Thursday, March 26, 2009

Chaos unleashed – Hungary in the Maelstrom

Four days after the announcement from premier Gyurcsány about his willingness to abdicate, the following events were very much in line with the predictable. The socialists are almost unanimously denounced as the roots of all evil; the first contemptous articles full of rage and triumphalism were published; the media is dominated by the expectations of the business elites regarding a prime minister convenient for their own interests, of course portrayed as the absolute public good; the president of the republic urged early elections; the socialists are in disarray, mainly only sticking to their positions and not to values or an ideology and we still don't know whether at least a new government will be installed or the dissolution of the parliament is inevitable. (Well, otherwise, everyday life seems not to be affected very much by the events. Hungary is a pessimistic country where passions are boiling under the surface but not outbursting at the moment.)

Conventional wisdom says that the fate of the Hungarian government was sealed by the crisis and the collapse was inevitable. Although there are many elements of the truth in this assumption I tend to disagree with its entirety. Not in the sense that the crisis wouldn't have had an impact on the events, quite the contrary. The decisive moment was the choice of the prime minister in the fall of last year to make an attempt to recover his credibility with effective handling of the crisis and at the same time snooker his opponent, Orbán, with the help of diverse social organization, from whom he hoped for support. He hoped for a reframing of the political discourse and legitimize not only his politics but the reform attempts as well. But the last decision, regarding Orbán, meant that instead of putting forward the structural problems of the world economy in the form of discussing the roots and possible outcomes of the crisis, the responsibility for the events etc. he returned to the earlier problems of Hungary and Hungary's economy, regardless any possible change in the external circumstances, because his would be allies were only interested in those problems. As a consequence, the discourse remained narrowly focused on Hungary as if it would be a sole entity, independent from the world economy, therefore capable to resolve its problems alone. Thus the presumption that the earlier economic policy was wrong and a decisive factor of the crisis, became an implicit axiom of every approach to the problem, that way not strengthening, but weakening the governments credibility, quite the contrary effect Gyurcsány wished for. Moreover the handling of the crisis became entangled with the problem of reforms. Those are not really popular and I suppose not only because of their effects on individual income and wealth. Similarly important is the fact that the vison and ideology behind them is very vague and clearly favoring only a minority of the society. Therefore without a profound debate, it is unrealistic to expect acceptance from those, who would be disadvantaged.

Maybe it is worth to make a short excursus regarding this problems, as it could highlight a very peculiar specificity of the current proposals in Hungary: almost every one of them is aimed to solve a particular problem in the system with a general transformation. For example the most popular version of a pensions reform among „experts” is the cutting of the present pensions with 8-10% and their freezing in real terms. Thus today's standard of living would be offered for today's pensioners forever in order to save money, while at the same time almost every one emphasizes that those are the burden on the system who get early pensions as handicapped with fraud. (The estimated number is well over 400-500000!) Another example is the general property tax, 0,5-1% of the value of the real estate according to the proposals. As the value of real estate expressed as multiple of personal income is very high, it could lead to a new burden not counterbalanced with the proposed tax cuts and especially in the case of pensioners and those with a minimal wage, whose income is tax free at the moment. Therfore they won't receive any easing, only a new tax, that easily could compel them to sell their houses. The main argument supporting this proposal is once again the fact, that many entrepreneurs exist, who pay taxes and excises after a minimal wage, while having a large and luxurious house. But once again instead of making a correction in order to eliminate the specific problems, the proposals are designed to achieve a profound transformation.* Returning to the problem of the crisis and reforms the above examples show one more important characteristic of the respective plans: those usually tend to redistribute the burden favoring the upper income categories and hitting the lower ones significantly and it is comprehensibly not really popular.

Once again putting forward reforms as the way of handling the crisis was clearly a mistake, as it enraged significant groups of the society and the result was indecision and ineptitude. Moreover, as Gyurcsány was hoping for support from those who's plans he was not able to implement, he was at the same time not in a position to attack them and spark a debate in which the responsibility of the rich for the future of Hungary would have been the most important topic. As a consequence came a deadlock, and Gyurcsány lost the remnants of his credibility.

One can argue that it was the only way, not only because those reforms are necessary (something I would like to discuss, even though not in extenso, later), but because the country is depending on the benevolence of the markets and they expect such moves in order to lower the country's risk assessment. I won't be that convinced, especially as the two problems, crisis and reform can be detached from each other. The crisis is a matter of how to pay back your outrunning debt at the moment (the real economy deopends on the recovery of the export markets, first of all Germany) and nobody (especially not the markets) expects the crisis lasting forever or for too long. (The former assumption is almost certainly true, the latter one is more dubious, but we can see every day how markets believe in the easy remedy in the form of some very smart and sophisticated action plan restoring the assets to their true value and they are waiting its arrival in any moment.) Therefore the foremost problem is not how to pay back your outrunning debt ten years later, when according to the expectations everything will be in order again (especially as nobody knows how much it will be, and with what conditions) and not how to pay it back at the moment when Hungary has a short-term credit from IMF, EU, World Bank, but how to pay it back at the very moment without accumulating a huge burden of new debts. If one simplify this problem it is quite clear: the government has to control the budget deficit in accordance with its most important creditors conditions (what are softening from day to day) and with the need to make some kind of stimulus as well. This is a hard task but not necessarily means measures aimed at long term objectives, rather ones that are effective but clearly only temporary. Like cutting the working week with one day in the public service, suspending, but not erasing the so called 13th month pension etc. I would suppose that the temporariness of the measures would make it easier to accept them, the measures itself would portray the government as capable to act decisively, while not necessarily meaning the renunciation on structural changes after the crisis is over.

On the other hand I would suppose that such an approach to the problem would be even advantageous for the quality of the structural changes as well. The most important problem with the present proposals is that those were developed in a completely different environment, when it was easy to assume that the model implemented in many ECE countries as an effective means of attracting FDI brings a fast real convergence and is capable to restrain the accumulation of imbalances. But with the crisis (and with the developments in the Baltics, even before the crisis hit those states) it is hard not to place a question mark after this presumption. Thus it would be deadly important to put two questions not independent from each other: how far are the earlier models valid (especially in ECE) and how will be the world economy emerging from the purgatory of the global crisis? As far as these are not answered convincingly no reform proposal (except some vague and very universal assumptions,like the need of balanced budget etc.) can be treated as well founded because those clearly wouldn't be based on the realities. (It does not necessarily mean that no reform proposal would turn out to be effective and succesful, but it would be rather the result of luck and not of the quality of them.)

If the latter approach would have been prevailed it would have had political advantages as well. Gyurcsány would have had an opportunity to take stance against the unpopular reform proposals arguing that the country needs a solid plan and not one based on dubious premises, to make populist attacks on the „capitalists” or the „bankers” and „brokers” as responsible for the crisis, seeking their own personal advantage even in these dire hours and therefore lifting some of the burden on him and maybe generate a popular rage against them, giving him real political weight after months of minority government when he was treated as doomed to lose his position sooner or later. Maybe he even would have been capable to implement some measures for the handling of the crisis that would have distributed the sacrifices a bit more evenly (for example with a one time levy on large properties, a nice, one time income for a shattered budget), thus making it easier for the majority of the population to accept the inevitable. It would have meant the renunciation on the snookering of his opponent, but maybe it would have been a real chance to reframe the discourse and transform the political situation in order to emerge with more popular support even for well thought changes. It was not a very probable outcome, but the possibility certainly existed. With the abdication he not only accepted his failure, but once again returned to his earlier strategy, waging war as the champion of reforms and modernity and almost certainly lost the real opportunity forever.

*(I know that there are many other supportive arguments for pension and tax reform. But as these reasons surface the most often, I only would like to highlight the twist in this approach, because it is a general problem regarding the different plans.)

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