inability of Hungary's authorities to come up with an economic reform package. He states that there is no effort in government but rather a "heterogeneous" approach in dealing with these problems, thus allowing intervention by interest groups to exploit the instability of the economic structure. Agresano does not believe that this has to be the end. He states that the government has a responsibility to create an atmosphere of faith, a "safety net" that the public can depend on. With public faith you can take the measures necessary to create economic reform policies, that will in the long run make Hungary prosperous but in the short run cause hardship. The people will stay behind the government.
I believe that the author is correct in his evaluation of the problems in Hungary. He sees the hardship of the people but without any long-term goals the suffering will drag-on. Strong economic reform policies will give citizens hope in gaining stability and eventually prosperity but as of now the future is a large question mark, with few answers in sight. Even though this article was written in March 1992, these questions still linger in Hungary presently and no real end is near, obviously these ideas brought up by James Angresano are important in evaluating transformation in Hungary.
The problems outlined in my response to James Angresano article, Political and Economic Obstacles Inhibiting Comprehensive Reform in Hungary can be seen in the figures relating to Hungary's economy. The first major point made by Agresano was the problem of inflation. Inflation since 1990 has consistently been in the mid twenties reaching a high in 1991 of 35%. This has caused constant decline in real wages resulting in 17% loss in real wages over the past 4 years. At the same time there has been a decline of production and unemployment has increased to a high of 669.800 people (12.9%) in 1993. In terms of exports and imports there has been a sharp decline to -24% last year with only minimal growth expected for this year and 1995. Imports have generally stayed the same though in 1992 there was a -7.6% decline. The current account of the balance of payments shows how poor this relationship is. In 1991 there was a positive balance of 267 million US$ but in 1993 there was a negative account balance of 2484 million US$.
With all of these indicators pointing at a dismal next couple of years for Hungary Angresano views become even more important, since the transition path chosen by the Hungarian government obviously is hurting the Hungarian economy with no real end in sight.
James Angresano : Report on the paper Political and Economic Obstacles Inhibiting Comprehensive Reform in Hungary ,East European Quarterly, March 1992.