Competitiveness and Public Finances Alternatives for Selecting Action Scenarios

Content

Public Finance Quarterly Renewed ...... 3

PUBLIC FINANCES

János Veres: Challenges to the Hungarian Economy ...... 5 László Parragh: Why is it Important to Modernize Public Finances and Public Services? ...... 15

DEVELOPMENT POLICY

Árpád Kovács: Competitiveness and Public Finances ...... 26 Péter Balázs: The Future of the European Union ...... 50 Mihály Varga: PPPs in Hungary - Do They Hurt Us or Help Us? ...... 59

SUPERVISION AND AUDIT

László György Asztalos: The Hungarian Financial Supervisory Authority Established 90 Years Ago ...... 74

WORKSHOP

43rd Economic Convention Sustainable Growth in the Hungarian Economy (Tamás Halm) ...... 95

Doctoral Dissertations Encouragement of Competition – with Negotiation (Éva Voszka) ...... 106 Transformation, Development, and Characteristics of the Hungarian Banking Sector (Éva Várhegyi) ...... 113

BIBLIOGRAPHY REVIEW

Books One Book – Three Reviews László Antal: Can Sustainable Growth be Maintained? (István Hetényi, Péter Ákos Bod, Zoltán Török) ...... 120 Review of Periodicals Articles about the Pension System (I. S.) ...... 132 PUBLIC FINANCE QUARTERLY Journal of Public Finance Published Quarterly Founder and Owner: Ministry of Finance, Hungary, from May 1954 State Audit Office, Hungary, since July 2005

The purpose of this journal is to offer readers a credible picture of the Hungarian domestic financial system, and - from the perspective of dominant financial interactions - significant features of public sector and national economic operations, efforts to reduce the development gap and construct a future, and related professional debates.

EDITORIAL COMMITTEE: László Akar, László György Asztalos, Henrik Auth, Gusztáv Báger, Péter Ákos Bod, Katalin Botos, Attila Chikán, Pál Csapodi (Editor-in-Chief), Tamás Erdei (Co-President), Károly Fazekas, Erzsébet Gidai, Tamás Halm, István Hetényi, Tamás Katona, Árpád Kovács (President), Mihály Kupa, Tamás Mészáros, Zoltán Nagy, Éva Palócz, László Parragh, József Roóz, Iván Schweitzer, Péter Székely, Elemér Terták, Ádám Török (Co-President), Mihály Varga, József Veress, Éva Voszka

EDITOR STAFF: Pál Csapodi (Editor-in-Chief), János Lévai (Senior Editor), László György Asztalos, Gusztáv Báger, Tamás Halm, Iván Schweitzer, Ádám Török (Head Columnists), Ildikó Nagy (Editor), Pálné Görgényi (Proof-Reader)

No part of this publication may be reproduced or distributed for commercial use in any form or by any means without prior permission of the Publisher.

PUBLIC FINANCE QUARTERLY - Journal of Public Finance g Editorial Office: 1052 Budapest, Bécsi u. 5., Phone: 235-4075 g Translation and Typesetting: TYPO 2000 Llc. g Published by: Publishing House of Hungarian Official Gazettes, 1085 Budapest, Somogyi Béla u. 6., Phone: 266-9290; Responsible Publisher: dr. László Kodela, Chief Executive Officer of the Publishing House of Hungarian Official Gazettes g Printed by: The Printing House of the Publishing House of Hungarian Official Gazettes; Responsible Executive: Norbert Burján, Deputy Chief Executive Officer. g HU ISSN: 0031-496-X; 05.3075 Public Finance Quarterly Renewed

The Public Finance Review (as a monthly journal) is half a century old, for its first issue dates back to May of 1954. As a professional journal, it was designed as a forum to debate practical issues, criti- cize shortcomings in financial operations, and disseminate the latest knowledge - goals set by the Minister of Finance in that very first issue. Since then, theoretical and practical specialists in charge of the world of finance have graced some fifty thousand pages in hundreds of issues. It has offered a wealth of information, raised diverse problems, conducted countless analyses, and made a myriad of proposals that contributed to the operation and advancement of the monetary and financial systems, principally to public finances.

Thanks to encouragement from Parliament, cooperation by a number of government and financial organizations, and assistance from well-known professionals, we managed to overcome last year’s transitional difficulties (for 2005 we could not even accept subscriptions). Our joint effort has led to a clarification of the main principles under which we aspire to update and upgrade the content and thematics of the journal. Then, relying on this professional consensus, we managed to establish the ground on which to “save” the country’s only periodical that specializes in public finances through a modernization that retains both its traditions and values. In 2004, Parliament passed a resolution (No. 43/2005, May 26) evaluating auditing office activity, in which it declared the need for publishing an up-to-date professional financial periodical as part of the advisory services of the State Audit Office. In conformity with that resolution, the fundamental rights to the journal were transferred to the State Audit Office. The Office, as owner of the journal, provides the conditions necessary for the editorial staff and for the editorial offices to operate in cooperation with the publisher of the Public Finance Quarterly the Publishing House of Hungarian Official Gazettes. The Publisher handles the concrete compilation, printing and distribution of the 2005 combined issue for subscription collection purposes, and accepts all related business risks.

Our friend Tamás Szamek, whom we all recognized and admired as the person serving as Edi- tor-in-Chief for 25 years, and who had received prestigious professional awards for his efforts, also did everything in his power to keep the journal alive. Sadly, he is no longer with us. We are no longer able to take advantage of his extensive knowledge and wealth of experience now, when the journal faces a watershed and we have an introductory (sample) issue to offer our readers.

The basic goal of our renewed and updated journal of public finances is to offer a current and credible picture of the domestic financial system. The special focus is on the public sector and - as far as major financial relations go - on the significant features of national economic operations, interactions that influence them, goals of gap reduction and shaping the future, and professional dis- cussions supporting all of the above.

As a professional journal covering a broad palette, it operates with a flexible column design. The two pillars of support are the columns on public finances and development policy. The former will spotlight issues related to the budget, financial policy, public finance issues, and will include the monetary system and systemic interactions within the financial market. It will also address the financial affairs of the business and competitive sectors and their developing interactions with the public sector. The development policy column will stress development and structural policy,

3 innovation and the transfer of knowledge, and economic relations with the European Union. Within those thematics, it will also attempt to reflect the views of larger and smaller businesses, chambers, and manager organizations. In addition, the journal will have a column for supervision and audit that is concerned with state oversight of financial markets, oversight of competition, and financial controls. A workshop column will focus on research, significant professional gatherings, and higher education. Finally, a column will offer a bibliography review of domestic publications to allow access by the international community.

The journal, new in both content and design, will devote adequate space to the interactions of financial and real flows. It is also open to scientific studies that have a practical approach. Thus, the Public Finance Quarterly will have a natural audience in the financial world, the real sector, the public sector, and the business sector. It will also be of use to participants in political life, students and teachers in universities and colleges, and researchers.

Within the Hungarian publication we are also providing an English version. This will make international distribution possible. Such distribution is the prerequisite to having the journal cited in respected international publications, which in turn will support authors in furthering their professional and scientific careers.

As far as international distribution is concerned, we are counting on assistance from library ex- changes, universities and colleges, research institutes, and our nation’s foreign missions as well as from the organizations involved in the publication itself. We hope to see everyone with an interest in presenting a realistic image of our country become involved.

We have altered the practices of recent years and set up an editorial committee consisting of well-known professionals, with a varied spectrum of opinions but with a common intent of cooperation, to decide upon the concrete content and professional line of this journal. On occasion, editorial committee members will serve as copy editors and, of course, they will author articles. Dele- gates from the financial and administrative organizations cooperating in publication of the journal, such as the Tax and Financial Control Office, the Government Supervision Bureau, the Hungarian Financial Supervisory Authority, and the Hungarian Customs and Excise Guard will also participate in the work.

We offer this send-off to the new volume of the Public Finance Quarterly in the hopes that the authors, editorial staff, readers, and organizations involved in publication will combine efforts to attain the success of the new and updated public finance journal. Our goal it to maintain its fifty-year-old reputation while meeting the challenges of the new millennium.

Pál Csapodi Editor-in-Chief

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János Veres Challenges to the Hungarian Economy Inside the EU but Before Introducing the Euro

I welcome the request to express my views in the re- Therefore, the problems and contradictions newed finance journal that is a combined effort of were not as acute as elsewhere, or at least, the previous and current owners and other finance or- people not have to confront them as bluntly as ganizations. My opinion is focusing on our common did residents of some of our neighbors. Never- initiatives, economic gap-reduction efforts, and the theless, the economy was moving in a very challanges of public finances with possible solutions. wrong direction. For quite some time the coun- In less than twenty years Hungary, together try teetered on the brink of bankruptcy as with several of its Central European neighbors, state-owned companies swallowed up a good has managed to navigate a road no one would portion of revenues and sharp distinctions were have dared to dream of in the preceding four de- made between exports to the east and to the cades. That road had simply been impossible: it west. In an attempt to access foreign exchange, required breaking away from the back of the pack, the countries drifting along the periphery, and a Herculean effort was made to increase “capi- catching up to the world’s frontrunner nations. talist” exports, to use the terminology of the In Hungary today, we simplify matters by time, but the cost was high. saying we are catching up to Europe. Actually, Two decades later, the country was at the end what we are doing is not catching up to Europe of an incredible journey. It had switched from alone but joining the ranks of the advanced na- membership in an eastern integration to a west- tions, which is a much broader field. ern one, from Comecon to the European Union, and from languishing within a non-functioning TWENTY YEARS AGO and unsustainable system to surging forward in a competitive and rapidly advancing one. Twenty years ago Hungary was part of an East Back in those past decades, Hungary’s ex- European integration that was slipping farther and farther behind and struggling to cope with ports to countries that paid in dollars amounted crisis after crisis. Its operative problems were to barely a few billion dollars. Today its exports manifested in increasingly serious forms and in- are valued at EUR 40–50 billion and at least stead of being able to offer subsistence to the 70 percent of them go to the EU15. Back then; peoples of the participating nations, they had to the country had a truly obsolete production contend with deepening depression and despair. pattern. Today, it is typical of the most ad- Hungarians always were creative in their vanced nations of the world. It would be ability to cope with difficult times, and man- lengthy to list all the fundamental changes that aged to live better under quite bleak conditions. have taken place over that period.

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Exports to GDP Ratio (consistent prices for 2000)

Foreign Exchange Debt Trends

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WORKING HARD TO CLOSE THE GAP is related to a drop in employment. The coun- AFTER THE REGIME CHANGE try’s foreign debt as a percentage of its exports dropped by a large magnitude and today we are Of course, Hungary’s problems remain quite sig- well past worrying that paying off our foreign nificant. It still has many concerns to resolve, but currency debt might be a problem. What hap- the type and severity of those concerns is chang- pened in this area is something that many people ing.Theregimechangehasbeencompleted,the economy is functioning well, and conditions for never would have believed possible. The econ- continued potent development through the next omy grew so rapidly and revenues from exports few decades are promising. Limiting ourselves to picked up so sharply that the country actually statistics, we can see that over the past 15 years outgrew its foreign exchange debt. In other productivity turned around from an initial de- words, our revenues far exceed the amount we cline to grow by over 50 percent. Obviously, this owe.

Productivity and Growth (1989=100%)

There were many changes in government- examples in the more advanced countries of level economic operations as well as in public fi- Europe, but that is no consolation. nance. However, the public sector never took We have known for quite some time that we off the way the private sector did. In fact, need to take basic measures to transform gov- the opposite is true. The transformation was ernment economic operations. There have been slow and burdened with substantial social several periods of consolidation in public fi- and political dispute, which have often been nance over the past 15 years. However, none unproductive without leading us closer to proved to be permanent and we were unable to solution. maintain or build on what we have achieved. Hungary is clearly not the only country where The main reason was that the consolidation this has happened. There are many similar measures never transformed or updated the ma-

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jor government distribution systems, aiming to gary was not in a position to introduce a change make them more efficient. The reforms were of that magnitude. Although it would have not followed by periods of stabilization so the been fairer to higher-income people, it would financing problems picked up and became have essentially left out the less fortunate strata acute again and again. of society which would have generated huge amounts of tension. Therefore, nearly a full REFORMS – SO FAR year before 1998 parliamentary elections a decision was made to establish a mixed system. The However, it would be unfair to say that nothing old system of mandatory contributions and had changed regarding reforms. To date, the central distribution has been retained, which most progress we made has been in transform- takes a huge part of the edge off social injustices ing the pension system. There was a great and reduces differences. At the same time, a deal of debate during the preparatory phase. mandatory private pension insurance fund has The question was how much of the old system been established to give an incentive to people to retain now that we were aware of its short- with high incomes to pay contributions in re- comings. The state pension system, which operates on a foundation of mandatory contributions turn for which they will receive a higher level of and central distribution, does not really offer in- benefits while on retirement. There is a third el- centives to working people to pay the contribu- ement to the system as well. This one is volun- tions.Theyarenottheoneswhoreceivethe tary and based on the idea that most people money they contribute, since today’s contribu- plan for the long term. While still young, they tions are used to cover today’s pensions. realize that eventually therefore they will grow Considering this fact from a self-interest old, and so they are willing to begin to put aside point of view, it would have been best to design money well before that happens. The state has a system in which the amount of pension peo- offered and continues to offer tax concessions ple receive is fully dependent on the amount to encourage people to make payments to the they contribute to the fund. However, Hun- private pension system.

Membership

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Thesystemprovedtobeviableandcontribu- significantly more than that. The amount of tions to private pension funds grew significantly. money paid into the mandatory private pension In past years, the decline in inflow to the state fund is growing by HUF 200-250 billion/year pension system triggered by the shift to the private (about EUR 800 million – 1 billion), while the one – which the central budget has to make up for amount of money distributed by the government to pay today’s pensions – slowly crept up to 1 per- pension system is somewhere around HUF cent of GDP. Then, it boomed and it is now 1,500-2,000 billion/year (about EUR 6-8 billion).

Membership Dues

Assets

The pension reform, however, was dis- The main reason was that this type of reform continued. In fact, following 1998, there costs money. If the central budget spends were several attempts to halt it altogether. money on an effort like this, whatever

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government is in power has fewer opportuni- of damage and people would have learned to ties to finance its own day-to-day projects. distrust any and all long-term measures. However, this reform could not be halted. Nevertheless, the next steps to continue the It would have caused a tremendous amount process were not taken.

Main Factors of Pension Fund

Compared to pensions, comparatively little about the reforms. There was a time when even was achieved with the other subsystems of pub- the “reform”word generated some rather un- lic finance. This was particularly true with re- pleasant feelings, since people associated it with gard to the economic operations of local gov- constraints, belt-tightening, and a worsening ernments where any decision to alter the system situation. requires a two-thirds majority vote by Parlia- Reforms really do have an unpleasant side ment. Professional circles, irrespective of the since they trigger significant changes. The result political party they support, agree that the next of those significant changes is that certain inter- steps must be taken. Things absolutely have to est groups – currently operating in a wasteful change. The same is true for healthcare. manner, consuming large amounts of govern- As time goes by and unfavorable experience ment monies and enjoying the benefits of sys- builds, demand for reform is growing through- tems that perform very poorly – will find themselves significantly worse off. They are unlikely out society. We cannot say that at this point ev- to ever voice support for issues that will change eryone is vociferously demanding fundamental their status. Nevertheless, the vast majority of change. However, there certainly is growing people are beginning to find it obvious that dissatisfaction with the systems operating at something has to be done. present because of their very low levels of efficiency. Once voters no longer consider reform to be a dirty word, politics will not be afraid to face the idea. This may be part of the reason why the REFORMS – WE ARE NOT READY TO subject is once again on the table and consid- LIKE THEM, BUT WE ARE STARTING ered not only among professionals like analysts TO REALIZE WE NEED THEM and economists. Newspaper articles, radio and television programs also have been spotlighting The public mood is changing though it is quite the issue, which suggests that a more general de- difficult to gauge what average people think mand for reform is evolving.

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Meanwhile, the need for reform has become both the budget and the current account balance, much more obvious within the economy, where, to have a low inflation rate, and in parallel with given unchanged conditions, it is already compara- this, to quickly reduce the development gap tively difficult to adhere to basic priorities. The pri- through high-speed infrastructural growth. By be- orities are to promote rapid economic growth, sig- coming a member of the European Union, Hun- nificantly increase economic competitiveness, sub- gary has gained infinite opportunity, but it has also stantially cut taxes and quickly reduce deficits in been forced to face some serious constraints.

Dynamic Growth – Closing the Gap Annual GDP increase in the European Union and Hungary %

Its opportunities are infinite, since in a whether it is going to take twenty years or historically short period it can become a fifty. Nevertheless, in historical perspective wealthy country – in the sense that we now it is still a very short time, especially if we consider Belgium, Switzerland, or Austria consider that this is a chance that was never wealthy. The dispute on this point is offered to us in past centuries.

Comparing GDP Trends in Austria and Hungary (per capita)

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Atthesametime,wearealsobeingforcedto to push forward and approach the highest peak face some serious constraints. When we joined of integration ever attained. We are now at the the EU, Hungary agreed to meet some very gateway of introducing the euro, but we need stringent requirements within just a few years. to realize that many things just did not fit into Thenameusedtosummarizethoserequire- those20years.Thistimewasnotenoughto mentsisMaastricht;inotherwords,asetof build a sewage network, or to establish a criteria designed for the advanced nations of state-of-the-art road and railway network, a Western Europe. These countries underwent centralmotorwaynetworkandmanyother rapid development in the post-World War II things that are essential for reducing the devel- decades, and in the meantime established the opment gap and becoming an advanced coun- European integration step by step. They took try. It was not even enough for many parts of each step at a time and finally reached their the country to link up to the dynamic eco- present status, in which they were able to in- nomic circulation that is typical of other areas. troduce a common currency and hold to the In other words, Maastricht was not designed stringent fiscal requirements. Hungary and for the countries that recently joined the EU, the other Central and East European countries and even the older members have faced com- donothavethatamountoftimeattheirdis- pliance problems. Not only have Portugal and posal. After spending forty years parked on an- Greece had problems, but also Italy, Germany, other track, they had only the past two decades and France.

Convergency Criteria

If the only countries that find the regula- in mind when performing the evaluations. tory system too rigid were the ten new EU For Hungary, the pension reform it under- members, then clearly no one would have took and the current major costs were con- thoughtthatMaastrichtmighthavetobe sidered, while for Germany the large amount modified to become more flexible. Never- it had to spend on its eastern regions was theless, since the problem has affected a taken into account. However, no further re- larger circle, the issue did come up on the finements are expected. The requirements agenda and regulations were relaxed to a cer- have to be accepted as objective conditions tain degree, allowing some factors to be kept applied in all fairness.

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THE BUDGET – NOT JUST AN decisions in part reflect rational considerations ACCOUNT BALANCE and in part relay the relationships between the various interest groups. It would be idealistic to There have been professional suggestions made call for keeping budget operations separate on how a tight budget policy could be consistently from politics when the budget is the crux of all executed. Of course, these professional sugges- political administrations. tions have totally ignored the political aspects. They view the budget solely as an account bal- The realm of politics has to recognize the fu- ance into which various mechanisms need to be tility of erratic distribution and come to terms built, to assure that any deterioration in balance with the unavoidability of less popular mea- can be halted at a certain level. Their assump- sures to treat the problem at its roots. tion is that politics will never be able to resist Both politics and society are progressing the singing of the Sirens; that politician inter- along this road. Both are beginning to recog- ests are conducive to spending and not saving. nize that it is essential to move forward in a vari- Therefore, they say, the system and the rules ety of important areas including healthcare, ed- have to be airtight, to make sure that the gov- ucation, and local government. They are realiz- ernment cannot change them, no matter how ing the need to restrain the underground econ- greatly it is tempted. The professionals want to omy and to improve tax-payer ethics and see fiscal regulations enacted into law with some tax-consciousness. We do not expect people portions possibly set down in the Constitution taking their healthcare reform demands to the to limit the motion of a particular budget index streets, but surveys have shown that residents or several indicators. The indicators in question give top priority to receiving high standard could be the budget balance, debt, expenditure, healthcare. However, whether they are truly or tax revenue trends. willing to pay the necessary taxes and contribu- Designing a system like this is not a waste of tions to achieve this is another question. So far, time. Although it cannot work miracles, it can they have not been asked to pay. help decision-makers, budget planners and ex- ecutors in their efforts. First, it cannot resolve We have to admit that the current system of- the basic problems. Second, the budget cannot fers no incentives to contribute to public funds, be stripped down into a mechanical account since everyone receives the same quality of ser- balance. The budget and public finance opera- vice (at least in principle) indifferent to the tions are the hub of all governments’ economic amount of taxes or contributions they pay. policies. The budget is the gauge through This fact was recognized a long time ago, but which we can actually discern what portion of nothing has been done in past years to change an announced economic policy is imple- it. An important step in this direction was the mented, what portion is not, and what the out- government decision made as part of its new come of the implemented portion is. As such, it 100-Step Program. Under this program, as of becomes a center of contention between various next year, the health insurance fund will record political interests. In fact, every single point of contributions according to the person making contention is somehow connected to the bud- the payment. The people who pay and who do get, and the budget itself is the result of a variety not pay will be tracked by name. Some esti- of compromises that differ in type, nature, and scope. Some of these compromises rest on a mates claim that about half a million people foundation of economic rationality. For others, with some form of income that should be pay- this is only partly true, while still other compro- ing contributions, do not. These freeloaders mises are in no way related to economic ratio- sidestep the costs while taking advantage of the nality. None of this is unique to Hungary, this services, which gives them the best of both is the way budgets are constructed all over the worlds. Everyone else, the people who pay, are World. It cannot even be said that things are worse off because of them, since what others different in the European Union. There too, we contribute has to be spread thinner and that see that the most important budget regulatory means a lower level of services for all.

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WILL WE SEE POLITICAL CONSENSUS we do know that those countries which have ON BASIC ISSUES? been able to develop rapidly and move forward significantly, in remedying their economic and This is only the beginning; there is a need for social problems, are those in which the political additional and significant steps. Everyone along parties and leaders managed to achieve this type the entire range of the political palette knows of cooperation. The best example is Ireland, this, and all have said so. A time might even where development did not really get underway come when they all say so together, in other right after it joined the EU. EU membership of words, when a desirable political consensus is itself was not enough to trigger the growth, reached on certain basic issues. We have still to which really accelerated in the wake of social figure out what those basic issues might be; but consensus.

Ireland’s GDP Trend

Closing the economic gap will be much slower contend with. Right now, we are only beginning than desired, until we reach that economic con- to define them, but if we manage to progress, we sensus. The various political forces are strong can begin to hope to accelerate reforms. enough to thwart the aspirations of their oppo- Hungary’s ability to reduce the development nents, but do not have the strength to push for- gap depends on whether or not the political par- ward with their own plans. ties, with the power to decide on the most im- It would be worthwhile to agree on certain portant measures of these reforms, can come to basic values around which cooperation and not an agreement. If they do agree, it will certainly opposition could become the decisive factor. speed up the gap-reduction, especially if the When setting down those basic values, the sole necessary decisions are made timely. The players consideration should be that they serve the who define political life bear a fundamental re- long-term interests of Hungary and Hungari- sponsibility for defining those basic values, do- ans. We need to define the basic points sup- ing the groundwork, and reaching national con- ported by the entire community, support that sensus. I hope that the broadest circles possible any person or group opposing them will have to recognize the responsibility and act in this spirit.

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László Parragh Why is it Important to Modernize Public Finances and Public Services? The need to reform public finances is a topic of in conjunction with changes in market condi- discussion for decades. Recently, the demand to tions; considering that, the market environ- upgrade government management and public ment itself is in a constant state of accelerated administration, in other words, public services, change. had been added to this discussion. We can approach competitiveness trends With execution of a tax and public finance re- from a number of angles. We can approach it form, competitiveness would have the chance to from the perspective of our immediate neigh- improve spectacularly and over the long term. bors, or as being part of the European Union, There are multiple resources available to recoup or looking outwards at the world at large. budget revenues that would be lost to tax-cuts We might analyze competitiveness based on the and mandatory contributions. Reforming pub- sizes and compositions of our businesses, along lic finances and the public sector would trigger the lines of the various industries or of concrete growth, while the service providing state would sectors of the economy. significantly cut the overhead costs of public At this point, we offer a few major indicators administration. Lower tax rates would also im- as a comparison with our neighbors and the prove the willingness to pay, all of which would EU-15, while focusing on the role of Hungarian increase revenues. public finances and public services to illustrate However, this appears to be an idyllic state of the necessity of the earliest possible moderniza- affairs that is far away, as even reform initiation tion. (The countries used for comparison were is being postponed. The longer these reforms chosen for the various reasons. The Visegrád are postponed, the less chance remains to some- Four (V4) nations – Slovakia, Czech Republic, what rapidly close the economic gap, and estab- Poland in addition to Hungary – are important lish a state of equilibrium. political and economic partners. Romania is increasingly becoming a competitor. We also need to consider Austria, Portugal and the rest of the COMPETITIVENESS EU-15, since Portugal is similar in size, and Aus- A question we often hear is whether Hungary tria is our immediate neighbor). and the Hungarian economy are competitive. Politicians tend to oversimplify the issue, – as Competitiveness Rankings they usually do – and they respond at the two Looking at the various rankings of competitive- extremes of the scale. They claim either that all is lost and gone forever or that the Hungarian econ- ness,* let us see how others perceive us. ¦ omy is the tiger of Pannonia. We cannot accept ei- According to one OECD ranking, as of ther response, since we are seeing combinations of January 2005, Hungary was in the lower sec- warning and promising signs at the same time. tion of midfield. Hungary, or more correctly, the Hungarian economy should be in a steady state of competitiveness. It should dynamically maintain competi- * Sources of competitiveness ranking: IMD, OECD, tiveness and improve it by moving forward ICEG, EBRD, Eurostat

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¦ The list prepared by the EBRD of the (with 43.2 percent), and Romania is well be- 2004 transformation shows Hungary in the top hind the pack (with 31.7 percent). slot. According to the ICEG survey published Considering all, these competitiveness rank- by the daily economics paper, called Világgaz- ings support the argument that Hungary’s daság, Hungary was in the sixth place among good/intermediate competitiveness rating has the eight Eastern and Central European coun- weakened as an outcome of deterioration in its tries in economic gap reduction. macro-level equilibrium. Moreover, the relative ¦ Based on growth and business competi- weakening appears more pronounced since tiveness, the World Economic Forum placed other countries became stronger. Most criteria Hungary three places back in 2004. The Econ- indicate that the former “head of the pack” omist Intelligence Unit (EIU) brought Hun- country is still performing well, or at least not gary forward by two places in its investment at- poorly. tractiveness survey, while Romania moved ahead by eight places and Slovakia by three. ECONOMIC INDICATORS The IMD competitiveness ranking brought Hungary forward from 42nd place to 37th. From the major economic indicators, it is ap- At the same time, in the international price parent that when compared to the other coun- competitiveness category, Hungary was in the tries chosen as a frame of reference, Hungary’s top slot of the negative field. performance is weaker in the sphere of govern- ¦ In 2004, Hungary’s total productivity in- ment intervention where the state has a powerful dex (GDP per economically active person at influence on economic flows, and stronger in the purchasing power parity, USD), a comprehensive market sphere where the economy tends to op- measure of competitiveness, placed Hungary at erate on its own. 52.5percentoftheEU15index.Thisshows Differences in the size of the public finance the same level as Slovakia. As far as the other deficit as a percentage of GDP are not dramatic competitors in its “weight category” are con- within the countries. However, it should serve cerned, Slovenia is well ahead (with 76.2 per- as a warning, and is actually a worrisome sign cent), the Czech Republic is slightly ahead that Hungary is also at the top of the negative (with 56.0 percent), Poland is behind Hungary list in the area of pension correction.

Public finance deficit/GDP

* Forecast Source: Eurostat

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The inflation rate remained on a high level for many years, but by today, a downward trend is clear.

Annual inflation

Source: Hungarian Central Statistics Office (KSH), Eurostat 2004

Hungary’s gross national debt as a portion of GDP “is fast approaching” that of the EU15, Austria, and Portugal. Meanwhile, our infrastructural development level is low and improving it requires enormous government spending, which in turn further increases the debt.

Gross national debt/GDP

* Forecast Source: Eurostat

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As far as the 2004 GDP growth is concerned in our region, the Czech Republic was the only country that performed worse than Hungary.

GDP – Annual growth rates

Source: KSH, Eurostat, UN Economic Commission for Europe

As far as the overall growth of productivity is concerned, the countries of the region have performed quite similarly. The growth-rate of the EU15 was, of course, slower.

Overall productivity* – growth rates

* GDP/economically active person at purchasing power parity Source: Eurostat, UN Economic Commission for Europe

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As far as unemployment was concerned, Hungary was in a distinctly favorable position with a low rate. However, a slow – and hopefully transitional – deterioration began in 2005.

Unemployment rates

Source: KSH, Eurostat

The inflow of foreign direct investment (FDI) climbed significantly in 2004. A significant relationship is assumed between EU-membership and the FDI indicators.

Inflow of foreign direct investment (FDI)

* Forecast Source: UN Economic Commission for Europe

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For quite some time, the high prime interest Real earnings and household consump- rate was a serious obstacle to the competitiveness tion rose significantly. Their growth-rate ex- of the Hungarian economy. Hungary had the ceeded that of the GDP in the past four highest central bank prime rate in the region – ex- years. From 2005 this phenomenon favor- cept for Romania – however, it dropped signifi- ably turned around, when the GDP began to cantly in 2005, in line with other economic shifts. grow more rapidly.

GDP, real earnings, and household consumption (%)

Source: KSH

THE GOVERNMENT Inefficiencies in Public Administration AND COMPETITIVENESS and Local Government Operations One factor influencing the country’s competitiveness The efficiency-levels of public administration and istheperformanceofpublicservices. local governments are poor. While the headcount size might be disputable in these areas, the ineffi- There are one or two examples of this from ciencies are undeniable. For instance, the major public administration. Most recently, the state distribution systems operate with low efficiency has taken (been forced to take) a role in busi- levels. Neighboring countries are taking much ness. For instance, according to current plans a more courageous steps to address these issues; series of tourism-promotion bureaus, called and although some of their actions are forced Tourinforms, will also operate as travel agen- on them, their results are just as commendable. cies. These offices, financed from business taxes, will appear as competitors in the travel in- The public administration reform is underway. So far three recommendations were made dustry. – one on the organization of government, one It often happens that the state does not even on the bodies supported by the budget, and one keep to its own rules. One blatant example was on government assets. There is a fourth under the auditing of all reimbursement requests for development regarding the structure of govern- the 2004 value-added-taxes, which delayed ment and – it is said – it should be ready by au- payments for months. Another example is the tumn. The basic principle of the reform – quite non-payment of winning bids for funding. In correctly – is that “affordable government” can- some cases the government still owes money not be bigger than required by doing its job, and that was due back in 2003. cannot spend money hand over fist, meaning that

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an institution should not be spending more on vague parallel authorities have already damaged itself than the amount allocated to manage the the country’s competitiveness. To cite one ex- tasks it has been charged with. ample, the trade development programs for Unless reforms are completed and consensus is 2005 (International Trade and Development reached, the counties (and the districts) are “con- – Hungary – ITD-H) were made public in demned to live.” Even if every single political June. There was no organized project at all dur- force agreed that they need to be transformed/ ing the first half of the year, and ITD-H under- eliminated, which they do not, interests op- went one of its habitual reorganizations. There posed to closing them down (power, status, was absolutely no purpose to the operation of jobs) would still be so strong that all repeated the organization, which annually costs about efforts would most likely fail. So far, the only HUF 5 billion (about EUR 20 million). move forward has been the establishment of the We need to clean up the jungle of participating micro-regional system. As of 2005, this system organizations and the outsourcing of tasks. allows local governments to combine forces and Outsourcing agreements will have to include manage certain high-level tasks related to educa- not only the specifications of the tasks that are tion and administration at a lower cost. being outsourced and the fees for handling These reforms would not necessarily result in them, but also the responsibility of contractors staff reductions. If a regional structure is estab- and sanctions for under par results. lished, central authorities would be transferred. The introduction of electronic administration Thus, the jobs would not be lost, only their lo- keeps running into obstacles; Hungary is behind cation would change. even the Central and East European region when it comes to building e-public-administra- Cutting staff using the lawn mower principle tion. We should consider following Estonian has nothing to do with reform, so no results should practices, where tax authorities refund taxes be expected from this type of move. Moreover, within 24 hours of receiving an electronically constant job insecurity will chase away the highly submitted refund request. Meanwhile, in Hun- qualified professionals who have the ability to gary, members of the business sector are forced adapt. In some areas, the additional work re- to waste months, for instance, even on obtain- sulting from EU membership will require even ing investment permits. more staff. Consequently, headcount reduction Inefficient administration also increases the connected to annual budgets will not speed up costs of the economy when managing official administration or make it more efficient. business. Another reason why it would be im- All attempts to reduce staffing appear to be perative to accelerate e-administration urgently doomed to failure, since “the system is pro- is that including the performance principle grammed to grow,” and experience to date has might even force the entire administration shown that the status quo ante is guaranteed to scheme to change. Distinct boundaries between return in some manner. The most often used tasks and responsibilities, regular analysis, per- method to address this challenge is outsourcing. formance targets, and continuous evaluation of However, outsourcing tends to increase costs, whether targets are being met are all essential complicate coordination, and limit account- factors to e-processes. Both domestic and for- ability and oversight functions. eign investors are alarmed by slow and disorga- In the current administration system, an in- nized administration, and by the low level of stitution is considered more important if it has cooperation and information exchange be- a bigger staff, its management has “bigger tween authorities. desks,” and if it receives more funding from the budget. On the other hand, their operational efficiency – which cannot be measured without The Government’s Contribution the introduction of performance principles –isig- By turning the regulatory and economic environ- nored. Overblown, monstrously complex, and ment into a pro-business one, the government

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would contribute to improving the competitive- Entrepreneurs, and Employers (VOSZ) are the ness of the private sector. We already see signs most vocal advocates of this card, which again, of movement in this direction, but the actual cases, is not surprising. In 2003, eighty-two percent where real action has been taken, are still isolated. of the state supported projects assigned to be Hungarian businesses are still undercapital- implemented by the Hungarian private sector ized, so it would be very important for them to (including the Hungarian Development Bank attract low-cost capital. There are various initia- (MFB), various developmental and other tives, but despite their efforts, they are not suffi- state-owned corporations, and the Széchenyi ciently coordinated within our systems of condi- Card) were done with Széchenyi Cards. tions and targets. Configurations are changed One-half of these funds were distributed often, though sometimes only in name. No one through the organizational efforts of the Hungar- is surprised that the Széchenyi Card, a simple ian Chamber of Commerce and Industry, the re- and quick way of obtaining capital, has been gional chambers, and offices of the National the most “popular” alternative. The various pro- Association of Entrepreneurs and Employers fessional chambers, National Association of (VOSZ).

Breakdown of ventures by credit type

Source: Calculations based on data provided by the Ministry of Economics and Transport

Breakdown of overall credit allowed

Source: Calculations based on data provided by the Ministry of Economics and Transport

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The guarantee of a bright future is a well- economy. Representatives of the real sector have trained workforce with diverse skills, which is begun to participate in vocational training efforts, ready and able to upgrade and update its knowl- and this has been turning them in a positive direc- edge. However, a look at the education system tion. At the same time, adult education appears reflects a growing number of problems. We are to be entirely isolated from economic reality. seeing a rise in functional illiteracy, very poor The state plays a dominant role in these areas, language skills, and a deterioration of quality in in foreign language education, as well as in the higher education as the number of students in- dissemination of computer skills. The Chamber creases. The initiatives submitted by the educa- took on the job of managing student contracts in tion profession for improvements are dismissed 2000 to help promote vocational training. To- one after the other. Instead, hurried and hap- day 21,300 students are included in this initia- hazard measures are taken, while the prestige of tive and their number continues to grow. the teaching profession is heading steadily Within two years, their number should be downhill. A problem of vocational training and reaching the maximum, which is about 30,000 adult education, that very slowly being resolved, (estimate based on the number of children in is that they do not support the needs of the the country).

Trends showing the increase in student contracts

Source: Hungarian Chamber of Commerce and Industry

When building a knowledge society, the by establishing regional centers for knowledge most important thing is to catch up to the inter- (research and innovation centers), and increas- national knowledge level, raise the general qual- ing lifelong learning opportunities. ification and knowledge of society (one part of The economic players themselves must be in- which is to eliminate functional illiteracy), im- cluded in the decisions on the content and re- prove the value of knowledge, and to restore the quirements of education that offers competitive social prestige of teachers and other educators knowledge. of children. The state needs to participate in improving The main pillars of a knowledge-based econ- competitiveness, mainly by adjusting the com- omy are adjustment of the content and structure petitive environment, but direct development is of education and training to market demands also necessary. Government efforts should be

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focused on building and maintaining a basic When modernizing the network of institu- infrastructure, implementing long- term re- tions, we need to rely on the existing networks search projects that are not focused on the imme- and build on them. If we establish a new organi- diate market and profits, and on reducing re- zation to handle every new task, all we are doing gional disadvantages as financial resources al- is increasing the number of parallelisms. low it. It would be a major move forward to introduce A key issue to reducing regional gaps is the concept of signing planning contracts on to build the network of necessary institutions. various tasks management, and financing these Decentralization and regionalism need to be re- by the local governments and the regions. inforced. Clarifying the status of the regions In summary, the time is here for a second re- (counties) and micro-regions is an urgent task. gime change. When the first one took place, It would be important to conduct a rational many areas were left untouched, including pub- transfer of central government tasks to the re- lic finances and its distribution systems, the ad- gions and micro-regions (decentralization), and ministrative systems, etc. They remain in place to disseminate electronic administration and as fossilized structures and unless they are simplify laws. changed, our competitiveness cannot be in- Representatives of the business world need to be creased. drawn into all levels of institutional development as equal right partners, and serve on re- Second Regime Change: Public Finances – gional councils discussing regional improve- Competitiveness ments. Without them, the job cannot be done The services included in public finances are the successfully. However, for many years, success- entire social and economic environment, and ful governments have refused to consider doing the budget and financial systems (inclusive of this, which is understandable from their per- planning, methodology, accounting, and mon- spectives. When political forces take develop- itoring areas). For that reason, it is extremely ment decisions, they prefer to make their difficult to move forward. It is not enough to choices based on political and popularity con- agree on financial and economic issues, but it is siderations (sometimes not even on these), and necessary to have social and political consensus. the last thing they want is the “disturbing” presence of professional business organizations. This demand throws a new light on the concept and practice of partnerships, which can no lon- Lower mandatory contributions and taxes are ger be limited to seeking opinions. The princi- key elements of competitiveness. However, it ples and practices of partnerships need to be re- would be a mistake to attempt to improve com- vamped according to EU practices. They need petitiveness and foreign economic equilibrium to operate as integrated institutional systems primarily through tax cuts. Government expen- and not as lax forms of cooperation or dialogue. diture would just increase the deficit if taxes were This “second regime change” would be vital cut, unless the structural reasons for its overspend- to public finances where we have lost our view ing are eliminated. of the interactions. The private sector has given Effective incentives for investment and an up its one-time social and welfare institutions. appropriate network of institutions to rely on These either have been terminated or continue require the operation of trade promotion systems to exist as service organizations, but financing that rest on regional chambers of commerce and now comes from social insurance, weighing industry. down central and local government budgets. Public finances and government administra- The number of “public service providers,” and the tion also have to utilize quality assurance sys- public expenditure itself have increased, which tems and procedural protocols. can be only financed by increasing public debt.

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This also illustrates the close relationship of reform preparation, but they also could be between public finances and the competitive- addressed on their own. ness of the business sector. As far as recommendations resulting from The first thing we need to clarify is exactly oversight, we can say in advance that more gov- what tasks the state has to meet, and what re- ernment tasks should be delegated –butnotinthe sources (staff, miscellaneous expenditure, fixed “usual way.” The overhead and support that need assets, etc.) must be available to maintain a cost to be reduced should not be outsourced to various conscious, but efficiently operating public finance and public administration system. businesses. Instead, spending conscious stan- Then, the reduction in expenditure will not be a dards need to be established. Then, numerous goal, but rather an achievement, because tax current central government tasks, with the re- monies only will be used to finance necessary sources to manage them, should be turned over public tasks. This is the only way to attain a to local governments and public bodies of long-term expenditure cut, which could also re- chambers of commerce that have their own sult in budget balance improvement. This will al- nationwide networks and infrastructures to low for increasing resources to boost competitive- handle them. ness on one hand, and to cut high taxes that are Competitiveness is the concern of the entire na- hindering competitiveness on the other. tional economy and the Hungarian society as a There is no planning or financing norm con- whole. It can be improved only through a complex nected to the handling of government tasks. approach, where every sector of the national econ- When the budget is prepared, analysis is not performed to determine the actual need for the omy has its own assigned tasks, and when execu- funding categories. This “good practice” is tion is under public control. Today, Hungary is also used at closing. Therefore, there is a large still competitive, but unless it manages to improve margin of error when trying to judge the effec- the state-run economic environment within the tiveness of public financing, delegation of near future, not only will its neighbors catch up, tasks, and necessity of parallel institutions. but it will have to deal with the social conse- Thesetasksmightbeconsideredcomponents quences of falling behind as well.

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Árpád Kovács Competitiveness and Public Finances Alternatives for Selecting Action Scenarios

When working in political or social affairs, one is management! There is another common feature, also making decisions about money, the econ- which is the necessity for time to pass so we can omy, and public financing. To dispel any doubts more realistically judge our actions. However, on whether this is true, it is worth looking up the this has to be considered with today’s immediate minutesonbudgetdisputesinthedecadesfollow- concerns, such as the need for economic gap-re- ing 1867, the year Hungary reached a compro- ductionthatcannotbepostponed. mise with Austria that restored a measure of au- Nevertheless, we could argue that drawing tonomy. Addresses by statesman Kálmán Tisza, 1 a parallel of this type is an error triggered by an en- and by novelist Mór Jókai, who was certainly not ticement to play with history – the result of sim- a financial expert, as well as administrative and fi- ply not understanding economics. The message, nance policy publications of the time illustrate the we might continue, is not really a good one if the point. It is actually surprising to see the vehe- rhetoric of today’s debates by Members of Parlia- mence behind the words of these respected histor- ment is excessively similar to that of nearly a cen- ical figures and the contemporary character of tury and a half ago. Even though the “spiral of their rhetoric. They utter scathing words on the history” may be coming around again, it should “situation:” the chronic budget shortfall2 and the beonahigher“curve.”Itshouldbeunderquali- political inability to find a path leading to a “solu- tatively different circumstances and should have tion.” They tabled cries for a “complete” public fi- goals that demand different applications and new nance reform, viewed as the generally propitious solution. They pointed out the need to clarify arguments,andtheyshoulddefinethepresent. government tasks and, of course, the “unbearable Acceleration in technological progress, especially burden” carried by businesses, the demand that it in information technology, a growing concentra- be reduced, and the “shameful” self-interest tion of capital, the crisis of the welfare state, inten- shown by the behavior of the opposition and/or sified economic competition, and the rising the government. Nonetheless, today we look upon power and dominance of globalization have cre- those times as an era of progress in state development ated an unprecedented situation for the world and modernization. economy and individual national economies There are many similarities between the decades alike. This requires new ways of problem manage- that followed 1867 and 1990. Each of those ment and innovative solutions by leadership. years marked new beginnings following decades The late-19th-century model with its admi- of repression in the wake of failed revolutions. nistrative (“bureaucratic”) outlook has been re- Each entailed the joys and tribulations of build- placed by a contemporary trend dominated by a ing national and “common” institutions, eco- social self-regulatory mechanism (“management”) nomic integration, opportunities for com- that relies on market coordination. Rapid re- petition, a new stratum of capitalists coming sponses to change permeate all aspects of life. into existence and advocating their own inter- Spontaneous ad hoc actions building on day- ests, and many more parallels. We might even to-day empiric experience and impromptu find ourselves grinning as co-conspirators, seeing feedback that are aimed at attempting to maxi- that there is nothing new under the sun in either mize short-term results actually run the risk of the nature of the criticism or that of problem increasing the gap. Attila Chikán writes: “The

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20th century seems to have brought victory to market terms of growth and development in alterna- coordination. A special issue of Fortune magazine, tives of and/or? Then again, is it better if we focused on the future of business, appeared recently simply recognize that development is, – al- and called that century the century of capitalism. though more than economic growth – actually the In that special issue Paul Krugman ... argues that consequence of growth. Of course, we might also ... in the final analysis it has been proven that the say that there is no guarantee that economic market is the most efficient of all coordination growth itself will bring about a livable human so- mechanisms conceivable today and all attempts to ciety on society-wide scale, in a contrary ... 3 deviate from it have failed.” To continue with Both growth and development incorporate that chain of thought: we might consider the fu- the concept and assume that an economy, a ture of the integration of public finances as a con- country, or even a social model will be competi- nection to market coordination mechanisms,al- tive. In this context, competitiveness can be in- beit while maintaining several differing basic terpreted principally as the performance and characteristics. This means that government development of a nation. The concept of na- and communal institutions and their international economic competitiveness first appeared tional integration are institutions that are open in American economics in response to the chal- to market coordination mechanisms in which lenges of the 1980’s world economy.4 The cited they themselves play roles. However, an ap- article deserves attention for its definition of a proach in which market-based coordination is st competitive society in the sociological sense. It considered the only “modern” 21 century tool says that a society is competitive if “it is able to is faulty and erroneous. Even the international attain dynamic equilibrium between the produc- business conglomerates use models in their tion of wealth and social cohesion.” The interna- internal management mechanisms – as it is tional competitiveness of an economy can be made necessary by their sizes and need for coor- conceived as something even broader, as the dination – that are based on state organization creation of an economic structure that has the models, which have a wealth of traditional, ability to grow on the long-term and easily “bureaucratic” features (there is plenty libraries adapt to world market requirements.5 The fea- full of professional literature on this). There- tures needed to define competitiveness are closely fore, the most important task is to identify the interrelated and interactive, and some of them can appropriate elements to fit a given step from be included in various indicators,6 that form a among the action tools we have available, once base for establishing a wide variety of competi- a step has been decided. tiveness gradations. The more factors we con- There are two dominant concepts regarding sider, the greater the chances of moderating the the content of contemporary socioeconomic quantitative and statistical outlook and receiv- change. Both are well known. One focuses on ing a subtler image. At the same time, other the components of economic growth as definable competitiveness factors can hardly be measured through quantitative features, while the other fo- at all with exact figures. I do not think I need to cuses on the qualitative aspects of sustainable de- offer evidence that the competitiveness founda- velopment, for which establishing parameters is tions of sustainable economic development more difficult. Growth and development are not include not only economic rationalization interchangeable concepts. The latter indicates a factors in the strict sense of the term, but also transformation of content, a maintenance and the factors that are more difficult to quantify. creation of values that cannot always be de- Economic, social and even management-ad- scribed by statistical indicators, and it means a ministration systems are living human systems. socioeconomic modernization that is deliberate As such, adjustment to change is influenced not and offers people more in not only the sense of only by the time required to prepare, make deci- welfare, but also in respect of values. Of course, sions, adapt, and begin to apply technical and we might ask whether we can speak of any monetary features, but also by a wide variety of of this without considering the economic other factors such as abilities, identification, and foundations. Is it even possible to think in public confidence.7 In this respect, the willing-

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ness of the political and professional elite to ad- tation of social (public) tasks, we often come just smoothly to modernization is a particularly across opinions – voicing generalities and ne- important factor.8 In fact, we might even say glecting to compare their yardsticks – which that there is no deliberate choice of values without charge that the “exaggerated” expenditure of an ideological foundation. the public sector itself has a counter-effect on Deliberate consideration of circumstances diverse competitiveness factors and hinders and opportunities inherent in world flows – in economic growth. Can we say that eventually other words, in the environment –shouldbe we will have to give up our hopes since the the foundation for the various possible action road chosen by Europe and its order of values scenarios. This leads to the building of adjust- (which cannot be narrowed down to a ment strategies. It is best not to be misled by il- so-called “social model,” and which, itself is lusions since the field of motion is very limited incoherent in its uniform) does not contain in more than the economic sense. Therefore, the brutal performance requirements and acceptance of reality, preparations combined methods that devalue human subsistence with foresight, and well-founded actions that are conditions; which – on short-term – would consistent on longer term, are particularly im- be necessary to improve economic competi- portant for the long-term possibilities of a tiveness, or at least, to maintain the size of the country. development gap at a constant (bearable?) AquestionIbelieveweareallconcerned level? Alternatively, should we keep our with at this time is whether, or for how long, hopes up based on international analyses:9 as we can still operate a “livable” – or let us put it relates to macroeconomic data and expen- it this way – a “European track” socioeconomic diture levels, from the perspective of compet- model – which of itself is not coherent in its uni- itiveness, microeconomic effects are more formity? Is what we hear with increasing fre- important. In other words, how we utilize quency true, insofar, as the model called the our resources, for what purpose, with what social market economy will become increas- level of foresight, and which development ingly unsatisfactory in attaining a global per- scenarios are we working with, these are all spective that identifies development essentially factors that through social transitions – al- as economic growth? In connection with the though difficult to measure – contribute to government role in organizing the implemen- economic growth. (See Figure 1)

Network of Interactions among Competitiveness Factors Figure 1

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The scope of this article is not broad enough sources, market distribution of incomes, the to do more than to touch on many factors that chosen or selectable political structure, and influence development. These include natural technological and scientific progress mold and resources, culture, history, tradition, interac- shape the modern social systems.12 tions of political and social factors, “global The well-known and generally accepted in- asymmetry,”10 the consequences of demo- terpretation states that the supreme task of the graphy and migration. There are also other de- state is to create conditions in both the human and fining factors, such as science and technology, the real infrastructures. Thus, the role of the technical and natural resources, and in particu- state appears as the regulator and owner of the lar, the business sector and the components of economic role, the articulator of social goals, and business growth. Of course, when looking at the organizer and implementer of the tasks leading development possibilities, there are times when to attainment of these goals. one cannot avoid citing these factors without Any and every action scenario can be consid- going into detail. Summarizing possible scenar- ered a pragmatic, general challenge. Each is a ios of the future or even outlining a single vision management routine or a system of tools offering is well beyond my abilities. This article is no an identity resting on a deliberate choice of val- more than a suggestion of the frame of reference ues that are stable on long-term, enjoy for the changes and for several competitiveness-re- socio-political support, and can be linked to a lated interactions of public finances. I shall at- national image of future and perspective goals. tempt to offer a few thoughts on choosing a possi- If we accept this, it also means that concrete for- ble course of action that is necessary for adapta- mulation of these modernization goals cannot be tion, focused very specifically on the public sec- postponed any longer. European integration for tor. In some cases I have oversimplified, and in us is an unavoidable, direct environmental fact, others, I have left things out, which might be so in choosing our goal we can preclude all op- considered an arbitrary move on my part that is posing models that reflect a different choice of arguable or even unacceptable. I freely admit values in the major principles of societal distribu- that my intention has been to take advantage of tion. Thus, we can compile a scenario of domes- the opportunities inherent in the Public Finance tic modernization involving development and Quarterly to invite everyone with opinions on the economic gap-reduction – the two widely issue to join in a debate. known challenges within our long-term alternatives, (set in opposition to one another here for didactic reasons) as the program of action giving POSSIBLE COURSES the following response:13 11 OF DEVELOPMENT The consolidation of the foundations for sustainable economic growth by improv- The (social and economic) environment in- ing competitiveness, and fluencing choices of values and action scenarios The maintenance and reinforcement of is of itself dependent on the various systems. The environment is defined by “major” sys- social cohesion. tems. These systems are the social and eco- Both scenarios require continuous choices of nomic order, the practical aspects of the politi- values – and on longer term – are to be inter- cal structure, ownership relations, and the eco- preted in connection with development,ortobe nomic mechanism. The latter consists of the more precise, with the political and social ideas re- system of coordination that influences the mo- garding the content of development. This also tion of economic flows (flows that also reflect means that it is absolutely necessary to have a so- social tradition, history and development-re- cially accepted and politically articulated image of lated endowments). Just barely different is the the future in order to choose a long-term value- concept that resources, including natural re- based scenario.

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There are significant interactions among the Lepage’s forecast are important targets and re- various responses that can be given for the chal- quirements for competitiveness.15 To be suc- lenges. For instance, if an economic and social cessful with anti-inflation measures on a long- policy scenario focused on improving economic term it is necessary to achieve significant results competitiveness, and therefore on boosting in both improving productivity and cutting growth potential, is successfully implemented, costs as quickly as possible. Both Robert Z. it may gradually “extend” into resolving social Lawrence and Henri Lepage wrote noteworthy problems. Since social security by itself is an im- competitiveness scenarios in the latter half of portant driving force for development, this, in the 1990’s.16 turn, can have positive repercussions on (fu- The outcome of a successful scenario focused ture) growth. I do not believe any detailed evi- on competitiveness is long-term and accelerat- dence is needed to prove the fact that one very ing economic growth and, in the final analysis, significant component of the socio-political the modernization and development of society. factors influencing competitiveness and choice 14 At the same time, it is likely that social uncer- of values is demographic trends. The various tainties and tension will rise because of these scenarios carry different feasibility and socio- changes. Differences in opportunity will grow economic risks which mean that in the context while the increasing output of the business sec- of the political and econo–political field of mo- tor will only be able to partially offset them. tion, when establishing some factors in ad- These factors work against taking the bigger, but vance, we are forced to remain within limits necessary econo-political risks. This means that in while determining the foundation on which the the context, in other words, we need to consider scenario is chosen. the extent to which the steps planned will limit the short-term interests of the political credit An Action Scenario that Relies on Advancing economy (and the social strata accessing the ser- Competitiveness vices). Part of that is the extent to which chances for consensus-based measures that go Choosing a scenario in which action is centered beyond a single term of political office are cut on conscious socioeconomic action to improve com- back. Let me note here that from time to time petitiveness is aimed at maximizing the individ- the tools that can reduce the state’s economic ual’s social and financial responsibility, while at role or increase its authority are pulled back. the same time minimizing or at least significantly The measures appear to be direct and irrational, reducing government intervention. It narrows but really are ways of seeing to it that interna- down direct responsibility for its services, and for tional and domestic political and economic in- the provisions that are technically performed terests are served. Very often, the rhetoric sur- through its own system of organization, as well rounding these moves claims that they are serv- as its bureaucratic administrative restrictions. ing an opposite purpose. Consequently, the concentration of income If we treat external and business-condition- may be more moderate, with the hoped for high based support from the world economy as a level of economic awareness and flexibility constant, then the basic condition for imple- coming about, improving efficiency and acting mentation is that faster domestic growth should as an effective tool to combat economic waste. be able to offer short-term compensation for the The growth dynamics of public finance expen- unfavorable impact on residents and institutions diture will drop from the previous order of resulting from public finance restrictions.17 magnitude – with the exception of expenditure Meanwhile, a situation in which the mainte- for education and training – and along with/de- nance of social and welfare tranquility on spite of tax cuts for businesses and consumers, short-term becomes forced upon the system to more funding will be available to support devel- theextentthatitspontaneouslycancelsoutall opment and innovation. other aspirations must not be allowed to come In the final analysis, the attainment of infla- about. The risk is particularly high among the tion-free growth and the attainment of Henri countries that changed political regimes and

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have joined or are joining the European Union. The countries newly joining the European The credibility of the system of political insti- Union might give priority to this alternative to tutionsisparamountinkeepingtheeffectsof establish the conditions under which they have a the process within bearable margins, with chance to close the gap. This alternative might be hopes of eventually closing the economic gap necessary because of social strata that will re- that increases the level for tolerance. The his- quire special assistance because of the structural torical chance for economic growth and gap- transformation (such as people living off agri- reduction that Robert Z. Lawrence calls “gap- culture and related fields). Innovative services reduction advantage”18 offers a favorable per- – research and development support, assistance spective as seen in the examples of Europe and of small- and medium-size companies to enter Japan during the post-World War II develop- the market, etc. – promote competitiveness, ment phase and in the experiences of the Baltic and improve the chances for making it within nations today. the EU’s internal market.21 As far as chances of success are concerned, two types of countries Action Scenario that Relies on Reinforcing have an advantage. In one type, the measures Social Cohesion are those backed by social support resting on strong consensus regarding values that go be- Some views call this scenario the reincarnation of yond the tenure of elected administrations. In the welfare state.19 I firmly believe that it is the other, the people of a nation achieve the somewhat more and somewhat different. This kind of joint success that becomes a cathartic scenario focuses on the maintenance and rein- experience, such as the winning of sovereignty. forcement of social cohesion, and it trusts in the The two can be separate or combined. strength of this choice of values in planning to sustain growth. It aspires to do that by operat- This scenario works under the assumption ing a social and welfare model in which sig- that the economy is working well and that the nificant public institutions continue to operate elements of strong social solidarity, social coordi- and offer basic welfare and innovative services. nation, and satisfactory finances (reserves) are in This occurs despite that the role of the state as place. In this case, it is possible to rely on the service provider and organizer is reduced and foundation of these values in defining the new the efficiency of the service provision systems is values and norms of participatory democracy. increased. In the meantime, the private sector This will require construction of institutions to obtains the market for services and offers com- handle organization on regional, sub-regional, petitive solutions, taking on an increasing role and settlement level at no small cost, as well as in organizing these services and managing the a large number of new and untested arrange- ments in administration and social organiza- technical aspects of providing them. 22 Scenarios offered by Dennis J. Snower and tion. It may also affect state systems. Clam Offe are built on the reinforcement of social One might think that this type of scenario cohesion. Snower concentrates on the technical would definitely receive broad social approval, means of resolving social conflicts, while Offe which would make it easier to implement. In fact, focuses on theoretical and sociological interac- this is not the case. There are probable risks asso- tions.20 They both indicate that the “replay” of so- ciated with not only the movement of the pri- cial distribution is both the stakes and (they vate sector in a given national economy, but claim) the solution. This scenario does not suggest also with business interests, faulty estimates of in any ways that obsolete service provision systems world economic prospects (assuming stable do not have to be modernized. In fact, the goal is business conditions!) or possible unexpected to make them more efficient, based on the prem- and unpredictable events impacting material ise that in a modern system social and welfare ex- foundations (such as natural disasters). Usually, penditures bring in a higher social yield. Increased the risks to financing alternatives spotlighted by solidarity and maintenance of a comparatively con- competitiveness come forth when social toler- flict-free society serve as an economic driving force ance is waning. However, this latter scenario that increases competitiveness. has a higher financing requirement at the outset,

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so the risk involves the ability to access necessary re- Choices of Value that Interfere with and Form sources right at the start. Under these circum- Pathways between the Various Scenarios stances in the pro-competitiveness model, ma- Choices of scenarios are based partially on inter- neuvering is possible by cutting back the devel- nal features of the environment, some of which opment rate – which runs the risk of increasing have already been mentioned (social supports, the development gap or of stagnation. traditions, system of political and administra- In contrast, if a model is focused on develop- tive institutions, economic development level, ing social cohesion, state organizations may turn debt level, financial reserves, etc.). The other set disproportionately high sums towards users of conditions are external (the need to adjust to when welfare expenditure is allowed to drift and EU and global requirements, NATO and other economic power is insufficient. A state organiza- international commitments, the amount of EU tioncandothisevenwhenitiswellendowed resources that can be included in projects, with financial reserves and has a substantive field trends in world economic conditions, etc.). of motion, but it feels the need to meet voters’ These factors provide a framework within demand in order to maximize in the political which decisions are being made. credit economy.”23 From this point on, the only We now need to ask whether the choice of sce- waytoattempttoreturntoatrackofsustainable narios is fully objective and – in agreement with growth would be quite traumatic with restric- Tamás Mészáros26 – we also need to ask whether tions that would destroy society’s image of the fu- the scenarios are equivalent. The answer in both ture. The social and even the political repercus- cases is an unequivocal “no!” sions of this should not be ignored. Introducing The choice of target and values cannot be an “econo-political dictatorship” aimed at carry- fully objective even if it is scientifically and ing out the substantive financial restrictions that knowingly sound and if environmental factors, become necessary would yield a “coerced com- available means, and expected trends in social petitiveness” scenario, which would increase the supports are precisely known. The fact is that chances of an alternative or ultimate establish- social outlook and ideological elements, social ment of a government operating as a narrow cen- psychological, and human motivation all play ter of power and/or based on its reputation. roles in choices of values through political com- Chancesandhazardsofthisaresignificantinthe promises and bargaining mechanisms. Motiva- post-socialist countries, as we can see examples of tion by government and opposition members this among countries towards the East. are all involved in generating these changes, – as will be discussed later27 – by their career paths, From the point of view of a scenario with socialization, by their economic and profes- these characteristics, not only the countries sional supports in the background; and at last, that recently changed regimes are in a peculiar but not least, by the nature, intensity and composition, but also the European Union. His- mitments of personal networks, which have a torically, the order of values and model that fundamental influence in the way situations are evolved under conditions of peaceful coexis- viewed.28 tence cannot be considered precisely a “social It is worth mentioning the causes of the phe- market economy,” or even a “livable country” nomenon as well. I agree with Tamás Szentes,29 24 or a “welfare state.” Moreover, financing will who has pointed out that the demand to adapt become increasingly doubtful even in the most to rapidly changing world economic require- advanced European countries, unless they ments, while improving national competitive- manage to build more competitive, knowl- ness, paradoxically increases the role of the state edge-based economies in which higher levels and its institutions rather than reduces them. of employment trigger more rapid economic The increase is primarily due to the state’s role growth for the purposes of social cohesion and to attain a more favorable world economic posi- environmental protection. However, for the tion and to promote the internal integration of moment, no real steps taken in this direction the economy and society in that context. In this are visible.25 way, the role of the state is not reduced to, for

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instance, influencing the choices of values on a The next question is then whether there is any level of “competitiveness” versus “enhancing possible way to combine the components of the var- social cohesion.” Instead, the state and its insti- ious value choices and still manage to have a typi- tutions follow the dominant economic force cal scenario, based on the fact that we need a field in coordinating the operation of the na- democratic state that creates opportunity. That tional economy and social movement. The re- means having an economy coordinated in the sult derives from the three components of the interests of international competitiveness with economic role – the regulator, the owner, and social equalizing mechanisms also built in. This, the organizer – as the basis of a “vector.” The di- I believe, is possible! If its location is set very pre- rection of the vector and the power with which cisely, it is possible to set up a course of action that it appears tells us the goals of the given state, the reflects “equilibrium,” in that it does not put so values it chooses, the social and coordination much pressure on priority goals so they collapse, tools it applies, and the effectiveness with which and it offers compromise and a consistent choice of 30 it operates. Using this approach, we resolve values. A “pure” model that ignores circum- the dilemma of the “retreat” of the state that stances, and over dimensions the sovereign po- would follow from the logic of the regime sition and opportunities for action is a mistake. change, and the maintenance of its role. Fol- Another model is faulty as well with inconsis- lowing through with the logic of the regime tent changes of actions that cites the slogan of change, the state is a regulator and implementer of quick adjustment and reflects a disturbance of social goals and tasks, therefore it can never vanish. values or rapidly changes its action scenarios – Instead, its operation will receive a new quality. which may even have been triggered by its in- The answer to the second question, regarding flexible strategy. In other words, there is no the equivalency of the scenarios, also receives a neg- clear black-and-white response. However, it is a ative response. The only possible primary goal is fundamental requirement that the choice of the reinforcement of social cohesion and secure op- scenario need to rest on adequate professional eration of society. However, at this point we can analyses. As part of this, there must be no attempt state that these features cannot be developed to try to simultaneously implement all elements of unless there is a satisfactory economic founda- different scenarios that are very different from one tion to support them. Moreover, development another in their basic principles and in their cho- can be established by improving competitive- sen values. A series of such measures would be ness, but boosting competitiveness or even growth equivalent to delaying a substantive choice of does not automatically lead to increased social co- scenario due to the uncertainties in choosing hesion and security. (We can speak of “growth values and the impossibility of reaching consen- for growth’s sake,” which reinforces divergence sus. The consequences will be particularly disas- between social groups rather than cohesion, or trous if the absence of a well-founded, substan- perhaps creates products that those who create tive choice is covered up by rigid legislation that them are unable to obtain. At this point, how- lacks financial backing. Such a serious error ever, we are no longer speaking of democracy). would be to come forward with promises, from At the same time, to follow Tamás Mészáros’ tax cuts through pension hikes, which are irre- chain of thought,31 sustainable development also vocable for political reasons, but are based on means that the cohesion and secure operation of so- scenarios with differing content and points of ciety includes intergenerational cohesion. That means no generation has the “right” to “live better” emphasis. at the expense of succeeding generations. How- I firmly believe that if a country operates in a ever, putting that principle into practice is a dif- balanced manner and is “guided by reason” in ferent matter, as it was already mentioned while setting its main goals, the design and selection discussing demography. The fact is that to proof its scenario and the sequence of its actions vide welfare and healthcare is becoming in- will be carefully considered. That action will be creasingly difficult as the ratio of the elderly at least as professional as election-term and power- population increases. policy-based moves.

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Attempts to Choose a Scenario in Hungary structural transformation. That did not happen. Instead, an attempt was made to implement two There are practical scenarios in operation that, scenarios simultaneously.35 The new program of- to a greater of lesser extent, differ from theoreti- fered society, which viewed the prospective cal ones, and very often they result in different measures as ordinary justice, a chance to finally courses of development. Many excellent sum- enjoy the fruits of the regime change. This pro- maries on Hungarian economic history and gram of action promised a “social regime within that, on the course of development change” combined with the promise of im- taken by public finances following the regime proved competitiveness and “reduction of the 32 change of 1990 have been published. If we ac- gap separating Hungary from the European cept the evaluations of these publications on the Union,” which was impossible to carry out. various changes in scenario, we might say that The fiasco was not just the result of a fundamental although building a “social market economy” shortage of funds, but also of choices of values that was a constant political slogan during this pe- precluded one another, and of the inconsistencies riod, between the spring of 1995 and the sum- with which various measures were phased36 and mer of 2000, the scenario that defined all action connected to one another. was focused on developing competitiveness. Ac- cording to György Surányi, between 1995 and In the given structure of social insurance pro- 2000, the situation in Hungary was so excep- vision systems, the growing number of elderly tionally favorable that acceleration of growth people and the overall state of health of resi- and keeping the public finance deficit under dents required increasing inputs, despite the control were achieved simultaneously, and at fact that the level of care declined. The original the same time33 unemployment also dimin- belief was proven to be wrong, according to ished. This successful scenario operated over a which the financing to cover the modernization relatively long period of time. To maintain of the government organization could come equilibrium in the social systems, it undertook from upgrading financing techniques and cam- deliberate restrictions in allowing wage growth paigns forcing the system to “go on a diet” – as – sometimes openly admitting the existence of opposed to planning out the resources required these and sometimes leaving them unmen- to meet the task. Not surprisingly, a “yo-yo” tioned. However, the break came when it be- effect – to borrow a term from those with diabe- came urgently necessary to sidestep the near tes – went into effect. Once let off the diet, the bankruptcy that evolved following the shake-up “patient” – the Hungarian public finance budget – of the regime change, when social and eco- lacked self-control and generally managed to re- nomic policy were balancing and drifting on gain more “weight” faster than what it had prior 37 the edge of crisis. In other words, the scenario was to going on the “diet.” not the result of a deliberate choice of value for the We all know the consequences. There is con- longer term. Its implementation cannot be sensus in that we are in a worse position than we linked to one specific term of political office; it were two or three years ago. To prevent a wid- ran from about the middle of one term through ening of the gap, it is agreed that we must take the middle of the next one. immediate steps with a scenario that centers on This action scenario overvalued the results competitiveness, that is willing to rapidly trans- and began to change gradually, starting in form the social provision systems, and that does not 2000. However, even in 2002, it appeared that put the budget balance at risk.38 In the given situ- after the corrections, the high rate of economic ation, measures, some of which included mutu- growth would continue. At the time, it was ally preclusive aspirations, were initiated with- more realistic to think in terms of growth that out appropriate funding. Other benefits were resembled the Cyber-Euphoria34 scenario than offered, but not linked to performance, and one with a more gradual nature. During that there were promises that steps would be taken time, there was a realistic chance of restoring to transform obsolete benefit provision systems the upset in balance between economic and (some of which never got beyond the promise social policy after unbalance resulted from phase). This is going to be very difficult to

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change, for in the initial and most sensitive phase I shall recommend several considerations that of shifting to a new course, all the risks that are – I hope – can be put to profitable use by do- otherwise connected to one or another dominant mestic practice. choice of values could “backfire.” In today’s Hungary there is general agree- SCENARIOS – THE METHODOLOGICAL ment that the main role of the state is, on one FRAMEWORK FOR CHOOSING VALUES hand, the fullest possible adjustment to global flows and a successful link to European integra- New management and leadership problems tion; and on the other, the attainment of the 39 arose starting in the 1980’s. They appeared not highest possible level of social cohesion. only in manufacturing, but also in the opera- The real questions are: what ratios will be re- tion of government services – including admin- quired for implementation? What are the con- istrative services – demonstrating the mutual crete steps through which it will be achieved? impacts of institutional changes and economic How realistic are these steps? How much of a performance. We can postulate that the mutual risk do these steps entail? The possibilities for impacts of these factors are generally valid and rethinking the government tasks that rely on that they occurred with a particularly high in- consensus not only deteriorated by socio-politi- tensity during the transition to a market econ- cal divisions, but also by the worse demo- omy in Central and Eastern Europe. graphic situation. We cannot pretend to ignore the moves we are forced to take because of the short-term interests of an aging society that re- Coordination Mechanisms quires social benefits. In fact, we have to face up and Change Inducing Organizations to the real danger that any deterioration in the ratio of economically active to inactive citizens According to a method employed in 1997 by in Hungary will not only slow economic the Dutch Central Planning Bureau,41 the insti- growth, but it will specifically hinder economic tutions “in a society the rules people accept, … development. The reason is that an increasing [and] the restrictions they set up to shape human proportion of the national income will have to relations are equal.” Within this framework, be spent on citizens who become inactive due to they distinguished between four mechanisms their old age. To simplify this phenomenon, that were able to coordinate economic behav- – and following Elemér Terták’s chain of iors in market economies. They are: thought40 – given this demographic trend, even Competition between economic players, if per capita production of GDP were to remain in which the liberalization of prices (rent, unchanged, the volume of the social product by transportation, and community services), economically active age groups – would have to international trade privatization, and an increase by at lease 0.3-0.4 percent per year for effective financial feedback system are es- decades to come, while all other conditions re- sential institutional factors; maining the same. When designing political Government leadership: the transfer capac- programs, this fact has to be considered as a ity of the government’s will to influence value-determining factor that underlines the decisions, for instance, through govern- steps to be taken. This includes the need to sig- ment regulation, which assumes that there nificantly increase the current 57 percent rate is a high level of public administration of economically active citizens – which requires linked to the new role of the government, a conscious decision based on a predefined meth- as well as guaranteed legal security for the odology. private sector, and effective governance in Now, I will briefly touch on coordina- the state sector;42 tion mechanisms, organizations that generate Joint values and norms: the compatible change, and choice of value judgements as a preferences of a group of economic partic- frame of reference for the scenarios, focusing ipants, which fundamentally influence on modernizing domestic public finances. human behavior;43

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The cooperative transactions of the eco- sulting. Meanwhile, the financial monitoring nomic participants are the result of coop- organizations are playing an increasing role in eration attained through bargaining. the government organizational system in the They include, for instance, three-way co- broader sense of the term, considering that they operation among government, employers, are quick and among the first to notice short- and employees, which are important insti- comings and problems that need resolution. tutional factors and the foundation for a From that point on, “only” legal authorization, social partnership. acceptance, and ability for these organizations We will add a few elements of change theory, to become agents of change to varying degrees, which is part of strategic management, to aug- – depending on the extent to which they can ment this briefly outlined method of analysis. take advantage of their opportunities to gener- In the world of institutional changes, it is worth ate change – are needed. giving particular attention to agents of change, Dominant among the global agents of which appear in the different interest groups. change – in addition to the transnationals that These organizations – supposing an optimum have gone global, the international banks, the state – deliberately and continuously monitor advisory services and large auditing firms – are and evaluate socioeconomic flows and within the UN and NATO. The international finan- that, the activities of one or another institution. cial and economic institutions (IMF, the World They also have the ability to quickly identify Bank, WTO, OECD, etc.) also play defining desirable changes, and therefore – depending roles, as well as the global professional organiza- on periods, development level, debt level, etc. – tions (such as the supreme institutions or gov- to either directly or indirectly influence the ernment control or INTOSAI and IFAC, change of the balance between the value choices which form an umbrella for private auditing of two scenarios, and to make appropriate firms and coordinate the principles of their recommendations. We distinguish between do- work). Among the European agents of change, mestic and international agents of change, the most important are those that spread the ideals latter of which are rapidly growing in signifi- of integration, and the institutions of the Euro- cance. Among the latter, we distinguish be- pean Union. Therefore, as far as Hungary is tween global and European agents of change. concerned, an objective and sovereign definition The main groups of domestic agents of change of position would be inconceivable without are party and political organizations; govern- adoption of the European Union’s legal and ment organizations; and private sector organi- value systems and of its convergency criteria. (It is entirely another matter, that on the long- zations, in which dominant roles are played by term, influenced by both our achievements non-profits and larger corporations that partici- and weak points, we can become shapers of pate in community services, research institutes, the common system of values and goals as a and consulting firms. member of the EU). The framework of this article does not al- Building ties with these agents of change runs lowmetoofferanyanalysisoftheroleof the consequence of seeing certain government these organizations, as agents of change, for functions rise above the level of the nation-state in often that would require an organization-so- exchange for the advantages of integration. ciology effort. Instead, I would like to simply The part of this integration in the past decade ev- indicate that from the point of view of signifi- idenced by the forefront movement of large cance and of forces that generate and influ- business, business group concerns, along with ence change; these groups are also undergoing a trans-border international corporate empires44 restratification. There is a tangible increase in when meeting government tasks. This has re- theroleoftheprivatesector,particularlyinthe sulted in a new phase of the cooperating state, areas of non-profits and business-research-con- which Hungary has never experienced before.

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Although, the order of values and willpower different business cultures and diverse national of the domestic business world have definitely regulations and customs. influenced centralization and redistribution, these are often overwritten by international The Frame of Reference for Institutional business interest, multinational companies, and Changes the political-economic alliances of nations and networks representing their own interests. The considerations cited allow us to compile a When management systems everywhere are frame of reference for institutional changes – that scrutinized to improve their efficiency, we see a expresses the consequences of globalization – decisive move towards separation of decision in the area of institutional change (I) and competencies, responsibilities and decision-mak- in trends in economic performance (T). ing, and execution at a professional level (ad- Thefirsttable(Table 1), suggests that that ministration, financial transactions, execution, frame of reference attaches the factors operat- service provision, etc.) leading to overall decen- ing in given place and generating change tralization. (combining global and European agents of The average size of business organizations change) to the mechanisms generating the has been growing in conformity with the above change. It also connects the necessary organi- processes. The significance of this development zational specifics to the mechanisms, assum- is underlined by the fact that increases in size ing, of course, that they must be characteris- through mergers and acquisitions have resulted tic of every single institution and that the fi- in the evolvement of a mass of global corpora- nancing of the institutional system corresponds tions. Thus, alongside the tasks triggered by to the tasks and the finance planning mecha- growth, we see the problems of adjustment to nism is appropriate for this.

The Network of Interactions for Change45

(Frame of reference) Table 1

Mechanisms Inducing Change Government Cooperative Competition Values and Norms Leadership Transactions Organization Qualifiers

Inter- Inter- Inter- Inter- Domestic Domestic Domestic Domestic national national national national

Awareness of goal A11 A12 A13 A14

Awareness of mode A21 A22 A23 A24

Awareness of abilities A31 A32 A33 A34

Awareness of resources A41 A42 A43 A44

Awareness of environment A51 A52 A53 A54

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Government Management: and guidelines that act as the guiding principles Multidimensional Awareness for the central and local government bodies involved, and based on these principles the estab- A requirement, so well known that it is almost a lishment of monitoring the related financial platitude, is that the efficiency of government processes.48 In other words, responses to chal- activity in the broad sense of the term is the lenges must be coordinated consciously, be- dominant condition for the success of implementa- tween long-term regulations, institutional sys- tion, whether the scenario implemented operates tems, management and methodologies, and the to reinforce competitiveness or social cohesion. tools of implementation (to say it more fashion- However, opinions do differ on the importance ably, they must all be in harmony). Multi-di- of its various components. mensional government consciousness also in- The comprehensive goal, on which updating cludes recognition of the fact that the govern- the management mechanism is focused, is ment tasks, such as the Hungarian legal system, attainment of a standard of public manage- whether defined appropriately or poorly, define ment and administration that conforms to the the structure, superstructure, tasks, and even the changed role of the state and is deliberately con- 46 personnel and qualification requirements of pub- trolled and operated, and able to generate change. lic administration and public service. Unless the The new forms of social activity will not leave content is redefined, as far as staff cuts are con- this key area untouched. There are traditional cerned, it will not be possible to attain a “propor- measures in line with traditional solutions (or- tionate” (meaning, using downsizing percent- ganization sociology and/or public administra- ages, applying the lawn-mower principle) and tion rationalization) – that we might call effi- substantive reduction in staff without any further ciency improvement with an “operative eco- deterioration in the efficiency of public adminis- nomics outlook.” However, other measures tration and public service. that are philosophically new and open up public administration have come forward and – as we According to this and based on current au- will see – tend to be a type of environmentally diting office experience, government leadership conscious approach. – in the broad sense of the term – will have to en- The essence of New Public Management sure that the target systems of the domestic agents of is that the management outlook becomes a change operating (connecting point A12) on inter- fundamental part of public administration. nally consistent regulation that corresponds to the This means that management must be up-to- choice of scenario. Budget planning also needs to the-minute on the costs of the various activities “think” long-term within the financial systems and must be performance oriented. The classic of public finance, while limiting and changing principle under which public administration the methods of government presence and inter- “has an everlasting presence” and offers stability vention. and predictability is becoming a relative one. ¦ The financial system of public finance “Open system” public administration and, to must have an evolved, internally consistent an even greater degree, public management in- and stable system of regulation. It needs regula- duce representatives of the business sector to action that offers not only a momentary frame- 47 cept public functions. However, the funda- work for economic operations, but also opens mental issue here is that they must be able to up perspectives and serves as orientation, be- think and act along a horizon that rises above cause, sectoral interests. Governments and local governments need to It sets the foundations for the reality of me- evolve a sharing of competencies and the con- dium and longer-term budget planning; tent and forms of possible cooperation with It improves opinions regarding the eco- their new partners. This includes establishing a nomic stability of the country, and serves uniform order of procedures containing norms to attract foreign investors;

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It contributes to improving the quality of Transparency is key to effective – or let us financial operations; say “accountable” – governance. The best re- It offers incentives to operate with trans- flection of its reality content and the extent to parent and accountable – controllable – which it operates is the public finance budget business management, and requires and of a given country and within that, as a prior- facilitates fundamental reforms within in- ity issue, the level at which its budget planning and accountability system operates.Thebest formation system. way to determine the transparency of the bud- Within regulations, it is necessary to orga- get is to expose periodically, in a methodical nize the various levels of information. This re- and consistent manner, all relevant revenue fers to Parliament, the cabinet, the ministries, and expenditure information. We generally the local government bodies, and the manage- describe four main elements regarding the ment and control of budget-sponsored institu- transparency we expect of the government. tions and so on. In order for valuable usage of Based on the IMF transparency codex,50 the data between the various levels, it has to be they are: ensured that the information needed to make a The clear specification of tasks, authori- decision on a given level is available. This re- ties, and responsibilities; duces the burden on data providers while having the optimum amount of transparent and Accessibility to information by the broad- unambiguous data available to make well- scale public; founded decisions, and to prepare and report Public budget preparation and execution; on the budget. This will also restore the pres- Assuring fair economic practices. tige of data providers and their sense of responsibility for the reliability of the data they In relation to the latest, – as a consequence provide. I need to mention that the State Au- of the changes in concept and content touching dit Office has been lobbying for years, and on the regulatory, management and control of considers it timely even today, to replace the the state – besides the traditional controls fo- diverse regulations – with their many contra- cused auditing, there is an increasingly power- dictions – with a uniform state accounting act ful presence of financial auditing that focuses that is in a closed and integrated system. How- on performance-based financing, direct man- ever, preparations of such system must be pre- agement support, analysis and evaluation, and ceded by a new public financing act that better decision-maker assistance, while providing con- adapts to state tasks and can offer a stable and clusions and recommendations on these as well. long-term framework. As far as operations are concerned, if regulations are not in place there is no sense in investi- Transparency and accountability49 are vital gating performance. We also know that simply and closely interconnected basic requirements measuring efficiency is sufficient to trigger im- needed not only for the accounting and audit- provement. ing of public organizations, but also for national economic actions, the operation of the Increasing competitiveness and evolving re- state organization and public finances, as well as sponsible public administration requires the for international relations. Achieving transpar- predictability and transparency of monetary ency and accountability provides a necessary flows and overall and itemized accountability as guarantee and fulfills security requirements of a an organic part of it. Here, I should mention democratic nation functioning under the rule that the issue of accountability has recently of law, and for international financial relations come up on EU level, with respect to large and 51 as well. Demand for the complete achievement complex systems. of these principles is growing throughout the ¦ Budget planning that “thinks” over longer World and they are fundamental to the operations horizons must be provided. In terms of public fi- of various alliances such as the European Union. nance budget operations, this type of planning

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Makes budget decisions and their effects Government operation becomes more trans- transparent and easily to follow for parent to the “public,” which results in a Parliament, which exercises regulatory higher level of political confidence and more authority over the budget; stable government. A long- term budget that Offers satisfactory information to de- is “thinking” in perspective, and the planning cision-makers at all levels related to of such a budget assumes and requires the op- future consequences of decisions made eration of a macroeconomic financial plan- today, and on existing determining ning system that is more robust than the current one – and in conformity with the “na- factors; 52 Offers incentives for quality-based de- ture” of the contemporary market economy. When preparing to choose a scenario it is ex- velopment and for conservative financ- pedient to count with a situation in which ing, after creating the opportunity to es- economic developments will differ from as- tablish reserves and after the surpluses of sumptions, and the socio-political medium funds that are allocated for development will not offer the favorable climate that had appear in the annual budget; been expected and considered probable. Creates an opportunity for increased If there are alternative “emergency scenarios” security in planning long-term devel- and “crisis management plans” available, the opment concepts, and understanding risk level will go down, since less time will be the costs associated with their imple- needed to find a way out from an unfavorable mentation. situation. A budget designed in this way and the fi- ¦ It should be possible to restrict govern- nancing that relies on it will improve coordina- ment presence and intervention once large- tion of tasks and resources. This not only turns scale redistribution and the related high the question of “a larger or smaller public fi- taxes and contributions are reduced. This in- nance budget” into one that can be interpreted cludes: in the context of choosing a scenario, but it will Defining and limiting the circle of tasks to also help to resolve current transparency and be financed by the state; accountability problems of budget planning and operation. It is indifferent whether a gov- Initiating shifts in the proportions of the ernment in office utilizes a decentralized plan- goals that are financed to give priority to ning mechanism (which organizes the concepts factors that boost international competi- of the organizational system through bargain- tiveness, education and training, and envi- ing mechanisms) or a centralized one (which sets ronmental requirements as opposed to ex- up a framework and then distributes funds). pense that is directly related to production. In neither case will it be able to avoid submitting Restricting the presence and intervention of proposals for the tasks undertaken along the lines of the state assumes that the role of the state has been an action scenario thought out in terms of long- reconsidered53 and the contents of government term feasibility, and defining the requirements, tasks has been clarified – something that will re- performance indicators and algorithms on that quire social and political consensus and new com- basis. promises.54 Clearly, the different action scenar- A budget adjusted after tasks have been ios require public finance budgets that differ in clearly defined, planning has been transpar- structure, focus, and income centralization. In ent, and targets and performance require- addition, the interactions of the different sce- ments have both been set will make perfor- narios call for government roles that differ in mance more measurable. This will (can) lead content and coordination mechanisms. How- to an improvement in accounting, analysis and ever, what is certain is that the tasks of a future evaluation, as well as in correction, and – at state cannot be treated as identical to what is fi- last, but not least – in auditing opportunities. nanced at present. (See Table 2)

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Details of Public Finance Expenditure as % of GDP Table 2

Of this:

Government Welfare Social Economic Country Insurance Total Operations* Functions Healthcare and Other Education and Culture, Housing EU 15

2000 9.8 31.7 5.0 6.2 20.5 4.6 46.1

2001 10.1 31.9 5.1 6.3 20.5 5.1 47.1

2002 10.2 32.5 5.2 6.5 20.8 4.9 47.6

2003 10.2 33.1 5.2 6.7 21.2 4.9 48.2

EU 25

2003 10.2 32.9 5.3 6.6 21.0 5.0 48.1

NM10

2003 10.2 29.7 5.8 4.4 19.5 6.3 46.2

Hungary

2000 14.0 27.9 5.7 4.6 14.7 6.7 48.6

2001 13.8 28.1 5.9 4.6 17.6 7.1 49.0

2002 12.4 29.6 6.2 4.8 18.6 11.5 53.5

2003 11.6 32.1 6.1 5.7 20.3 6.5 50.2

2004 (estimate) 11.2 31.0 5.7 5.6 19.7 6.7 48.9

2005 forecast (estimate) 10.2 30.2 5.5 5.2 19.5 7.5 47.9

Source: EU15 (2000-2002); Eurostat database 2003 international data: General government expenditure by function in the EU in 2003, Eurostat Hungary: IMF data until 2002, Eurostat data for 2003, 2004-2005 self-estimate based on Ministry of Finance final cash-flow accounts, and forecasts * Includes expenditure for national debt management (interest, etc.) In today’s Hungary, re-thinking the content of economy. It also assumes that there are “generally state tasks (primary and secondary education, comprehensible” mechanisms that control and healthcare, care for the elderly and disabled, and coordinate activity within the government and so on) and re-defining the framework of these tasks that there is a clear order of expedient division of in a more concrete manner are fundamental to com- responsibilities within the government, which in- petitiveness and modernization.55 A clear definition cludes a division between the legislative, execu- of tasks, authorities, and responsibilities assumes tive, and judicial branches. In addition, a clear that there are delineated boundaries between the definition of the content of government tasks, that government sector and the other players in the is: “what and how much” is also essential. On that

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basis, it becomes possible to define the manner of are known, appropriate measures are financing tasks, and the matter of “how.” Then, taken to eliminate shortcomings; adjusted to and reflected by this, it becomes possible Awareness of resources: economic operations for the government to separate tasks and authori- conform to available resources; and ties, and clarify the contents of accountability, in Awareness of environment: participating other words: organize the answers for “what, why, partners and environmental endowments how much, for whom.” are kept in mind when taking measures. This listing alone is enough to indicate the Only in rare cases does the entire value-goal- complexity of the tasks. However, for the most program-ability-resource-environment awareness part, that is a matter of indifference to the per- series operate in a truly harmonic manner. son receiving the service. For the user of a ser- Among the agents of change in the domestic vice the essence is how it may be available and at world, we most often come across awareness of what quality it is being offered at. The interest goal and of mode. Sometimes the two are com- of the state in providing services and its respon- bined with an appropriate awareness of ability. sibility is to pay the least possible amount for Experience has shown that it is far more diffi- delivery of qualitatively satisfactory services. cult to create an awareness of resources, but If the person requesting the service has a choice perhaps the most difficult factor is awareness ofwhereandinwhatformtheservicemaybede- of environment. This is the case; despite that livered, the interests of the state and the person the significance awareness of the environment receiving the service can be brought closer to- is vastly enhanced by increasingly frequent and gether. The state has to decide on the manner in closer cooperation with international agents of which it provides the given service. This means it change. chooses the organizational structure that runs The choices of values connected to the vari- the lowest financing costs while guaranteeing a ous scenarios must include the clearly defined specific quality of benefits. goals of the government as the agent of change ¦ Forms of Awareness (A12 point of connection), which must be in an appropriate chronological and hierarchical or- In addition to focusing on the factors generating the changes and learning what is essential to der. The definition of a goal always reflects meet the tasks, it is also necessary to recognize some professional or political will and if it is and identify the motivational factors of coopera- clear, it has a powerful influence on the choice tion within the organizations serving as the of action scenario. (In this respect, the experi- agents of change in all three – domestic, Euro- ence of the State Audit Office is not very favor- pean and global – sectors. In addition, organiza- able. The consequences have already been men- tional qualifiers of decisive importance in man- tioned in the first part of this article, when dis- aging institutional change must be paid very cussing domestic scenario choices). close attention based on the five types of aware- Improving the efficiency of public finance ness. On that basis, the activity of the organiza- operations requires a high level of awareness of tions generating the change is successful if there mode (A22 connection point) in both budget is: policy and planning. Since the State Planning Awareness of value and goal: goals are Office has quite extensive experience on this clearly defined and choices of value are matter, I will go into a bit more detail in recom- straightforward; mending the changes to consider, namely: Awareness of mode: goals are imple- Through the authority of Parliament, the mented through clear measures and pro- regulations need to be shifted in such a grams; way that Parliament has an oversight of Awareness of ability: the abilities of the the finances during the time of budget members and organizational departments preparation, as well as during the period

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of execution. It should not be possible to to be either terminated or clear and strict use technical tricks to extract funding or procedures have to be established that supports from the budget. It should not govern them. be possible to force Parliament into a situ- The organization system that produces ation where there are no alternatives and revenues for the public finance budget they need to approve, after the fact, al- needs to be re-evaluated in connection ready made government level decisions with its tasks and operation. This is not and implemented measures. simply a matter of increasing or reducing There does not appear to be any way to taxes. avoid not only the re-examination of tasks financed by the current budget, but also The effectiveness with which government the content of institutional operations, development programs are implemented de- their organizational and human resources pends to a great degree on the level of awareness aspects. Here, special interest needs to be of ability (A32 point of connection). Experience given to the exact placement of tasks with financial auditing have proven that there within the scope of the central budget and are consequences if one does not consider how a of the local governments. change that is initiated in one of the underlying The local government financing system areas – no matter how rational – will affect the needs to be re-examined. A priority issue public sector, public financing as a whole and here is whether it is really necessary to its subsystems, or even employment conditions. hold to a rigid redistribution of funding In this area, it is absolutely necessary to system- with capitation rules that cover just about atically address the demands and requirements everything and which are very hard to – while considering their interaction as well – glean an overall picture of, given the re- that the public sector had to face since joining sponsibility of the local governments for the European Union, which it is still far from handling certain tasks. fulfilling. The practice of separating the rights of the As far as awareness of resources is concerned, bodies maintaining institutions from I think it is necessary to stress the need to better those financing them – particularly in the meet the requirement of a more efficient opera- financing of social insurance – needs to be tion in all sectors of public financing (A42 con- revisited, because it creates serious tension nection point). The profound changes in the in budget operations. operation of the public sector have resulted in a State guarantees, acceptance of obliga- decline in centralized incomes. The paradox of tions, debt write-offs, and acceptance of a “welfare state” without an economic founda- debt transfers need to be re-examined. tion cannot be maintained. However, it must These types of supports carry the risk of be seen that the transfer of government tasks to the being unpredictable both in time of oc- private sector is, of itself, not equivalent to nar- currence and in amount; they are impossi- rowing government tasks; it is just one technical ble to plan for, and put an unexpected solution, and not necessarily a cheaper one. burden on the budget. The justification for providing assistance In essence, the first part of this study was to the media, sports, and the private sector about a choice of an action scenario based on needs to be re-examined, keeping in mind awareness of environment (A52 connection that today these entities are dominant point) and questions surrounding government. agents of change. It is necessary to intro- Here, I will only reiterate that awareness of en- duce a stringent financing practice in this vironment is an expression of an ability to co- areas that is linked to specific goals. operate and conform. Since it is based on real- It is necessary to revisit the place and role ity, it is capable of integrating all the goals, action of institutional revenues; the maintenance techniques, abilities, and resources as the founda- of these within the institutional sphere has tion of efficient basis for (competitive) action.

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A FEW SUMMARIZING THOUGHTS outlook and rigid system of goals that sets up time horizons and parameters, and describes goals My introductory thoughts were, partially, con- in terms of “catching up and moving beyond.” nected to the budget debates of the decades fol- This way of thinking and the related choice of lowing the Compromise Agreement with the scenario bears a striking resemblance to the di- Habsburg monarchy of 1867, but they were re- rectives of the two World Orders of the 1950’s ally related to the question of whether one and 1960’s; while at the same time, if we look at should rely on old and worn pillars when build- the European Union as a whole, we can see – that ing a bridge to the future. At the same time, in it is in trouble. I firmly believe that we need to connection with the groundwork for the possi- think about this when speaking of shaping con- ble action scenarios, I spoke briefly of the fact cepts that go beyond single government terms that besides the statistical figures that portray of office. I think that this is an answer to one of competitiveness there are other indicators of the questions I have raised earlier in the intro- development. duction. In Europe and at home we have to be- In concluding this study, I want to return to come competitive with the other regions of the those thoughts and remain within the circle world, but we also have to remain true to our- where I work as a professional, for the content selves. We have no other alternative. of the goal of financial auditing is the service and reinforcement of the security of public fi- Under current circumstances, the political nancing. Auditing convinces us that things are players and the professionals working in our either secure or that some intervention is neces- public institutions bear a particularly great re- sary, if it finds there are shortcomings or risks. sponsibility. The fact is that we need a firm pro- The experience gained from investigations al- fessional background that does much more ways report on the past or present, but really than simply supports ideas. It is obvious that if speak about and to the future. The professional the members of the political and administrative and political preparations for choosing a sce- networks that form the state are open to coop- nario and, in particular, the related decisions eration and improvement, regulatory problems and government measures are – by law – out- during the transitional period will be fewer and side of the authority of an auditing office. It is, preparations towards the next steps can be however, the responsibility of the supreme fi- taken. I cannot resist once again quoting from nancial supervisory authority to report on its di- an address by 19th century novelist Mór Jókai. rect investigatory experience as well as to go be- He made the following comment on the subject yond that and tell of the conclusions it reached, of the budget 125 years ago, while he was a of where it sees risks, and where it thinks that government representative: “I do not believe in corrections are necessary. By doing this, it is of- political geniuses, I am suspicious of financial ge- fering advice and a method to conduct a situa- niuses, and I am terrified of national economic ge- tion analysis and to make choices on the courses niuses. ... Anyone in this respected House that seri- to follow. ously wants to see the regeneration of the adminis- In conclusion, there is a single question tration must take into account the human mate- I would like to ask, because I believe that the rial available; because whether the representative method of analysis outlined justifies asking it. body is the result of election or appointment, that I would like to stress the need to move beyond an body must itself be healthy.”56

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NOTES

1 Légrádi Brothers, “Kálmán Tisza’s address to Parlia- tional debt) and real convergence (per capita GDP, ment on February 3, 1875.” [in Hungarian] (Budapest: wages, prices). OSZK, 1875). “Mór Jókai’s address to the House of Rep- Another concept that deserves attention, as expressed resentatives on budget issues, February 26, 1880.” [in for instance by Károly Fazekas in his opinion of the article Hungarian] (Budapest: ATHENEUM & Co. Book dated September 19, 2005, that implicit use of the Publishers, 1880). Lajos Láng, “The Hungarian and concept of competitiveness leads to a very broad inter- Austrian Public Finance Budget 1868-1877.” [in Hun- pretation while using and giving priority to a more garian] (Budapest: Publishing House of the Hungar- limited interpretation should be considered. There- ian Academy of Sciences, 1881). fore, instead of the concept of competitiveness as 2 The budget showed a marked deficit for fifteen years expanded to cover national economies and social systems, following 1867. The “overspending” was due to in- it might be possible to use expressions such as “ability vestments made to build a system of national institu- to develop” or “ability to attain sustainable growth.” tions, and personal and miscellaneous expenses. 7 These factors include history, traditional features and 3 Attila Chikán, ”Globalization of the Economy and Dif- the power of social cohesion, as well as society’s general ferences in Civilizations,” [in Hungarian] in “Magyar willingness to accept the new, its “tolerance,” and its Tudomány” (June 2002). Sometimes, when drawing ability to adjust and its sensitivity to preserve value. the outlines of the terrain in which market coordina- Other features are the effectiveness/cooperation of tion is efficient, we need to do some additional survey- politics, culture, and management (the governing and ing and fine-tuning. Krugman, referred to above, professional conditions of public administration stem- called attention to this in a recent article criticizing the ming from the system of institutions), global competi- government of the United States for its inability to act, tion, the effects of the operation and integration of the in connection with the tragedy of New Orleans. He world economy, and that of international organiza- believes that the roots of the problem lie in the fact that tions. the federal government took areas, for which it bore a 8 A politician is moved simultaneously by the political phi- primary coordination responsibility, and turned them losophy and worldview he or she espouses, the interests of over to the market for coordination. See “Killed by the group or stratum represented, and his or her own in- Contempt,” in The New York Times (September 5, terests vis-á-vis power (often financially based). This is why 2005). he or she cannot view any rule or action of a newborn na- 4 See Annamária Artner, “National Economic Competi- tion with indifference. He or she will try to intervene and tiveness and Attracting Capital – Ireland,” [in Hungar- influence the course of events, whether in office or opposi- ian] in “Külgazdaság” 11 [in Hungarian] (2004): tion. See János Kornai, “What Countries on the Road p. 58. to Post-socialist Transformation can Learn from the Transition up to This Point,” [in Hungarian] in 5 See above, page 59. “Közgazdasági Szemle” 10 [in Hungarian] (2004): 6 Competitiveness is typically approached from both the p. 903. supply and demand sides. It may be made up of a wide variety of complex synthetic indicators or in some 9 See “Rethinking the Role of the State Based on the New cases, “backed” by related descriptions and explana- Public Management Concept,” [in Hungarian] in Sum- tions. They include nature and the environment, mary Study, Management Summary – Manuscript geopolitical resources, skills, technical and IT develop- [in Hungarian] (Budapest: Prime Minister’s Office ment, the economy, performance of the “competitive” 2003): p. 2. sector, ability to innovate, power of the banking sys- 10 György Matolcsy, “American Empire.” [in Hungarian] tem, extent to which infrastructure level or commu- (Budapest: Válasz Publishers, 2004): p. 198. nity supply systems exist, and their capacities, effi- 11 The author has focused on this set of problems in ciency. Boosting competitiveness is the alpha and chapter 8.1 of his publication entitled “Financial Con- omega of the adjustments we absolutely must make as trols in a Changing Force Field.” [in Hungarian] In EU-members, which is, – as it is known – of primary part, I am keeping to the chain of thought included in importance from the point of view of EU convergency the book, published in 2003, but partially, I have requirements. In this context, it is worth looking added new thoughts and compared my own opinion among the indices and pulling out the evaluation pub- – my hopes – with earlier ideas. (Perfekt, 2003). lished annually by the Swiss Institute for Management Development in its World Competitiveness Yearbook. 12 This latter description comes from Ágnes Heller. See The institute bases its grades on the business environ- Ágnes Heller, “What is Modernness?” [in Hungarian] in ment and infrastructural development indicators, “Mindentudás Egyeteme” 4 [in Hungarian] (Buda- while including the components of nominal conver- pest: Kossuth Publishers, 2005). While the former cor- gence (inflation, public finance budget balance, na- responds to the views of János Kornai. The “major”

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systems are distinguished from one another by three main 17 It is important for the efficiency of services to offset the characteristics: 1) the political structure and the related narrowing of the supply system; that people dismissed dominant political ideology, 2) ownership relations, and from the public sector not become jobless, but be able 3) the coordination mechanisms (the relative volume of to find work in a booming real economy. They must market coordination, bureaucratic coordination and not consider the transformation of management, con- other mechanisms). The order they were placed in is not trol, and administrative systems as something destined arbitrary for it reflects their order of importance as the to destroy their personal existence and families from three main components determining social systems. Once which there is no escape. these three characteristics are given, they will determine 18 Robert C. Lawrence and John F. Kennedy, School of the other, also important characteristics of the system: the Governance at Harvard University, “Current Economic regularity of behavior, long-term power relations on the Policies - Social Implications over the Long Term.” market, etc. Kornai also points out “there are many types (OECD Forum for the Future, December 1996). of capitalism. In one, the state plays a more important role, while in another, its role is less important. In one, the 19 László Szamuely says: “The sector called “welfare” for the inequalities in the distribution of power, rights, property sake of simplicity is one of the biggest employers of the and income are greater; in the other, they are smaller. In post-industrial economy ... and ... the “welfare sector” fi- one, incentives for technical development are stronger, nanced by the state, for the most part, works to stabilize while in another; they are weaker and so on. The real is- business overall, because its activity is only indirectly con- sue is not whether the change in political regime has been nected to market forces which exert far less of an influence completed, but the type of concrete manifestation of the on it. Its appearance marked the birth of a built-in stabi- new system towards which the transformation flows are lizer as was recommended by Keynes during the economic moving. Connected to this is the question of norms: in crisis of the 1930’s. The advanced industrialized coun- what direction would we like to move. And at this point tries, for the most part, have the “welfare sector” to thank we have come to a value judgement.” See János Kornai, for the mildness of recessions in the past quarter century.” “With the Power of Thought - An Irregular Autobiogra- See László Szamuely, “The “Dying” Welfare State in the phy.” [in Hungarian] (Budapest: Osiris Publishers, 1990’s,” [in Hungarian] in “Közgazdasági Szemle” 2005): pp. 388 & 390. 51/10 [in Hungarian] (2004): pp. 948 & 967-969. 13 Choice of values may be conceived as one dimension 20 Important building blocks in designing the alternative of econo-political decisions. Here, choice is not based strategies, some of which were suggested by Dennis J. Snower, can be as follows: the introduction of support on optimization or on establishment of an order of ef- invoices to which the government also contributes in fectiveness as opposed to defining the field of the lower income categories and a benefit transfer pro- econo–political range of motion (resource allocation, gram to reduce regional unemployment. See Dennis J. macro- level demand, regulation). See Antal, László Snower, University of London, “Challenges to Social Antal, “The Economic Policy of the 1990’s,” [in Hun- Cohesion and Approaches to Policy Reform.” (OECD garian] in Chapters on Economic Policy. [in Hungarian] Forum for the Future, December 1996). Clam Offe Ed: József Veress (Budapest: Aula Publishers, 2004): p. believes that the social contract has lost a great deal of 183 & 185. its organizational significance as a force of both pro- 14 Unfavorable trends in the demographic age pyramid duction and distribution. He argues that there is a dual are a serious and growing problem not only in Hun- system of norms, a “left” management of demand and gary, but in almost all members of the EU, and in a “right” management of supply. Clam Offe, Humbolt many advanced OECD countries as well. The real University, Berlin, “Toward a New Equilibrium of Cit- problem everywhere is not so much the decline in pop- izens’ Rights and Economic Resources?” (OECD Forum ulation as the aging of the population. Consequences for the Future, December 1996). manifest not only in chances for innovation, labor 21 According to a study by the State Audit Office (ÁSZ): market problems, the ratio of economically active to “The growth and innovation capacity of a country de- inactive strata, and in related effects, but also in the po- pends not only on its research and development sector and litical decision-making mechanism. Political forces its “knowledge industry.” It also depends on its ability to wanting to count on the votes of senior citizens have to absorb, apply, and disseminate the output of that knowl- consider this when choosing their values. edge industry and of new technological processes, as well as 15 Henri Lapage, Institute Euro 92, “Un Scenario on the intensity of the demands made on the knowledge Socio-Economique Liberal a l’Horizon du 21-éme industry. For a country in the phase of economic gap-re- Siécle.” (OECD Forum for the Future, December duction, increasing the mechanisms and system of institu- 1996). tions for the dissemination of knowledge and the absorption capacity are of key importance in the productivity 16 For details, see Gusztáv Báger, “Three Possible Economic race involving continents, regions, and countries.” Policy Responses to the Challenges of Globalization” [in Gusztáv Báger, István Goldperger, György Varga, Hungarian] in Paper on Habilitation [in Hungarian] “From Research to Innovation - The Situation of R+D (Budapest, 2000). and Several Effectiveness and Financing Interactions in

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Hungary.” [in Hungarian] Ed: Gusztáv Báger (ÁSZ 27 Factors can include ideological or political convictions FEMI, 2005). and/or rhetorical attitudes, which restrict movement, or even considerations based on age and experience. 22 These factors, taken together, may suggest a need to re- design the constitution as happened in neighboring 28 Factors can include personal and group relations, the Austria. The chairman of the auditing office was called economy and/or the state, scientific life or the private upon to coordinate the elaboration of the concept and sector and the international and domestic participants once his term of appointment was concluded (in it is linked to, including relationship with members of 2004) this activity became his main pursuit. The goal the opposition. was to establish an affordable constitution. The con- 29 Tamás Szentes, “The Problems of National Develop- cept was submitted in Hungary at the beginning of the ment in an era of Accelerated Globalization and regional year. Integration,” [in Hungarian] in “Fejlesztés és Finan- szírozás” 2 [in Hungarian] (2005): p. 31. 23 In the countries that changed political regimes, the erosion of the social insurance benefits offered by the 30 This is also related to the fact that a growing business paternalist state triggered particularly painful social sector tends to base its businesses on reaching the mar- disillusionment. This was due to the high level of wel- ket of central and local government orders, using the fare benefits defined in the modern - western - sense abilities of the businesses to exert a political influence did not exist in any country of the region (meaning and to network. To promote its business, the sector that there was no and is no reserve). In fact, society was counts on expanding markets and thus it exerts politi- (is) really hoping that the change in economic system cal pressure and uses its networking capital to modu- will bring about the building of a social market econ- late the market flows connected to the social supply systems and public expenditure. It is worth thinking omy. Gusztáv Báger, Árpád Kovács, “Privatization in about these issues when discussing the number of pub- Hungary.” (ÁSZ FEMI, 2004). lic employees or determining the size and the location 24 László Szamuely draws some very interesting compari- of the headquarters of businesses that get such orders, sons in the study already mentioned. He shows that and the profile of the profit rate in the area when com- expenditure for education, healthcare, and other fac- pared to other parts of the business sector, etc. tors tend to take up a growing portion of the GDP in 31 See as cited letter above. the developed world, generally amounting to about 30 percent. He demonstrates that, based on OECD 32 István Hetényi, “Public Finance Flows in the Early statistics, there has been no decline in the welfare state 1990’s,” [in Hungarian] in “Közgazdasági Szemle” 5 in the past 20 or even the past 10 years. This argument (1994). Ákos Bod Péter, “Changes in Color Following the Hungarian Regime Change. Friendly Discourse on is supported by majority attitudes, as well as by statis- Present and Future,” [in Hungarian] in “Valóság” 40/6 tics. According to the author, the role of the welfare [in Hungarian] (1997). Béla Kádár, “Hungary, How do state will increase in the decades to come. It will occur We Stand? Prior to the Change in Administration,” [in partly for demographic reasons which push up the costs Hungarian] in “Figyelõ” 41/29 [in Hungarian] of healthcare and welfare, and partly because science is (1997). László Csaba, “Counterpoint - A Decade Since becoming one of the most important production fac- the Hungarian and Russian Regime Changes,” [in Hun- tors, boosting the role of the state in education and garian] in “Külpolitika” 6/1-2. [in Hungarian] training. See László Szamuely, “The “Dying” Welfare (2000). László Akar, “Thoughts on the Budget,” [in State in the 1990’s,” [in Hungarian] in “Közgazdasági Hungarian] in “Bank & Tözsde” 10/16 [in Hungar- Szemle” 51/10 [in Hungarian] (2004): pp. 967-969. ian] (2002). 25 In 2000, the Council of Europe initiated a program 33 See the written lecture by György Surányi, “Financial that became known as the Lisbon process. The strate- Summit: The Bokros-Package, Now Ten Years Old,” [in gic goal is for the EU to become the most competitive Hungarian] in “Bank & Tözsde” 3-4 [in Hungarian] knowledge-based economy in the World by 2010. In (2005): Appendix. 2002, the Council specified that the way to do this was 34 The imagined system suggesting huge opportunities to push up R&D expenditure to 3 percent of GDP, in for economic growth in the USA based on, what was such a way that two-thirds comes from the business briefly called an electronic revolution, triggering a sector. In February of 2005 the EU Commission eval- “new economy.” uated the by then five-year-old process, by saying that, “Europe will have to Renew its Concentration to Charge 35 An attempt was made to cut taxes and contributions the Engine of an Economy that has been Performing in a on employment (to boost employment and the ratio of Lackluster Manner.” Statement by J. M. Barroso in Fi- economically active persons) and at the same time to nancial Times (February 18, 2005). increase expenditure to improve the lot of the elderly and other population strata that relied on pension-like 26 Tamás Mészáros stated his opinion on a draft of this benefits. The two together only would have been pos- article in a letter dated September 13, 2005. sible without upsetting economic balance and public

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finances on long-term if efficiency and productivity 44 This affects the economy. Although for some time were improved significantly. there were major illusions regarding the economic power of the small- and medium-size companies, in 36 Analysts say that, for instance, the socioeconomic af- the past three years the dual structure of the Hungar- fects of the wage measures introduced in 2002, 2003 ian economy has continued to open wider, meaning were quite modest, and that this was partly because that the big companies have become bigger, while the phasing and the performance requirements were ig- market share of small and medium-size companies has nored. declined. See Ákos Bod Péter, “When the State Spends 37 Lajos Bokros, “130 Points: Outline of the Econo-politi- Money,” [in Hungarian] in “Bank & Tõzsde” 3/4 cal Turnaround and Structural Reforms Essential for (2005): Appendix. Hungary if it is to Close the Gap with the EU,” [in Hun- 45 This is the model used by the State Audit Office when garian] in ”Élet és Irodalom” 47/51-52 [in Hungar- elaborating its medium term development strategy. ian] (2003): Appendix. The organization is treated as a separate factor that 38 From the point of view of a scenario with these fea- generates change, which is independent of govern- tures, not only the countries that recently underwent ment leadership. regime changes are in peculiar positions, but also the 46 The tasks of public administration are defined by three European Union. Historically speaking, the model of major factors which - in line with István Bibó - can be the “social market economy” and the “welfare state” described as follows if we want to be a bit symbolic: evolved during the era of peaceful coexistence as satis- Power, Office, and Life. These concepts are not meant factory model. However, even the most advanced to describe social organizations or groups, but rather, countries in Europe have doubts now about whether to portray different modes of behavior. For the con- they can finance it, unless they can come forward with cept of power, public administration is just a tool that more competitive, knowledge-based economies and serves its purpose. For people who live and think manage to both increase employment and accelerate within the professional organization system, public economic growth to benefit social cohesion and the administration is primarily a profession. Life wants to environment. We all know that the Lisbon process and see its own world and the conditions and framework the Partnership for Growth and Employment were for self-fulfillment within public administration. Col- initiated and are now underway for this end. lected works of István Bibó, “On Hungarian Public 39 See Péter Szigeti, “Globalization and Nation-State Gov- Administration in Manuscript Fragment” 1946 [in ernance,” [in Hungarian] in ”Stratégia Füzetek” 13 [in Hungarian] (Bern: European Protestant Open Uni- Hungarian] (Budapest: Prime Minister’s Office, Cen- versity, 1981). ter for Strategic Analysis, 2003): p. 74. 47 There can be no rigid demarcation in government or 40 Elemér Terták’s written comments on the manuscript even in local government, between a salaried manager of an article by the director of the EU Commission. who works in public administration, even at the very (Letter, September 8, 2005). top, and the business leader who also undertakes a public function. One might say that government oper- 41 Springer-Verlag, “Challenging Neighbors: Rethinking ates better and more effectively, if it is not managed by German and Dutch Economic Institutions.” (Central mediators, career bureaucrats, people who work at pol- Planning Bureau, 1997). itics to make a living, but by people who became what 42 State (financial) monitoring plays an important role in they are through their own talents and resources. implementing all of the above, particularly in Central If, however, the teams operating in alternating politi- and Eastern Europe, where exercising the rights in- cal economies - another global phenomenon - do not cluded in existing legislation is particularly weak. For sufficiently consider the interest relations of the partic- that reason, this function should not simply be inter- ipants who define the economy, the latter will eventu- preted as something within government management, ally appear in the political arena and may even become but should also be treated as an autonomous mecha- a “third” power. nism operating alongside government management 48 At this time, financial auditing is not only the “built-in and closely related to it. stabilizer” for the operation of the network of bud- 43 By helping with the self-sustaining processes, the rules get-sponsored institutions. Most recently, it has also play an important role in facilitating economic trans- become the guarantee for the regulated and effective actions. A self-sustaining process resting on mutual cooperation of the public sector and the private ven- understanding and goodwill is a very important qual- tures affected by the business relations generated by ity factor, often manifest in lower costs. Joint values the public sector. It is neither one-sided nor an exag- and norms further reinforce confidence in civic soci- geration to say that if these institutions operate appro- ety, too, as the third partner within the state, whose priately, they become unique guarantees of the secu- members seek responses to problems resolvable by rity of the state organization. community decisions reached by cooperation between 49 The accountability of the public finance budget means each other. that it becomes possible to identify the actions of pub-

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lic participants and call them to account. Transpar- garian European Business Council. See István Csillag, ency means that reliable, relevant, and current infor- “Budget Coordination Science and Budget Operation mation on government activity becomes accessible to Economics.” [in Hungarian] (Budapest: “Pénzügy- public opinion. Transparency makes it possible for in- kutató Rt.” [in Hungarian], 2001): p. 25. Also, see terested parties - taxpayers and businesses - to see “Road to the Euro” [in Hungarian] (Budapest: Hungar- through government tasks and structures, including ian European Business Council (MEÜT), 2005): political intents and financial and economic undertak- p. 41. ings. This is one condition for making people accountable for their decisions and actions. Within the con- 54 The significance and diversity of the question and the cept of accountability, we generally distinguish be- “traditions” of related debates can be sensed if we look tween vertical and horizontal accountability. Vertical at a volume of studies published several decades ago. accountability refers to the pyramidal structure of the In this, the authors (Éva Erlich and Gábor Révész), in government and really means (internal) accounting by their recommendations to the Hungarian govern- the upper levels for actions taken at the lower ones. ment, consider it necessary to separately note that “the Horizontal accounting (social) refers to the account- constitution and the laws enacted on its basis ... set the ability of the cabinet and the legislature towards public tasks of the state and the various professional organs opinion. within the state to influence the macro economy, and ensure equilibrium and the general advance of the infra- 50 “Revised Draft Manual on Fiscal Transparency.” structure...” See Éva Erlich, Gábor Révész, Péter (Washington, D.C.: IMF, 1999). Tamási, “Central Eastern Europe: From Where to 51 This means that it would be necessary to see the EU’s Where?” [in Hungarian] (Budapest: Akadémia Pub- authorities and responsibilities in accounting, for in- lishers, 1994): p. 159. stance, in an official gazette. The same issue has come 55 Hungary is not alone in that the definition of a state up on national, regional, and local level as well. task is not specified in any law or other legal material The Nice Summit supported the idea of establishing on the operation of public finances. They do not tell us and publishing a catalogue of competencies that where the tasks begin or where they end, or why gov- would in part promote transparency. See, Ferenc ernment financing has been pegged to a given task or Miszlivetz, “New Sovereign is Born - a European Con- benefit or why it is the size that it is. There are many struct.” [in Hungarian] (Szombathely: Savaria Univer- nations that operate quite smoothly (UK, Israel) with- sity, 2005): p. 67. out itemized rules, for centuries of democratic com- 52 This shows features that are similar to the concept that mon law has polished them or objective existence has a planned market economy relies on comprehensive controlled them. In Hungary, we have a different situ- fiscal plans is not utopia, but a not-too-distant reality. ation. The state organization was constructed along See László Antal, “Can Sustainable Growth be Main- German-Austrian lines, after the country reached a tained?” [in Hungarian] (Budapest: “Közgazdasági compromise agreement with the Habsburg Empire in Szemle Alapítvány ” [in Hungarian] , 2004): p. 397. 1867, allowing it a measure of autonomy. A change here would be a watershed in that it would put an end 53 The New Public Management concept, already used to a point of departure currently used in planning and as reference, says that all public administration and spoken of in budgetary circles. It is said in these circles supply tasks and functions should be put to what it with a justified level of cynicism that the decision itself calls a “prior option” test. The essence of this is to ask is sufficient and the decision will “make” the money whether the given task is necessary and if so, who un- come about. In other words, if 50% + 1 vote in parlia- dertakes the responsibility for it, who needs to satisfy ment says it is a state task, then that’s what is becomes! its terms, and within what form of organization. I would note that István Csillag, who at one time was 56 Jókai, Mór’s Address to the House of Representatives on concerned with renewing the budget system, had the Budget. From the session of February 26, 1880. (Bu- asked similar questions. It is hardly an accident that dapest: ATHENEUM & Co. Book Publishers, 1880): he asks the same thing in his 2005 report to the Hun- pp. 20 and 25.

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Péter Balázs The Future of the European Union

Hope for a promising future is part of the at- as other nations is embedded in the political tractiveness of the European Union, member processes that emerged because of the two wars states know whom and what scale of values they fought by European powers for acquiring belong to, as well as the direction they are head- spheres of influence around the world. Volun- ing. At least, that is what outsiders think. Nev- tary union of sovereign states, or in other ertheless, there are significant differences in per- words, integration had begun and developed in ceptions of the European Union between those this context. This process was historically paral- countries that are just becoming members and lel with the emergence and expansion of the those that are already members. Hungary – to- two World powers, the United States of Amer- gether with the rest of the new member states – ica and the Soviet Union, that are located out- has just been over this change in perception. side Europe but have European cultural and Since May 2004, the European Union has been political roots. Expansion of these two powers playing a fundamentally different role in our determined the fate of the world for half a cen- lives than it did in the preceding period. How- tury. They established – among others a new ever, neither the public, nor politicians compre- experiment for a “World Government,”– the hended this change yet. The Union is still United Nations (UN) that is hopelessly strug- referred to as a separate entity; whether it gives or gling with its duties after sixty years. One of the denies, permits or rejects, prohibits or supports major reasons of the chronic crisis of the UN is etc. It is seldom heard that “we” are the Euro- that ex-colonies became independent during pean Union or that we – primarily the govern- the same period, at least in a sense of interna- ment – are active participants in the Union’s de- tional public law. Today 191 countries – most cision-making process. According to an appro- of them from the developing world – seek propriate – and still valid – statement, “for the Hun- tection and enforcement of their interests by garian political elite, the European Union is on this World Organization. However, the UN is the other side of the moon.”1 Nevertheless, Hun- still ruled by the victorious powers of World gary as a member state has vital interests attached War II, making it impossible to establish a to which way the Union is heading. Europe has World leadership according to the real power been seriously occupied with this question since relations and challenges. In the background of the referendum in France on May 29, 2005, these political processes, the world has been ap- which is threatening with a constitutional crisis. proaching a unified market and economic sphere with an enormous sweep. This process is the so-called globalization. These processes THE ELEMENTS OF THE FUTURE have gradually transformed the worldwide sys- OF THE EUROPEAN UNION tem of goals, apparatuses, organizations and power relations, thus creating new conditions In the beginning, the Western-European inte- for the European unification project. gration had a definite expectation of the future; its declared long-term goal was the establish- It appeared that the Western half of Europe ment of a unified Europe. The idea of a unified has found the right answers to multiplying global Europe and its latest composition are evidently challenges in the transnational, close cooperation a product of war. Desire for a historical recon- and actions of governments. This opinion has ciliation between France and Germany as well been confirmed by the numerous successes of

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the integration, from the establishment of the broader scale regarding the willingness and common market and certain common policies to ability of integration. On the other hand, the thecommoncurrency.ThemodeloftheEuro- steps taken by the Union quite specifically sig- pean Union is also praised by its unique appeal naled the growth of the organization as the out- exercised on its neighborhood. This appeal has lines of a thirty-three members union emerged incited nearly all of its close neighbors to give from the above-mentioned series of events. priority to joining the Union for decades. This Meanwhile, in the spring of 2002, a third signifi- trend has been reinforced since 1990 as the polit- cant step took shape in a form of an organized ical division of Europe ceased as a result of the program, the renewal of the governance of the Soviet collapse, and the phrase of “joining the Union. After the publication of a thorough European Union by every European state,” that “White Paper” on the issue, first the European is consistently repeated in the basic treaties, has Convention, and later an inter-governmental become a real opportunity. conference dealt with the wording of a draft Encouraged by its own successes, the Euro- constitution and development of a mixed-form pean Union began an energetic double expan- “constitutional treaty.” sion in the last decade of the past century. A consistent and far-reaching solution of the On one hand, it continued integration “deep- triple duty of deepening, enlargement and gov- ening” – in other words, intensification and ex- ernance could have outlined the significant tension to new fields of governance – that was characteristics of the 21st century configuration always successful before. By the millennium, of European integration, in other words, the fu- the common currency envisaged in 1991 has ture of the Union. However, the negative re- been successfully introduced in twelve member sults of the French referendum, and the referen- states. Reassured by this result, the Union im- dum just three days later in the Netherlands mediately declared itself as the soon-to-be win- – on June 1, 2005 – poured cold water on the ner of the worldwide contest of competitive- daydreaming political devotees of integration ness.2 On the other hand, it took new, brave and its officials, who became indolent in their steps for enlargement. In 1998, it started mem- well-paid jobs. The debate about the constitu- bership negotiations3 with twelve potential tion sheds light on the uncertainties of the countries simultaneously. Shortly thereafter, at “deepening” plans, the exaggerations in expan- the end of 1999, Turkey – that applied for sion visions, and raise doubts even on the possi- membership twelve years earlier, in 1987 – was bility of governing the whole assembly. How- announced to be a potential candidate for ac- ever, the only hope for new member states is a ceptance. Finally, in June 2003, a membership successful and operating model of European in- was promised to every country in the Western tegration. What could be done now, after all, to Balkan.4 These events have outlined the future save the constitution and even the European of the integration for the first half of the 21st Union? century in two directions. On one hand, they outlined – although somewhat obscurely, and TIMELINESS in fact, with growing uncertainty – the further OF THE CONSTITUTIONAL PROCESS internal development of the integration. “Deepening” in the field of economy is close to Constitutional process as a political action is es- the limits of realistically achievable integration, sentially associated with significant turn- while political integration – interior security, ing-points in the life of a community. Such an defense, and foreign policy – encounter the re- event was doubtlessly the decision on and elab- sistance of member states. Due to the growing oration of the legal basis for the Western-Euro- number of members, this could be more chal- pean integration in the nineteen-fifties. Until lenging as their position is dispersed on a now, the “Constitution” of the Union was built

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on the basic treaties that defined the goals, fully guard their sovereignty and information. means, and extent of common actions. It deter- Finally, foreign policy interests can be quite un- mined the necessary scopes of authority, and es- mistakably defined on the level of national tablished the bodies of integration with their communities and identities, and member states order of operation by reflecting the joint will of only intend using unified action occasionally as the community. The basic treaties were contin- a supplementary framework. Consequently, we uously amended and extended, and this increas- can state that after a half a century development ingly complicated “patches over patches” legal and at the end of the 20th century, the European construction have resulted in the desire to de- Union has reached a point where it has the pos- velop a short and permanent basic treaty, the sibility – in respect to both enlargement and so-called “European Constitution.” It appeared depth of integration – of being crowned by a that the long-term development of the integra- new, permanent basic treaty, or if you like, by a tion, and its gradual “deepening” provides suf- kind of constitution. This statement essentially ficient content and a political basis that needed refers to the stage of integration reflected by the to be topped with a legal “headstone.” President 1993 Treaty of the European Union and the of the European Convention, Valéry Giscard union that was reached in 1995 by the fifteen d’Estaing, repeated many times that the Consti- member states. The concept and substantial in- tutional Treaty would be the foundation of the novations of the Constitutional Treaty indicate Union for the next fifty years. The question is an extension to this development, its refine- whether this was the due time for the constitu- ment and improvement, without the intention tional process. With respect to the past progress of creating a new model that could better adapt and construction of the Western-European in- to answer future challenges. tegration it was, according to all likelihood. A constitutional process can be timely and The unification process includes the three larg- justified when a process culminates. Should we est countries, the Federal Republic of Germany, only examine the Western-European process France, and the United Kingdom. In Western after World War II, we can find the signs of Europe, only those countries are not members this. However, the well-constructed plan en- of the Union that did not want to be for some countered a new enlargement and the enor- reason.5 In the area of usually encouraged and mous wave of new applications in its wake. supported economic integration, the leadership Leaders of the European Union certainly did has reached the highest imaginable level that is not disregard this anticipated event and still realistic, the use of a common currency. would-be members as well as candidates were This level is bordering the delicate limits of na- all invited to participate in the European Con- tional sovereignty as in the interest of maintain- vention. At the beginning of the Convention, ing the common currency, the Union claims in the spring of 2002, it was already known that the right to interfere with budget policy. Be- ten of the twelve negotiating states would join yond this level, there are those types of gover- the Union first. In addition to these, the less nance areas of which consolidation would pain- rapidly progressing Romania, Bulgaria, and the fully interfere with the political apparatus of new candidate Turkey also received invitation. governments. Among all, such policy is the tax- Consequently, in addition to the fifteen previ- ation policy that firmly resists any attempt for ous members another thirteen European coun- harmonization. Government activities related tries were represented in the constitutional pro- to interior security are also on the perimeter cess, with practically equal rights and chances.6 of the scope of authority with a potential for After the Convention, the inter-governmental unification. For example, no matter how desir- conference held its meeting with the same par- able and rational would be an integrated orga- ticipants and approved – with some modifica- nization to fight against international terror- tion – the draft verbiage of the Constitutional ism; the secret services of member states resent- Treaty for ratification.

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Thus, the draft constitution can be formally member states, the European Commission, and considered as the common work of twenty- other responsible EU bodies simply disregarded eight countries. However, in reality this is not these problems. Attention was called impetu- the truth for several reasons. First, newcomers ously to their significance by the political im- did not have any experience of the internal ways pact of the French and Dutch voters and the of the Union. Although numerous excellent in- European representatives of the often-missed tegration experts were delegated by the candi- “demos,” the people. Attention should be given date countries to the Convention, and their to this sign as the future of the integration can governments could rely on their expertise dur- depend on internal support for the European ing preparation as well as governmental ap- project of governments and other political orga- proval, the difficulties associated with the oper- nizations. ation of the Union were not perceived by these governments as real and genuine problems. THE CONSTITUTION IN RESPECT Some of the candidates only looked on the oc- OF THE PAST AND THE FUTURE currences as observers. Active participants mainly protected principles, primarily the equal The draft constitution supplied for existing treatment of the would-be members. Under the needs in certain respect and corrected former given condition, this consideration appeared to basic treaties. Such a correction is primarily the be the most important one. This is the reason proposed introduction of the so-called double why the self-conscious small member states majority system of qualified majority voting. of the EU15 – e.g., Ireland, Portugal, Finland Even today, the number of votes possessed by a etc. – and the candidate countries discovered country in the main decision-making body each other and formed the militant group of the of the Union, the Council of the European Un- “identically thinking” countries opposing the ion, is decided by political negotiation. larger old member states. Regarding to the aspi- The vulnerability and controversy of this sys- rations “of the EU15,” they relied on their tem was demonstrated by the division at the long-time experiences in the constitutional pro- Nice Summit that would also be applicable to cess and insisted on perpetually represented thewould-beUnionwithitstwenty-sevenmem- principles. Their knowledge and objectives bers. As dispersion of the sizes of member states were based on earlier experiences of integration has increased in the enlarged Union, the scale and did not reckon to the least extent with the had to be extended so that differences that are expectable impacts of the coming enlargement. more refined could be reflected. The total num- Since a prominent condition for membership ber of votes granted to the fifteen member states increased from 87 to 237. Because of long nego- was the complete and fastest possible imple- tiations between the member states, the four mentation of the legislation and institutions of largest countries received 29 votes each that are the Union; the EU15 considered the enlarge- nearly triple of their former 10-10 votes. As opment as a – not too significant – expansion of posed to this, the number of Spain’s votes – and the existing Union; a simple physical change in- Poland’s, a new member of similar size – grew stead of a change with qualitative results. This is from eight to 27, exceeding the triple value of why the French “rejection” of the constitution the voting scale. It was expected that later on, was a political explosion. In fact, an analysis of these two states stubbornly insisted on the deci- the expectable effects of wage differences be- sions of Nice that appreciated their weight to a tween the old and new member states or taking high extent, even though the system was con- into account the consequences of Turkey’s ac- troversial. This problem was one of the main ceptance were not on the agenda of the Euro- debate subjects during the inter-governmental pean Convention at all. In addition to the Con- conference for the approval of the Constitu- vention, the governments and parliaments of tion. As opposed to this, the new Constitution

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recommends the introduction of a simple, the President of the European Commission in transparent as well as just system. The so-called everyday practice, and maybe even with the double majority requires a certain proportion envisoned Minister of Foreign Affairs of the of majority by member states on one hand, and Union. In these – and in other similar – cases the population of the Union on the other hand the Convention and the inter-governmental in order to pass a decision. Of course, determi- conference might have gone too far compared nation of percentages in respect of the two ele- to realities and genuine requirements. How- ments of majority was subject to a heated de- ever, these were not the concerns that domi- bate. Fifty-five percent of member states and nated the debates over the Constitution and re- sixty-five percent of the population could be sulted in the rejection by the aforementioned more favorable for some member states or coali- referendums; rather, it was the lack of facing tions than for others. However, there is no new challenges. doubt that taking into consideration these two In retrospect of the more than two years of specific factors is acceptable and fair for every the constitutional process, the definite conclu- member state. In this respect, the constitutional sion is that the participants only modeled the process supplied a need. past and did not contemplate for future condi- Numerous rules of the draft Constitutional tions. In accordance with the customs of the Treaty represent new and mostly brave prog- Union, old member states were seeking the way ress. Such advancements are, for example, the out mainly in the transformation of institu- new type of classification of scope of authority, tions. The legal-institutional structure of the declaration of the Union‘s homogenous legal Western-European integration is truly admira- identity, establishment of the possibility of ble of its kind. However, it is also obvious that closer cooperation of countries that are willing this level of precision, meticulous economic and capable of a more rapid integration, etc. regulation, legal regulation of all activities, leg- The already wealthy literature on the Constitu- islation provided and directly applicable in all tion mostly deals with such questions. We must native tongues, can be only accepted, endured add that the Convention went too far in case of and efficiently implemented on the grounds of certain issues and infringed the delicate limits of European cultural – including public adminis- political tolerance of the member states. For ex- tration – heritage. In other parts of the world, ample, the inter-governmental conference re- for example in the United States, Japan or in jected the separation of a “legislative council” developing countries, this model would not be from the presently operating meetings of Min- viable. However, even in Europe only the peo- isters, where the ministers responsible for a cer- ple who operate the integration directly – poli- tain subject approve the EU regulation of their ticians, officials, and analysts – find pleasure in specific field of action. Just as brave and some- the perfection of the acquis communautaire. what controversial ideas are those of the Prime The business world generally has an aversion Ministers’ Summit or electing a president spe- for excessive intervention by the state and is not cifically to reside over the Council of the Euro- fond of the meticulous regulation of market pean Union. The government head of the processes. Colloquialisms do not have a positive member state holding the Presidency fulfills message for citizens either, it makes the impres- this function currently. This person draws his sion of being elitist, isolationist, and secretive. prestige and information from practical experi- These are all well-known facts, yet the Conven- ences of his high position. By acting only as a tion did not deter from its traditional path and “European official,” it is likely to be more diffi- considered its advice on legal-institutional cult to chair the debates of prime ministers. structure reforms as its greatest achievement. The actions of the proposed “super president” The text, which resembled a true constitution would result in collisions and parallelisms with at first, became over-complicated due to an offi-

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cious change – insertion of the technical of old member states. There was less talk about verbiage of Part Three – and as indigestible for the fact that the governments of the EU15 the public as its precedents used to be. This step heavily restrict the immigration of the work discredited the entire constitutional process force of new member states and they are enti- and obscured the otherwise excellent proposals tled to do so for seven years following the en- hidden in the inflated text. largement. The real figures of labor force mo- bility give as little reason for serious alarm as they did at the time of acceptance of Spain and THE PROBLEM Portugal, when the alarm bells were also rang. OF THE “FOUR LIBERTIES” Capital transfer from old member states to The future of the enlarged Union was actually new ones is also subject to heavy criticism. not on the agenda during the constitutional There is no distinction made between the capi- process. Old member states simply did not tal that remains within the European Union want to recognize that the acceptance of new and the one that actually leaves the area of com- members could involve qualitative changes as mon economic activity and moves to other re- well. They considered enlargement as a me- gions. However, the two cases are not identical chanical extension of the existing model to their as location of industrial investment inside the Eastern and Southeastern relatives. According Union serves common interests by increasing to the “old-boys-club-mentality,” they mainly potential exports, improving employment indi- derived from the principle that entering coun- cators, and – hopefully – competitiveness as tries should adapt completely and uncondition- well. Compared to the rejection of free move- ally to the Union. Candidate countries as well ment of people and capital in the Union, the as other states that wish to join the Union ac- stormy reaction to the draft of the Bolkestein- cept this principle without a dispute, but politi- directive for the increased freedom of services is cal willingness does not eliminate objective just “icing on the cake.” It is common in the in- changes or solve the problems that inevitably tentions of restricting the movement of capital, result from the enlargement of the integration. work force, and services that the major reason These problems are mainly associated with the for resistance was the competitiveness – primar- common budget and the “four liberties” that constitute part of the Union’s foundation. ily due to the lower level of wages – of new The draft Constitution mechanically repeats member states. the thesis of free movement of people, goods, Since technical elements of the Convention’s capital, and services that are fundamental rights work were limited to the aforementioned le- in the classical model of the European Union. gal-institutional aspects, there were no means As the integration took a significant step – by and demand either for economic analyses or for adopting the Charter of Fundamental Rights measuring the expectable reaction of the public, and suggesting its inclusion in the Constitu- and polling the political acceptance of the tion – towards defining and enforcing individ- planned measures. However, it would have ual (or rather EU citizens’) rights, these “liber- been better to think over in advance the conse- ties” emerge more definitely as individual rights quences of codifying the “four liberties” – the besides being governmental deeds. fundamental rights of every member state and Regarding the debates on the French and citizen – in conjunction with maintaining un- Dutch referenda, it is obvious that most of the changed political willingness for accepting the criticisms and aversions were associated with application of “every European country.” Re- the extension of the four liberties to the new jection of the Constitution now calls the atten- member states. In France, the threatening fig- tion to the fact that above a certain level of wage ure of a “Polish plumber” became a symbol of difference, the practical enforcement of the cheap competitors flooding the labor markets “four liberties” infringes the political tolerance

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of member states that have higher living stan- tive effects dominate, and the point at which dards and income levels. The majority of idealized mechanism of integration will turn French and Dutch voters do not agree either wrong, such as where integration starts under- with the free entrance of the work force of new mining industry and jobs, reducing economic member states to their domestic labor market or performance and increasing various costs. Un- with the transfer of domestic capital to new limited enforcement of integration liberties is member states of the Union that offer cheaper an open-minded idea; it generates positive ef- wage costs. Thus, they have retrospective mis- fects in a homogeneous economic environ- givings about the respective sections of the ac- ment, and under favorable economic condi- cession agreements and do not want to hear tions. Market liberalization primarily serves en- about other poor countries becoming members trepreneurs’ interests in the integration when an of the Union under the same conditions. In this activity involves several national markets, mean- respect, their own citizens do not support the ing that it is worth and possible to optimize the governments of the EU15. Moreover, interests factors of production inside – or outside – the of employers and entrepreneurs are confronted Union. Exploitation of the integration dimen- as well. The latter has directed mostly and typi- sions prepares for international competition by cally the actions of the Union. Establishment increasing the number of competitors. However, and continuous development of market free- there are short-term losers (employees who lose dom and field of play have allowed free crossing their jobs and enterprises that go bankrupt) on of internal frontiers and connection of national the way of achieving long-term advantages, and markets in the interest of entrepreneurs, so that these provoke political discontent. The Euro- they could unify factors of production in an op- pean Union outlines a continent-size empire in timal combination in their expanding sphere of which the “provinces,” such as the member operation. The masses of employees have re- states, govern and control the central bodies. In jected this opportunity in respect of the en- such a distribution of power, partial interests rule larged Union. Since their governments acted over common interest. The partial interests of – admitted new countries in the Union and old member states – that have higher living stan- promised membership for others – without dards and a more refined social welfare net- their consent, they voted no in a context that is work – require the restriction of integration lib- difficult to manage politically, and which is a erties related to the enlarging and increasingly very important subject, the Constitution. This heterogeneous economic area. outcome also raised doubts on the further development of the integration. In any circumstance of continuing the con- MANAGEMENT OF HETEROGENEITY stitutional process, it will be inevitable to revisit One of the key questions of the further develop- the validity and conditions of the four liberties ment of European integration is generally the of integration. It is obvious that the issue can- management of heterogeneity. This task has not be managed on a political level and by polit- primarily been reduced to regional policy from ical means, because it creates anger, generates the beginning until now. Managing the differ- conflicts, and results in rejection. Rather, ex- ences in levels of economic development used perts should initiate the analysis of this prob- to be limited to the development of and assis- lem. Market expanding and enterprise optimiz- tance provided to regions within a member ing impacts envisioned under homogeneous state (e.g., Southern-Italy). Later enlargement conditions of integration should be transposed resulted in the requirement of developing entire to an economic area of increasing heterogeneity. states (e.g., Ireland, Portugal etc.). Because of Upon completion of the analysis, experts the most, recent expansion towards the East, must determine the limits within which posi- new and potential future member states consti-

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tute a transnational region; the Eastern part of tensions that can surface all of a sudden – such Europe which is waiting for transfer of funds as the French referendum. provided by the contributions of the original The constitutional process could have been a group of wealthy member states. kind of conclusion to the integration process. Conflicts about the next long-term budget of By analyzing the lessons of the Western-Euro- the European Union do not relate only and pri- pean unification process while taking into ac- marily to the income and expense items of the count the expectable impacts of enlargement to period between 2007 and 2013, but also to the the East, a model could be set up that would potential long-term political consequences of provide a real institutional basis for harmonious present-day decisions. Net contributor states, cooperation for another half a century. How- led by Germany, are right about that their ever, this work should be extended to assess the number is not going to increase, while there is a future as well. There are issues of great signifi- long line of potential net beneficiaries in front cance waiting for decision in the European Un- of the Union’s gates waiting for admission and ion that will determine the framework and ob- the associated large amount of supplementary jectives of the organization’s operation for a de- funds. The reasons for granting these funds in- cade. First, the 2007-2013 budgets must be fi- clude a certain rebalancing of internal market nalized. At the same time, a critical analysis of conditions, supporting investments for public the common budget must began that does not benefit (e.g., construction of transportation back away from a fundamental transformation corridors, reinforcement of external frontiers, of agricultural, and consequently, regional pol- etc.), and expressing solidarity between mem- icy. This analysis should also consider involving ber states. From these, the most tangible and the new and would-be members in the system defendable is promoting projects that represent of fund transfers in a way that is acceptable for a communal benefit. Today, it is obvious that the net contributor countries. Heterogeneity the common agricultural policy, which requires must be put on manageable political tracks in significant funds, needs fundamental reforms. One way to escape from this situation is to stop the further expanding Union. The possibility the disoriented – surplus production encourag- partially existing and partially outlined in the ing – subsidization of produces and cultivated draft Constitution for developing an “enhanced areas, and start transforming the determined cooperation” must be confirmed by more rap- objectives of rural development into a regional idly integrating member states. At the same policy. This action might change the role and time, the economic preconditions for “integra- budget position of regional development. tion freedoms” should be established. At the same time, it is less known regional pol- This would provide an appropriate way to inte- icy also requires reforms, since not all of its ac- grate new member states, with relatively low tions serve the set rules of reducing the develop- levels of wage and economic performance, ment gap of underdeveloped or less-favored rein the mechanisms of the common market. Fi- gions, and strengthening the cohesion of the nally, an enlargement schedule, as precise as community. Moreover, the European Conven- possible, should be developed for the next de- tion did not address the structural problems of cade. This would serve as a guaranty for those the common budget, despite that it is also in a candidates that are prepared, but would not poor state and ready for reforms. These unre- allow for unfounded hopes for countries that solved problems cause conflicts between mem- require a relatively longer waiting and transi- ber states when negotiating the final budget, tion period due to their unpreparedness or of furthermore, constitute reasons for political that of the Union.

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NOTES

1 By Attila Ágh, Magyar Hírlap, August 20, 2003. 5 The population of Norway rejected accession proposed 2 According to the so-called Lisbon Agenda, “The new and negotiated by the Government twice, in 1972 and strategic goal of the European Union is, for the next de- in 1994. In 1992, Swiss voters rejected even the idea of cade, to become the most competitive, dynamic, and the preceding stage of unification, the European Eco- knowledge-driven economy in the world, capable of nomic Area. Iceland deliberately stays out of the Union sustainable economic growth with more and better fearing that, being a small country, it would not be jobs and greater social cohesion.” (Presidency Conclu- given sufficient weight in the organization. sions by the Lisbon European Council, point 5, March 6 The rights of the thirteen candidate countries differed 23-24, 2000). in two aspects from those of member states. On one 3 Ten countries – including Hungary – joined the Eu- hand, they were not allowed to take a common posi- ropean Union on May 1, 2004. Another two countries tion that would have been contrary to the ideas of the – Romania and Bulgaria – fell behind and presumed EU15; however, this would not have happened any- to become member states on January 1, 2007. way. On the other hand, translation to their native lan- 4 During the Saloniki Summit, Croatia, Serbia-Mon- guages was not provided to them, but they were al- tenegro, Bosnia-Herzegovina, Macedonia and Albania lowed to organize translations at their own costs, by us- were promised that, on condition of meeting the re- ing their own translators brought from home. A couple quirements, they would become members of the Euro- of countries occasionally exploited this latter oppor- pean Union. tunity.

BIBLIOGRAPHY

“The Limits of Europe” Frits Bolkestein, Lanoo Tielt, 2004 “Developing the European Constitutional Treaty” Árpád “Der Verfassungsentwurf des EU-Konvents. Bewertung Gondos–Bálint Ódor, HVG-ORAC, Budapest, 2004 der Strukturentscheidungen“ ZEI, Bonn, 2003 “Constitution-Building in the European Union” Brigid “The Wider European Matrix” Michael Emerson, CEPS, Laffan (edit.), IEA, Dublin, 1996 Brussels, 2004 “The Making of the New Europe” Peter Ludlow, “Constitution of Europe – Future of Europe” Interna- Euro-Comment, Brussels, 2004 tional Conference, Budapest, October 28, 2003, Spe- cial edition of European Textbooks “The Accidental Constitution” Peter Norman, Euro- “La Régle et le choix” Jean-Paul Fitoussi, Seuil, Paris, Comment, Brussels, 2003 2002 “The European Convention, The Evolution of a Consti- “General Report on the Activities of the European Union tution for Europe” CEC. COMECE, EKD, Brussels, 2003” European Commission, Brussels 2003

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Mihály Varga PPPs in Hungary – Do They Hurt Us or Help Us? Analysis on how PPPs work, how they are viewed, how they come into play domestically, and what types of problems do they trigger

Recent economic news often mentioned PPPs project case studies, two of which are Hungar- as modern business configurations. However, ian and one of foreign origin, and discuss the the wealth of news reports and statements on advantages and disadvantages of each. the subject have done very little to tell people what they actually are. Are they just a new pri- THE CONCEPT, ROOTS, vatization trick in which private market players AND MAIN GOALS OF PPPs are the only winners, or are they the financial world’s miracle balm offering a win-win situa- Some countries introduced Public Private Part- tion to all players? nerships as a form of cooperation between the The English term Public Private Partnership public and private sectors before the 1990’s. (PPP) might suggest to some people that they Cooperation between the public and private were looking at a revolutionary foreign configu- sectors has been a popular financial configura- ration newly introduced in Hungary, even tion in the United States, Ireland, Spain, Portu- though the essential idea behind it – the attrac- gal, and the United Kingdom, even though it is tion of financial and intellectual resources from not an easy task to come up with an accurate the private sector to become involved with pub- definition of the “magic” term, PPP. In a board lic investments – is far from new to Hungary. sense, the PPP is a financial construct – that One very early example actually dates from the must including risk bearing – in which the state mid-19th century and was a contract to build commissions a private business to offer a public and operate Budapest’s Chain Bridge, the first service. In the narrower sense, a PPP is a longer term (possibly 20-25 years long) cooperation bridge spanning the Danube at this geograph- project between the public and private sectors ical location. Projects that are more recent in- in which a private business – which takes the clude concessions that were outsourced in the risk – attempts to provide a public service years following the regime change that mesh through shared ownership or reverse leasing. well with the PPP concept (such as construction The financial structure of this latter PPP differs of Motorway M5). fundamentally from the old economic position, The goal of this analysis is to offer an ap- which states that most of the time major invest- proach that manages to navigate the consider- ments are needed to provide public services, able amount of often contradictory information which are government tasks because of their sig- and views on PPPs. To progress beyond the nificantly large size. – sadly often-bias – statements by domestic In Hungary, the Internet website of the Minis- opinion-makers and “experts” – and conclude try of Economics and Transport – the most of- this article – I will briefly outline three PPP ficial source on the subject – defines the con-

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cept, which is employed extensively in coun- and how applicable and executable the regula- tries to the west of us, as follows: tions are). Since the method involves a long- “The PPP (Public Private Partnership) is a term commitment, changes in public finances manner of meeting public tasks in which the or in the macro or microeconomic environ- government – through competitive bidding – ment may necessitate the introduction of new includes the private sector in establishing, tools. Moreover, it maybe essential to rein- maintaining, and operating the facilities state earlier methods and regulations or con- and/or institutions it needs. Within the PPP versely, to terminate some that are still in ef- framework, the private business offers a ser- fect. The PPP configuration still has not really vice to the state by taking over a government taken shape in Hungary, although it is being in- task. The government and/or the actual us- vestigated extensively. In fact, initial attempts ers of the service pay a fee for the given ser- have been made to govern it legislatively. vice. In this configuration, the government, as the body ordering the service, defines the THE INTERNATIONAL SITUATION service itself, the quality, and the length of time that it plans to use it – typically 20 to The “magic” term, PPP, really began to spread 30 years. In other words, the service is pro- throughout Europe in the 1990’s, mainly be- vided by the private sector and the state acts cause of the Maastricht Treaty signed on Febru- as monitor.”1 ary 7, 1992. In Maastricht, the foreign and fi- There are two reasons why this study is fo- nance ministers of the EC countries set down cused on this increasingly popular form of public the criteria for establishing a monetary union. procurement. One is Hungary’s steadily swelling These criteria are stabilizing price levels, stabi- budget deficit, while the other is the spread of a lizing currencies, bringing interest rates into new type of support policy resulting from mem- convergence, and stabilizing budgets. Stabiliz- bership in the European Union. We are now in a ing budgets means on the one hand that the position to gauge the short, medium, and long- current budget deficit may not exceed 3 percent term targets, opportunities, and consequences of of GDP, while on the other, the national debt including private capital and private services in must remain below 60 percent of GDP. For the the public sector. If they are regulated vigilantly, countries that joined in the first round, an an- they may be able to trigger a transformation of nually decrease in national debt level was set as a public finances as well. criterion for countries with national debt level A modern infrastructure is fundamental to over 60 percent. Keeping the current public fi- the smooth operation of a national economy. nance deficit within 3 percent of GDP contin- When an economic environment is evolving, it ued to be a requirement for the various coun- is necessary to strive for providing the appropri- tries during their budget preparation, even after ate quantitative and qualitative conditions the introduction of the common currency, the (such as institutions of public administration, euro. To make it possible to compare the meth- energy distribution networks, telecommunica- ods used by various members to calculate their tions, information technology, and corrections public finance deficits, a uniform method institutions). Moreover, anti-depreciation mea- (called ESA 95) was introduced. Later, sanc- sures need to be taken in order to protect the tions were also defined. When the Maastricht value of material property and prevent signifi- Treaty was signed, the European economies cant increase in expenditure in the future. were growing, and it was unimaginable that Extensive analysis and planning can improve holding the current budget deficit and/or the the effectiveness of the PPP configuration. national debt at the pre-determined levels When conducting these analyses, we must be might become a problem for them. able to demonstrate the economic and demand Since Maastricht, the state of the economy effects triggered by the regulatorions (meaning has defied expectations globally as well as in how they fit into the legislative environment Europe. Germany was most badly hurt during

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the past decade. As the economic engine of Eu- decision will have a fundamental influence on rope, from the moment of German reunifica- the future of PPPs. tion, it offered a great deal of assistance to the When ESA 95 was designed, no separate rule eastern regions, generally without any effi- was included on accounting for PPPs, and for a ciency expectations. In the meantime, it faced long time this configuration was left completely the problems of population decline and grow- unregulated. In February 2004, Eurostat issued ing unemployment. The result was a slowdown a directive that established the guidelines for the in economic growth and deterioration in public national economic accounting of PPPs. The di- finances. The slowdown of the German econ- rective sets risk allocation as the main consider- omy had a negative impact on economic ation. This means that a facility built within a growth in all of Europe. Germany, Austria, and PPP project qualifies as outside the public sec- France were all forced to cut back on welfare re- tor if the private company bears the construction forms and benefits. However, the economy re- risk and the asset availability risk or the demand ally needed sharper cutbacks than what was po- risk. Therefore, if the government bears the litically bearable. It became clear by the early construction risk or the private company bears 2000’s, particularly looking at Germany, that only the construction risk, the asset qualifies as while unpopular welfare reforms were eroding a government project and its input costs have a the popularity of governing parties, they were negative impact on two Maastricht indicators: not improving the economies. The cuts in exit deteriorates the budget balance and increases the national debt since it counts as credit pro- penditure were not enough to keep the deficit vided by a private company. down to 3 percent of GDP, nor have they been enough to jump-start the economies. The financial configuration allowed in a PPP gives the government a greater degree of free- One item of debates on the European dom, and two extremely different arguments Union’s 2007-2013 budget was the revisiting for and against their use. of the Growth and Stability Pact (GSP) amidst For a slowing economic environment and a rise in laxness in keeping to Maastricht rules. The six PPPs make supplementary investments countries that are net contributors to the EU possible, which in turn promote eco- – Germany, France, the UK, the Netherlands, nomic growth. Austria, and Sweden – want their payments re- PPPs were used before Maastricht, sug- duced, while a number of them – and others as gesting that responsible and long-term well –have also lobbied to keep certain expendi- thinking are compatible with one an- tures off budget in their accounting, which cuts other. deficits on paper. On March 20, 2005, they PPPs support the timely appearance of reached a compromise to loosen up the GSP. economies of scale, helping to expand When calculating deficits, they will no longer thought processes beyond single govern- include increases in research and development ment terms of office. expenditure or the costs of structural reforms, With PPPs, the Maastricht deficit index particularly of revamping pension systems. includes only the portion of an invest- They also have exempted the costs of combat- ment paid out in the given year, so the ing natural disasters and other external shocks PPP barely increases the national debt. – such as terrorist attacks – from inclusion in Against budget deficits. In fact, Germany has even The PPP configuration lets government managed to have the costs of its reunification fantasies run rampant in attempt to chalk moved off budget. Since this has made it pos- up the short-term benefits of projects that sible for governments to do a better job of subsequent administrations will spend the including their priorities in their budgets, the next 20-25 years paying off.

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Before Maastricht, very few governments very advanced, thanks to their historical roots. dared to take the responsibility for the Many electric and water utility systems were long-term decisions required by PPPs, built in nineteenth century in England. On and even the ones that did kept these pro- long term, they served to link up the private sec- jects under tight wraps. tor to the public one, including both the central PPPs are good for maximizing profits on and local administrations. This begs the ques- short term, which on more than one occa- tion of what kinds of legal conditions and fi- sion has meant ignoring future needs. nancial transparency can attract private inves- Original contracts require extensive re- tors when making public procurements. In view before new demands linked to new other words, the PPP has become a new form of technologies could be met. public procurement. It has become a specific Unlimited use of PPPs contradicts the form of the competitive procedure. Maastricht principle, which requires holding the budget deficit within 3 per- THE LEGISLATION BEHIND cent of GDP. They are an enticement for PPP PROJECTS IN HUNGARY future abuse. A growing number of countries trying to overcome budget problems have been choosing PPPs, through which What Considered PPP by Law? they can sidestep the politically unpopular measures really needed by the economy. There is no national legislation focused exclu- If, rather than shifting certain items off bud- sively on PPPs. The practical sphere has gal- get on long term to keep them from increasing loped ahead of the legislative one in this area. deficits, member countries manage to reach Surely catching up legally would provide more agreements, – conceived principally in confor- transparency and predictability for investor and mity with the Lisbon goals – the currently government alike. At the same time, regulations rising popularity of the PPP configuration in might not simply increase predictability since Europe, would decline. If they are not, and this they might also contain too many restrictions, is the more likely scenario, the PPP financial precisely because of the diversity of the PPP configuration faces a bright future. We have al- construct. There have been examples for both ready seen a rise in investments in Europe that separate PPP laws and coordination of various utilized this structure. One sign of its growing laws within the international arena. popularity is that Germany signed its first PPP Hungary has no legally distinct PPP cate- motorway construction project in March of gory. Legislators only refer to it or describe the 2005. (In each of the past few years, Germany’s phenomenon. The economic concept of the public finance deficit has exceeded the Maast- PPP has not yet become a legal category. richt level). From the finances point of view, exceeding The Regulatory Framework the Maastricht 3 percent deficit – a figure that is not supported by any rational argument, by the Hungarian PPP regulation rests mainly on Act way – is a greater risk to the country’s creditors, CXXIX of 2003 related to public procurement, and thus costs the country additional money in and on Act XVI of 1991 on outsourcing as well higher interest rates. Higher interest rates mean as on the Civil Code and certain tax laws. The a higher debt service outlay. EU has a wealth of legal material on regulatory At this time, the value of PPP investments issues, of which several major ones deserve in Europe has passed the EUR 250 billion mentioning. mark. The United Kingdom is the largest single Council Directive of July 26, 1971 on user of PPPs. The regulations they employ are public procurement contracts for con-

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struction projects regarding the termina- to assure that businesses from different member tion of restrictions on the freedom to pro- nations have equal chances to participate. vide services and on granting contracts to In keeping with the Treaty of Rome, the free public procurement bidders for construc- movement of people, capital, and services must tion projects who submit offers through be fully adhered to in PPP projects. Before that, representative offices or branch offices; giving priority to domestic businesses/investors Council Directive 92/50/EEC on the har- has not been prohibited. In the resulting keener monization of public procurement proce- competition, the national SME sector is given dures when ordering services; some protection by the requirement that the Council Directive 93/36/EEC on the har- winning bidder must use subcontractors, de- monization of public procurement proce- manding that subcontractors be chosen accord- dures when ordering products; ing to a specific percentage scale. Council Directive 93/37/EEC on the har- These regulations were behind the Public monization of public procurement proce- Procurement Act passed by Parliament in dures for construction investments; 2003, which is an attempt to coordinate the European Parliament and Council Direc- above principles. tive 97/52/EC on amending directives The law – by definition – is to be applied to 92/50/EEC, 93/36/EEC, and 93/37/EEC; all PPP projects. The applicability of the law is Council Directive 89/665/EEC on the more extensive than previous legislation had harmonization of laws, decrees and public been, but it does not affect the PPPs, since they administration ordinances regulating the had been within the scope of mandatory public application or legal remedies related to procurement even before the law was passed. public procurement procedures for product Procedures differ depending on the value of the procurement and construction investments; investments. The law calls for separate public Council Directive 93/38/EEC on harmo- procurement procedures for projects that reach nizing procurement procedures for orga- the community value threshold, for projects be- nizations within the water utilities, en- tween the national and the community value ergy, transportation, and telecommunica- thresholds, and for ones that are below the tions sectors; national value threshold. European Parliament and Council Directive 98/4/EC amending Directive 93/38/EEC; Data Protection Issues Council Directive 92/13/EEC on harmonizing the laws, decrees and public admin- It is important to mention a few words on the istration ordinances regulating commu- public nature of PPP. These agreements are of nity rules on public procurements within strategic importance and may influence the the water utilities, energy, transportation, lives of generations, not to mention the fact that and telecommunications sectors. the public monies used (and earmarked) are in The common principles of EU regulations the billions. Therefore, it may be very much in are transparency, equal access, and fair compe- the interests of economic players and citizens to tition. This is true not only for PPPs, but also learn the content of these private contracts with for all public procurement and government in- the central or local governments. vestments. Transparency, as a pervasive princi- Act LXIII of 1992 on protection of personal ple, is intended to reduce the flowering of the data and the public nature of data for public in- reprehensible aspects of bureaucracy, and to terest defines data that is accessible to all in very target the establishment of an EU that is closer clear terms: to the people and easier to monitor. With PPP “§ 2 In applying this Act: projects, this is best employed in the bidding 4. Data of public interest: data managed by, or process. Equal access is designed principally concerning the activity of a body or person that

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performs central or local government tasks or cation of the information is restricted by law as other public tasks as defined by law, does not information in any of the following categories: qualify as personal data; a) defense; 5. Data accessible due to public interest: all b) national security; data that does not qualify as data of public in- c) law-enforcement or crime prevention; terest that is managed by or refers to any natural d) the interests of central financial or foreign or legal entity, or organization that does not exchange policy; have a legal entity as specified by law shall be e) the interests of foreign relations or con- made public in the public interest;” tacts with international organizations; The law also specifies the obligation of state f) court proceedings. bodies to make information public: (4) The personal data of personnel as they relate to proceedings within the authority of the “§ 19 (1) Bodies or persons (hereinafter, to- bodies cited in Section (1) shall not limit access gether: bodies) performing state or local govern- to the data of public interest. ment tasks or other public tasks as defined by law shall be mandated to promote and assure the ac- (5) Unless otherwise specified by law, data collected for internal use and data related to de- curate and fast provision of information to pub- cision preparations shall not be public within lic opinion on the issues within their scope of ju- twenty years after they are handled. Upon re- risdiction. These shall include, in particular, the quest for this data, the head of the body in ques- state and local budgets and their implementation may allow access within this period. tion, the management of state and local govern- (6) The Civil Code shall have precedence with ment assets, the use of public monies and associ- respect to accessing and making public data of ated contracts, and the provision of special or ex- public interest and accessing business secrets. clusive rights for market players including pri- (7) Furthermore, publication of data of vate organizations and persons. public interest may be restricted by European (2) The bodies noted in Section (1) shall Union legislation and significant financial or publish or otherwise make accessible the most economic policy interests of the European important data concerning their activities – in Union including monetary, budgetary and tax particular, regarding the evaluations of their policy interests.” authorities, jurisdiction, organizational struc- Sadly, current practices have been exactly the tures, and professional activity and the out- opposite, not allowing access to the significant comes of the above, the types of data in their points in the contracts. In my view, there is no possession, and the legislation under which reason for treating them as service or state se- they operate and manage their finances. Unless crets. On the long term, the absence of trans- otherwise specified by law, the names, positions parency and treatment of decisions as confiden- or titles, and job descriptions of the persons tial information is not beneficial to either eco- representing these bodies in their fields of juris- nomic players or the political elite. diction shall be public and accessible to all. The manner in which this information is to be provided and the circle of relevant data may be PPPs – PUBLIC ADMINISTRATION specified under separate statute. PROCEDURES (3) The bodies cited in Section (1) shall The ministries conduct preliminary analyses to make it possible for all persons to access the data decide which projects are worth executing of public interest in their possession. Unless the within a PPP configuration. The ministry in data has been qualified as a state or service secret question handles the details of elaboration as a by a body authorized to do so, or if the informa- project plan. Project plans have to contain the tion is qualified because of an obligation set total of the annual projects for a given year forth in an international treaty, or if publi- including PPP projects underway as well as other

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long-term commitments. The project plans also considered inappropriate when the pro- have to contain information on each specific ject goes before the cabinet, the call for project. This information consists of two parts: tenders will have to be submitted through The general issues surrounding the pro- the Inter-Ministry Committee. In this ject (goal, social impact, possibilities for case, the initial calculations will have to be execution, international examples), and revamped to make them more specific. A more detailed presentation of project There are two possible outcomes to the ten- specifications (time of completion, esti- dering process: mated costs, fee payments, central budget The value of the bids may exceed the value payments, cost breakdown). that had been preliminarily calculated. In When putting together the project plan, so- this case, the ministry may declare the bid- liciting the opinions of two organizations is ding process invalid. (It is not necessary). possible and worthwhile: The value of the bids does not exceed the One is the opinion of the bureau investi- value that had been preliminarily calculated. gating supports, which is charged with de- In either case, the contract takes effect after termining whether or not the state pay- governmental approval. If the project exceeds ments to the private investors considered HUF 50 billion in value, the approval of Parlia- as state support, and ment is needed. The other is the opinion of the PPP The PPP Inter-Ministry Committee and the Inter-Ministry Committee, which is im- Hungarian State Treasury must be notified of portant to avoid later disputes. the amount of funding required, the way it is to After this, the project draft goes before the be phased, and the payment framework, as soon PPP Inter-Ministry Committee. This commit- as the contract goes into effect. tee is made up of delegates from the Ministry of Economics and Transport, the Finance Minis- During the life of the project, the organiza- try, the Prime Minister’s Office, and the Cen- tion responsible for it must brief the PPP tral Statistics Office, as well as from the minis- Inter-Ministry Committee annually. The com- try that submitted the project. The committee mittee will then prepare an annual report on the can propose the addition of supplementary in- status of the project on the basis of the briefing. formation or amendments. Then, after the possible supplementary information or amend- EXPERIENCES IN HUNGARY ments have been submitted, the draft project goes to the government’s economics decision- The idea of introducing PPPs in Hungary came makers. If they approve the project, it goes be- up in the early 2000’s, as it did in many other fore the cabinet. (The PPP Inter-Ministry countries. The motorways that were outsourced Committee has the right to submit its opinion). for construction in the early 1990’s might be If the cabinet supports the project and only considered predecessors to PPPs, but were not then, it will authorize an invitation for tenders. deliberate PPP-type projects. Both parties, the There are two possible alternatives: government and the private sector, contended If the project draft has been thoroughly with unpredictable economic circumstances and elaborated and the calculations appropri- risks when contracting for this project. (It would ately completed before it goes before the notbewisetoexcludetheseprojectswhendraw- cabinet, the ministry concerned can re- ing conclusions on lessons learned, even though ceive permission to invite tenders without there were only quasi-PPPs). The first specifi- having to resubmit the project to the PPP cally PPP project took place more than ten years Inter-Ministry Committee. after the regime change. When the contract for If the project draft has not been thor- the Budapest Sports Arena was signed, political oughly elaborated and the calculations are risks had been minimized, the economy had

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been transformed, and major macroeconomic It will operate well if the bidders are suffi- indices were in equilibrium. cient in number to allow market mecha- Then, circumstances changed fundamen- nisms to regulate the process, and tally between 2000 and 2004. The number of The promises of the political administra- PPP projects increased quite significantly start- tion will be binding and it will be forced ing in 2004. to produce the promised results. The role of the state has grown constantly in The private partner concludes the agreement recent years and it is still growing. This means with the government knowing that: that both the revenue centralization rate and The government may not necessarily have the redistribution rate are growing. There have an interest in coordinating short and been no adjustments since 2002. In addition, long-term goals, so that their balance be- by the end of 2002 a significant public finance tween short and long-term goals might be deficit coupled with a high current account def- upset. This is true for both the govern- icit had evolved. As measures to combat the ment and the specific sector. The private problem were not taken, the government chose sector always focuses on the whole venture to use PPPs to implement its projects. The situ- (the long term) when ascertaining the suc- ation is similar to the ones in several Western cess of the venture, and will not be de- European countries insofar as the Hungarian toured by short-term advantages while ne- government was also unable to create the condi- glecting its long-term interests; tions for economic growth combined with a cut Market mechanisms can be distorted (in in expenditure. cases of a monopoly or near-monopoly) While decisions to go ahead with PPP pro- conditions; jects in 2000 had been taken against a back- A rational venture conflicts with business ground of favorable macroeconomic condi- and political interests. On the govern- tions, in 2004, the PPP projects were initiated ment side, the political interests inherent because the administration had failed to reduce in winning reelection, this may cancel out expenditure and had continued its policy of dis- business interests. tribution. Now, let us look at the arguments Additional categories are also possible with given to support the various decisions from the respect to time lines, government players, and theoretical point of view. the subject of the contract. Regarding the PPP financing configuration, Often, cooperation projects between public the state concludes an agreement with the pri- and private sectors for 3-5 years duration are vate partner, knowing that: common in terms of timeliness. This is an inter- The benefit will be reaped on short term mediate configuration, which dulls the advan- ¿ For only in exceptional cases will the tages and disadvantages of a PPP project, taken government concluding the agreement inthestrictsenseoftheterm.Thesizeofsupple- be responsible for meeting it on long mentary investments will be significantly lower term (since the agreement will run than the amount needed for a PPP project, the through five or six terms of govern- government’s sense of responsibility will in- ment, which will rarely be the same ad- crease, and the advantage to the government ministration) – government outlook, from economies of scale will decline. There have ¿ For only in exceptional cases will one been already a number of such projects in Hun- and the same minister be responsible for gary and elsewhere in the world, but this type of meeting it on long term (since the cooperation is not a PPP project in the strict agreement will run through five or six sense of the term. Therefore, I will not focus on terms of government, and the post will this three to five-year configuration at this time. rarely be held by the same minister) – Further differentiation among the govern- sector outlook, ment players is expedient, because of the effects

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of a PPP project on the national economy will market will provide efficient services and reduce be significantly influenced by whether the pro- the role of the state. The regulation, however, ject involves the central or a local government. remains in government hands. In either case, The various projects might be too high in ratio the private business becomes profitable by compared to local government budgets, but offering more efficient public services than – with the exception of the city of Budapest – before. they will not really weigh down the national PPP projects cannot be utilized infinitely; economy. Of course, the overall debt under- their overall value has to be in sink with budget taken by the local governments can become sig- limitations. This is a true hazard to the PPP nificant on national economic level as well. configuration. It is not recommended that the (Later, I will return to ways of optimizing the central budget or the specific sectors exceed a debt amount). certain level of spending on this type of project. If the cooperation fails, it matters a great It is necessary to set the spending level in ad- deal, whether it had been a local or central gov- vance, because this helps the government and ernment PPP venture. In principle, the central the specific sectors to keep spending under con- government should be able to handle the finan- trol. It is important that both set their limits, cial repercussions of a bad deal. The local gov- because this enables the given government to ernment – with their limited resources – will choose its priorities. It also makes it possible for have to seek outside help (from the central gov- the central government to keep its PPP project ernment or credit) to manage the same. This outlay in hand. will be the only way it can maintain to a contract with a private business. ESTABLISHING PPPs – As far as the subject of the contract is con- OPPORTUNITIES AND/OR cerned, the defining point is whether the state LIMITATIONS OF THE offers the private business a monopoly (or CONFIGURATION near-monopoly) status in the contract or simply a service for which it must compete on the mar- When evaluating the PPP structure, the first ket. If the private firm is offered a monopoly (or thing to look at is the costs and benefits that are near-monopoly) status, the government can reasonable. In my view, often the theoretical serve as a medium and operate various market debates tend to make us forget to look at the features if it has an appropriate share in the concrete ideas promoting practical implemen- ownership of the company with the monopoly, tation or to conduct a detailed investigation of and/or if it introduces tight regulations (price, a specific domestic circumstances. At this time, public service that should be provided to all, the issue for debate is not whether we need this etc.). Government regulation is particularly im- method or not. The real questions are: why do portant in sectors that are sensitive to new tech- we lack the fundamental legislative framework; nologies and to demands for new technologies. and what specific areas would it be expedient to Although they are more risky on the long term open to PPPs. It is not a good idea to set up in- (require higher installments to the bank), in or- dividual public procurement as a framework der for private investors to increase efficiency, rule, rather, what needs to be considered are the they have to withstand the administrative costs programs already completed programs. It is es- of excessive government control to provide the sential to expose conflicts of interests, which service on at least the same level – which in their can have unique aspects based on industry, own interests, has to be income-producing. sector, and region alike. Transferring a monopoly requires the highest We could treat PPPs like resource optimiza- level of attention, the greatest care, and the tion programs, and use them only if certain most caution from the public and private sec- pre-determined conditions are met. When a tors. On the long term, competition on the commission is given to a private investor, it

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could include a variety of activities such as plan- limits of business management tools are well ning, execution, operation and financing, and known, so more attention has to be paid to the in some cases, even outsourcing. A wide variety quality criteria of providing the services. As so- of factors could trigger the outsourcing of gov- cial demand grows extensively, the state has to ernment tasks. They include insufficient re- compete, so that residents become increasingly sources or capacities, a lack of professional apti- satisfied with the services offered by the pub- tude, less willingness to take risks, less ability to lic sector. Thanks to the spread of a “con- compete with services offered by the market, sumer-friendly” outlook, all citizens will feel shortage of capital, or even tax factors (such as better if they have to manage some official the reimbursement of the value added tax). business. PPPs make it possible to break down the pay- The PPP is one means of expanding the in- ment configuration into small chunks as op- frastructure and as such, it is suitable for speed- posed to accounting for a single, large amount ing up the investment processes. However, in a when major investments are undertaken. given country, speeding up infrastructural de- Effective economic operation on the part of velopment could result in revitalizing the entire the private sector can contribute to meeting national economy. In an optimum case, the a variety of social demands in a responsible state’s share of resources associated with a PPP manner. A long-term commitment – lasting should be predictable regarding both duration through multiple terms of government – could and amount, since during the contracting pe- make project financing more stable and pre- riod the state will be required to pay a regular dictable, and the implementation more flexible. service fee that does not change from one pay- Extensive guarantees will ensure that the assets ment to the next, therefore it could be planned. resulting from the investments will be utilized With traditional government investments, inefficiently throughout their entire life cycles. vestment costs have to be covered first, followed For instance, this will prevent a facility, net- by operational costs, and the costs of mainte- work, or support system from becoming dis- nance and overhead. With a PPP on the other used or ownerless. hand, public finances will not have to supply Costs, risks, and responsibilities are shared any funding until the project has been com- based on reciprocity. Project implementation pleted. Only afterwards, when a set service fee strategies tell us whether a PPP configuration have to be paid according to a predetermined could be used effectively for a given project. schedule. The most important factors are the selection of Inflows from the operation of the project can the type of contract, and the manner of finan- affect accounting. If it chooses, the government cial accounting. Less complex projects involv- can agree to receive a lower share than it might ing only short-term effects could result in insuf- otherwise be entitled to, or even give up all its ficient use of resources or wastefulness within proceeds, in exchange for a reduction in the set the framework of a PPP. fee it pays for the service. At any rate, the gov- The principle of sharing risk and responsibil- ernment will own the facilities after their com- ity involves the practical danger that neither pletion, and since they will serve the public, it partner may be willing to accept the risks trig- would be wise to cover a portion of the opera- gered by uncertainties. Therefore, suitable prep- tional costs of the service from government arations have to be made to manage conflicts funds, so that low-income residents could ac- and the problems spawned by complicated legal cess these services as well. The state is responsi- disputes. ble for monitoring the implementation of the When financing projects for public pur- public service specified in the contract. It poses, one has to count with the professional should specifically focus on whether or not per- market outlook when introducing private formance requirements are being met. In this capital. The opportunities inherent in and the area, two serious problems could occur. One is

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related to mistakes made during the establish- as loan repayment and interest, while the re- ment of original performance requirements, maining portion will be used to finance opera- which is very costly to modify. The other occurs tions, distribute in a form of profits, and to re- when the partner does not meet the responsibil- invest. A high level of capitalization is needed to ities it undertook in the contract, blaming participate in a PPP, and the rate of return is special conditions for the non-delivery. long term (which is equivalent to stable revenue If contract conditions for the given public that can be realized on a long term). Less service are set in advance (this includes a com- well-capitalized firms could join the project as plex system of performance requirements), in- subcontractors. flexibility could hinder the attempt to adjust to changing regulations that are unpredictable in advance, which could upset the existing finan- THE FUTURE OF PPPs AND ASPECTS cial accounting system as well. The only way OF ADAPTING INTERNATIONAL this could be prevented is if the state accepts a EXPERIENCES certain level of risk, which of course, shifts some of the responsibility back to the government. Projects that based on cooperation between the A general principle is that the entity taking the government and the private sector are not new risk should be the one that has a stronger influ- in Hungary. To cite just a few examples: such ence on efforts to offset it. For instance, the pri- projects include the Budapest Sports Arena, the vate investor should accept responsibility for Millennium City Center, and Motorway M5. hidden flaws, because it is responsible for the However, these ventures differ from PPPs in quality of planning and execution. Adherence that in several cases the state has bailed out pri- to deadlines and keeping up with the budget are vate sector companies that incurred losses for also the private partner’s risk. The government, which they themselves were to blame. To attain however, is responsible for the risk of non-gen- more efficient financing, a far more consistent eral and foreseeable legislative changes that behavior is needed when sharing risks. One could be disadvantageous to the investor. Risks portion includes a mandatory public procure- related to unforeseen events (vis maior) are de- ment procedure, in which the appropriate offer pendent on their nature, but generally these are should be chosen in accordance with a prede- shared by the state and the private investor. The fined and measurable system of performance re- risk of public resistance is a phenomenon that is quirements. Investors that incur losses should more common lately, and the costs associated not be allowed to shift their responsibility and with this risk have to be shared in a similar man- costs to the future users of the facility, which are ner. the taxpayers. There can be three participants in a PPP pro- In the future, the way to gauge the effective- ject, and all three could share the financial risks. ness of PPP projects is for the government to In addition to the executor of the investment conduct a similar investment on its own as well and the banks providing the loan, the state will as within a PPP. The costs of implementation also have to give a guarantee of precise adher- and operation will yield explicit information on ence to payment obligations. From the point of which method is more effective. Although, view of financing, the private sector mainly there had been examples for this in Western Eu- tends to play the role of a mediator. Since it has rope, they did not occur in Hungary yet. For appropriate collateral and is creditworthy, it example, prison operations in the U.K. could will be able to access significant bank loans to fi- provide basic information on such projects. In nance the project and its operations. At the this case, the general cost decline is an argument same time, the state will pay the private firm the in favor of PPPs. Most likely, this is the reason amount agreed to in the contract. One portion why the first examples for PPP projects had of this amount goes back to the credit provider been prisons in Hungary as well.

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INSTEAD OF CONCLUSION... Te following state tools could assist various government bodies to finalize agreements that PPPs are not miracle-workers. They are just a benefit them on the long term, and effectively possible solution that could be utilized by the utilize the needed resources for appropriate state to execute large amounts of high-cost, but preparations: necessary infrastructural developments. Special Revisiting the regulatory environment; attention has to be given to the transparency Eliminating uncertainties in the legislative and accountability of the projects as well as a environment; competitive environment needs to be assured. Clarifying the relationship of related legis- Unless the initiator of the PPP prepares care- lation (outsourcing, public procurement fully and defines the areas of responsibility act) specific to the area; clearly, the outcome is almost certain to be a Establishing the mandatory rules that failure. guarantee the transparency of PPP pro- For the players in the private sector (banks fi- jects, designing sample contracts, etc.; nancing the project as well as the operating Establishing a central PPP institution, company) the main advantage of a PPP config- ¿ which collects, processes, and makes uration is that it is a long term and typically a available the theoretical and practical huge project with the government standing be- information on the subject and the ex- hind it. However, under current conditions, periences of realized projects, mutual dependency is not typical. The reason ¿ where the representative of the state for this is that – besides a few exceptions – the body planning the project could request PPP projects that are already completed or cur- advice on project preparation, contract- rently underway have been poorly prepared, ing, or project implementation from they are not transparent, and they were moti- the subject matter experts; vated principally by short-term budget con- Establishing pre-conditions, which must straints despite of their identified long-term be met before any PPP contract is signed, advantages. where If appropriate regulations are enacted, the ¿ a detailed project plan must be submit- PPP configuration could become an increas- ted to the PPP institution, ingly important area of local government in- ¿ vestments. The risks of PPPs may be even the advantages and disadvantages of the project are identified and quantified, higher among local governments, which do not have the professional knowledge and practical ¿ it is demonstrated that the configura- experience to offset these; therefore, I believe it tion designed is a more favorable alter- is important to establish a more circumspect native than a purely government con- regulatory environment. Despite a high level of figuration, interest, there have been few practical examples ¿ experts from the PPP institution ap- of this type of project involving local govern- prove the calculations, evaluation, and ments. The reasons for this are the lack of thor- support the project on that basis, ough knowledge of the configuration, and un- ¿ where experts from the PPP institution certainties related to local government make proposals, which are included in financing that makes it difficult to plan for the the configuration at the largest extent long term. possible.

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BRIEF CASE STUDIES

The M5 – Case Study 1. Project goal Construction of a segment of the No. IV. Pan-European traffic corridor (Berlin-Istanbul), running between Budapest and Röszke. 2. Project size The original business plan calculated about 370 million ECU.2 3. Reason for using PPP configuration The principal reason was to bring-in capital to build a motorway that requires significant investment, and to take advantage of international experience in operating a motorway. 4. Project duration, length of contract The concession/outsourcing contract was for 35 years. The contract was signed in May of 1994, but it only went into effect at the end of 1995 with an agreement on support for financing and operations. 5. Project players and their roles AKA Rt. was the private sector participant. Its two main owners were Bouyges S.A. of France and Bau Holding AG of Austria. Magyar Intertoll Rt., a South African owned company, was responsible for operations and maintenance. In addition to an income guarantee, the state undertook the design of the project, and procurement of construction and environment permits. It also took responsibility for acquiring the land, the existing roads and infrastructures, and reducing traffic on neighboring (competing) roads. Most of the project was covered with an EBRD loan, one portion coming directly from the EBRD and another (the larger share) coming indirectly, through international finance institutes. 6. What risks were shared during the project and how? Income risk: should incomes be lower than planned, the state guaranteed a minimum income for the first 6.5 years (until 2006). The government risk ceiling was set at HUF 9 billion based on 1993 prices.3 Profit sharing: with estimated traffic, the state supposed to receive one-third of the paid dividends. All other investment, operational, and financial risk was covered by AKA Rt. 7. How was the service price calculated? The initial fee for motorway use was set as HUF 5/kilometer based on 1993 prices, which AKA was authorized to increase to compensate for inflation.4 It was also agreed to offer concessions to local residents and regular users. 8. What type of contract was this? An outsourcing/concession agreement. 9. Lessons Learned (advantages, disadvantages) Purchasing power of motorway users was miscalculated at the beginning. The state income guarantee assured the viability of the venture, but resulted in poor incentives: AKA refused to cut motorway usage fees, even when it became obvious that at the given price level motorists were avoiding the motorway. Although, considering demand flexibility, a decline in fees would have cut losses. The international experience of the winning consortium regarding motorway fees did not match the situation in Hungary. The outbreak of war in former Yugoslavia strongly reduced traffic.

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The Berlin Wasser – Case Study 1. Project Goal To operate 11 waterworks and 7 sewage treatment facilities to meet the demands of 3 million consumers in Berlin, increasing efficiency and attracting outside resources. 2. Project Size EUR 250 million in investment until 2009. 3. Reason for using PPP configuration To evolve more effective management and attract additional resources. 4. Project duration, length of contract Berlin Wasser Holding AG, established in 1999, agreed to conduct the maintenance operations for an indefinite period, to complete the investments by 2009, and to retain the workforce until 2014. 5. Project players and their roles Following the transformation and partial privatization of the East German Berlin Wasserbetriebe, 50.1 percent remained in the ownership of the city of Berlin and 49.9 percent was transferred to a consortium made up of RWE Aqua GmbH, Allianz Capital Partners GmbH, and Veolia Deutschland. The participants were chosen from bidders who came from all over Europe. The role of Berlin Wasser Holding AG is to provide water and sewage treatment to Berlin for an indefinite period, for which it pays EUR 68 million/year as a concession fee. The EIB granted EUR 420 million in credit for the project. 6. What risks were shared during the project and how? The private sector is carrying almost all of the risk. 7. How was the service price calculated? Initially, the cost was defined in the contract at the start of the project and is being increased according to inflation. 8. What type of contract was this? Joint venture, concession/outsourcing. 9. Lessons Learned (advantages, disadvantages) The contract is pioneering in the sense that it combines the advantages of the joint venture and the outsourced project. Inclusion of the private sector provides the inflow of the capital needed to update the water network and to streamline the operation of the company. Beyond private sector interests, the configuration has adhered to environmental considerations and to the demands of users and employees alike. The company was not permitted to increase the price of its services or to dismiss employees. 10. Other information on the project Since the private sector carried a disproportionate share of the financial risk (the investment obligation, the 9 percent interest on credit, and an annual concession fee of EUR 68 million) and it was limited by welfare considerations, it found itself facing liquidity problems, which forced an amendment to the contract. Under an agreement reached in 2004, the city of Berlin and Berlin Wasser Holding agreed to raise water rates by 30 percent. This was not a disproportionate burden on consumers, since prior to the increase the service provider had cut rates several times as required by its contract. The EUR 361 million deficit that had been accumulated, was divided between the government and the private players. With further streamlining and reduction of work hours, the company’s financial situation was stabilized without having to resort to layoffs. Since then, Berlin Wasser Holding AG has appeared on the Hungarian, Croatian, Polish, Russian, and Chinese markets.

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Budapest Sports Arena – Case Study

1. Project Goal To replace the Budapest Sports Hall. 2. Project Size HUF 40 billion. 3. Reason for using PPP configuration Belief in the efficiency of private capital. 4. Project duration, length of contract 20-year lease; building completed in 2003. 5. Project players and their roles Bouygues Hungaria Kft., signed a contract that includes construction, maintenance, operation and sub-leasing. 6. What risks were shared during the project and how? Private sector bore construction risks. 7. How was the service price calculated? The state agreed to pay the private corporation an availability fee of HUF 3.8 billion for 12 years, and the state also receive a certain number of days to use the arena free of charge. 8. What type of contract was this? Hybrid contract including leasing. 9. Lessons Learned (advantages, disadvantages) A significant element of the project is that the low-cost envisioned was not achieved and the contract was amended significantly. 10. Other information on the project The original contract for the Arena was concluded in August of 2001, and set the cost of reconstruction at HUF 20 billion. In the meantime, the state granted the French company handling the project another project valued at HUF 7 billion. In it, Bouygues agreed to landscape the area around the sports arena, that is, to establish a 30,000 square meter public space around it – to include restaurants, a ticket office, and a sports museum – as well as a new long-distance bus depot and a parking lot with 1,200 spaces. With that and the interest costs on 12 years of payments, the final cost of the arena – calculated with fluctuating exchange rates and interest rates – was up to HUF 40 billion. One clause in the contract states that until January of 2013 no indoor sports arena, that can hold more than 7,000 spectators, may be built in Budapest. Ninety percent of the construction was financed by bank credit, 4 percent by budget funds, and only 6 percent by private capital.

NOTES

1 Source: http://www.gkm.hu/ 4 In addition to the inflation, the fee was also allowed to 2 Source: EC: Resource Book on PPP Case Studies increase by the forint devaluation exceeding the differ- (2004) ence between the credit borrowed in foreign currency 3 Source: EC: Resource Book on PPP Case Studies and the inflation of the forint. (2004)

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László György Asztalos The Hungarian Financial Supervisory Authority Established 90 Years Ago The Hungarian Financial Supervisory Author- both state and church (sacral) supervision of ity (HFSA), Hungary’s financial market watch- professional financial management and personnel dog, was established in early 2000 that placed performing financial transactions.1 After 1526, the crown on a centuries-long development Hungary’s unique historical development in- process. The evolvement of today’s supervisor volved a forced entwinement of the Kingdom of financial institutions was the outcome of ef- of Hungary and the Habsburg Empire, but forts by over a thousand members of our profes- sadly, the kingdom was compelled to develop in sion who took the matter systematically for- subordination to the interests of the empire. ward, building it “on the back of generations.” That being the case, it was no surprise that the Thus, we at HFSA feel that a community, first (imperial) regulation calling for supervision which does not respect its past, does not deserve over financial institutions, or more specifically, the present, and is certainly unable to find its over the privately owned financial institutions future. This is the reason why each autumn we operating on Hungarian soil, was an Austrian take advantage of the Prudentia Prize to pub- edict dating back to September 26, 1844. This di- licly honor our colleagues who devoted decades rective contained measures on the founding, to promoting the advance of the Hungarian structure, and supervision of savings banks.2 A system that supervises financial institutions. document dating back to July 22, 1847, ad- This modest remembrance is a way of respect- dressed by the court chancellery to the royal fully bowing before all the financial profession- Hungarian governing council, became an im- als, both the well known and the undeservedly portant measure in the history of professional fi- forgotten members of the community, who nances for reasons of principle. In this docu- helped in any way to establish the current su- ment, Vienna proposed that from then on the pervisory system. basic rules controlling financial institutions should be approved in Buda (the Hungarian PRECONDITIONS capital), and the personnel appointed as com- OF THE ESTABLISHMENT missioners to supervise the branches should be OF THE SUPERVISORY AUTHORITY* “highly professional and respected individuals who are completely independent of the savings Since (Saint) Stephen I founded the Hungarian banks.” It was stated that the positions were pres- nation and public administration, there was tige posts and not to be paid for.3 This proposal, which at the time was submerged beneath an in- * This study is but one chapter in a larger effort called finite exchange of documents, later did have an “The Cultural History of the Bodies Supervising Financial Institutions.” It has been re-written in honor of the first effect on the organizational framework. (celebratory) issue of the renewed Public Finance Quarterly. The parts of the study called “The World of Supervision or the Evolvement of the World of Supervision,” and “The His- THE SIGNIFICANCE OF 1848 tory of Hungarian Financial Supervision to 1848” are organic (historical and logical) precedents to this article. Their continuation is included in the chapters called “The 20th Act III of 1848 established, or rather re-estab- Century History of Supervision” and “Opportunities and lished an independent Hungarian state Limits of 21st Century Supervision.” structure after a lapse of over three centuries

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indicates decades of preparation by the best of a selor was János Fogarasi.5 In an indirect move great reformer generation, and a willingness to related to the regulation of monetary turnover, compromise that reflects the conditions of the on September 9, 1848, Kossuth, who was about time. The First Hungarian (Prime) Ministry to resign, appointed Antal Vörös, a chief archi- (the cabinet, to use today’s terminology), vist at the Finance Ministry to the post of gov- headed by Lajos Batthyány, established eight re- ernment commissioner “to make certain that the sponsible ministries. One of them, headed by bank note operations underway and the finan- Lajos Kossuth, was the Finance Ministry, made cial value thereof be assured in as consistent a up of five divisions and employed 414 people way as possible...”6 including the people who worked in institutions under the ministry. A transitional directive, issued by the minister related to adminis- THE BACH ERA AND THE tration, ordered that all documents that had COMPROMISE AGREEMENT OF 1967 been handled by the former royal court Cham- ber were to be transferred and assigned to an Following the defeat of the War of Independence, “assistant counselor with knowledge of the law” and the “New Year’s Eve Ruling” of 1851, su- working in one of the new divisions of the min- 4 pervision of privately owned financial institu- istry. To our knowledge, the assistant coun- tion was legally restored to the imperial cham- selor, who began to work at the No. 5 National ber. Control of (state) financial institute activ- Auditing Department of the Finance Ministry in ity connected to Hungarian nationhood be- Buda on May 1, 1848, was the first member of came the task of a Hungarian financial adminis- an independent and responsible Hungarian state supervisory body over financial institu- tration that was reorganized to conform to the tions (banks and insurance companies). Bernát Bach regime (1851-1859). It tended to deliber- Weisz (1800-1880) became the first director of ately overemphasize contradictory Josephinist the 30-employee division, who was a wholesaler (referring to Austria’s Josef II: 1765-1790) 7 from Pest and who earlier worked for an insur- principles “as punishment.” “Bach’s ideal was a ance firm. The first head of this department was bureaucracy such as that of Josef II, but Bach’s considered having a similar rank as today’s dep- bureaucracy was not independent; its only uty state secretary. power came from the military and the gendar- 8 The Ministry of the War of Independence merie,” wrote Henrik Marczali. Gyula Kautz took its first independent Hungarian (State and wrote about the general situation that had Finance Ministry) decision regarding bank su- evolved in his major analysis of the ideologies of pervision on June 17, 1848. Kossuth, who had the era. He stated “We suffered many disadvan- contracted with the Pest Hungarian Trade tages at the time because of an invasion of Aus- Bank (the first Hungarian-owned bank that trian financial and political ideals and regula- have been registered in Hungary in 1841) to tions. They were a heavy burden and we were print bank notes, responded to a proposal from heavily weighed upon in all efforts to put the bank president József Havas, and appointed economy into motion by the petty supervision four new supervisory commissioners. These that interfered with everything. It put its yoke of members were added to the twelve older board control on the financial institutions and forced members, who were already recognized (per- the national legislature into idleness. In addi- mitted) by the Finance Ministry. The first com- tion, we had to face the objectionable circum- missioners charged with bank supervision were – stance that most regulations were not intended in chronological order – Károly Conlegner, János to benefit the public at all, but to demonstrate Krusz, and Ferdinand Libashinsky. They super- and reinforce the absolute power of the state, vised the printing of bank notes. Banker Sámuel the interests of the treasury, and the prestige of 9 Wodianer was responsible for issuing the bank the military and the war machine.” notes; the commercial corporate manager was Submissions to the General-Government of Vince Weinzierl, and Finance Ministry coun- Buda were handled – or left untouched – by

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officials, none of whom were Hungarian. They It was also possible to take advantage of the were principally from the more advanced Bohe- fact that residents – particularly the Ger- mian regions and refused to speak any language man-speaking ones – were comparatively flexi- other than German. That public administra- ble in accepting innovations. This is the tion, which cost five times the amount of the reasonn why credit cooperatives developed. The “revolutionary” budget, truly presented the Saxons of Transylvania (today Romania) were Hungarians with “the curse of bureaucracy.”10 the first to take advantage of these opportuni- The government conditions of the time – be- ties in Beszterce (today Bistrita). This was fol- tween 1849 and 1867 – set deliberate obstacles lowed by the establishment of cooperates in to prevent credit institutions and savings banks Megyes (Mediaº), Segesvár (Sighisoara), Nagy- from being established and operate. For in- szeben (Sibiu), and Szentágota (Agnita), be- stance, in the 1850’s, all applications to estab- tween 1862 and 1864. Creditanstalt of Vienna lish new institutions were outright rejected.11 opened a branch in Brasso (Brasov) in 1857, Not much changed regarding this type of “ob- and a credit bank opened in Kolosvár (Cluj) stacle course” run by officials following the Oc- that same year.13 However, even until the last tober 1860 Diploma or the February Regula- days of the monarchy, the companies estab- tions issued in 1861. This system was a poor lished by Hungarians did not present a serious substitute for “Parliamentary supervision.” An threat to the financially strong Austrian finan- Imperial Council was made up of delegates ap- cial institutions. This is the reason why these in- proved by the monarch and authorized to man- stitutes were willing to tolerate the establish- age finances, commerce and military affairs, ment and unsupervised operation of savings and state budgets. The council was made up of banks, credit cooperatives, and similar institu- 343 members and included 85 from Hungary tions, which at this time only operated to redis- and 26 from Transylvania. From the point of tribute money. Nevertheless, more significant view of the development of Hungary’s financial banks that were authorized to print money and system, the consequences of the new system insurance companies that operated as share- were negligible. holder corporations required special permits Luckily, this arbitrary rule did not cause the according to the rules of the imperial govern- same problems at financial institutions as it did ment, and their operations were more restricted. with the banks. One form of taciturn protest (This is one reason why Hungarian insurance against absolutism among the intellectual elite companies were half a century behind foreign in- of the era was to withdraw from public office surers in getting started in the “competition of and become active in private ventures, in the the free market.”) Consequently, the Austrian non-government sphere. Therefore, it was no supervisory system had some unusual aspects. surprise that the owners of the First Hungarian For instance, until 1892 central government General Insurance Company (it was really the commissioners or regional supervisors started first), established in 1857, included the cream monitoring a savings bank only when a serious 14 of the top centralists who have not emigrated. problem arose. In Hungary, only the lowest Among them were Ferenc Deák, György level of supervision recognized by monitoring Apponyi, Gyula Andrássy, József Eötvös, Emil theory was required. It was called “publicity”and Dessewffy, Pál Somssich, György Károlyi, and consisted of a requirement that simply called for Henrik Lévay who was chosen as their chief execu- publication of annual financial results. This was tive officer.12 (In fact, we do need to realize that very much in the interests of the foreign firms 15 until the early 1860’s, when the period of “bar- that had more practical experiences. gaining” began with the “Easter article,” there The factors that defined supervision of were only three Hungarian-owned companies Hungarian financial institutions for the fol- willing to compete with the nine foreign- lowing half century rested on the works of owned world leaders...) Gyula Kautz, who designed its basic principles

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(concepts). His work clearly formulated the de- tional standards. In fact, we cannot add more to sirable (Hungarian) position as early as 1863, it after 150 years. according to which, “we can finally summarize the attitude of the welders of power towards the banks and the main principles of bank SUPERVISION IN THE LATE management and leadership as follows: MONARCHY a) Permission to establish a bank of issue should only be granted if the charter of the bank However, it took a long time before more ad- association has been investigated and is known vanced principles of supervision, monitoring to the providers of primary security. methods, and organization took root in Hun- gary. The Compromise Agreement brought ad- b) In all cases, professionals who are known to be of sound character should be appointed by ditional and new problems to the Hungarian fi- the associations to manage each bank, and they nancial sector. This time marked the start of a shall operate in accordance with the administra- wave of new banks and funds, and “laissez faire” tive council and under the supervision of a gen- competition. There was “no longer a require- eral meeting of shareholders. ment” for any type of permit, which led to the growth of the more advanced and better-capital- c) The banks should not become involved ized institutions and failure of the smaller ones. with ventures where there is a high risk of damage/loss (railway construction, trade with colo- The ensuing wave of concentration was benefi- nies, mining, etc.). cial to the larger financial institutions and to the stock holders. (The situation was made even d) They should not issue bank notes of very more complicated by the “wide-spread liberal- low value, because that would take the place of ism” that, under Act 31 of 1868, went as far as silver coins. eliminating the ban on usury interest rates, e) A government supervisor should always which ban was not restored until 1883 “to hin- have the right to attend bank meetings; how- der speculator-actions”). The situation was simi- ever that person’s agreement should not be re- lar with the Hungarian insurance industry, quired for internal banking decisions. which also underwent sudden growth. The dif- f) The citizens should be completely free to ference here was that the competitors from the accept or not accept the notes issued by a bank; Monarchy were challenged by the more under any circumstance or for any reason state significant British and French companies on the coercion is not allowed in this area. market, who also wanted to take part in the ac- g) The bank’s board of directors should be tion. However, as far as both types of financial in- required to make public the results of bank stitution were concerned, interests were sharply transactions and its financial status etc. from violated by Act 12 of 1867, adopted during the time to time. Compromise Agreement. It established the guide- h) All appropriately managed banks should lines for general and principal equality, which al- have a reserve fund to be used in extraordinary lowed the free settlement of a company in another circumstances. country or region without requiring a permit, as i) Both the state and the association should well as permitted services across the border.More- finally realize that strict order and honesty, the over, it included several paragraphs – these were principles of conservatism and respect for the also included in specific laws that passed later – law must dominate all banking operations and that Austria was able to use to its advantage they must never consider venturing into opera- from the very beginning.17 Another major dis- tions that might cause damage to or infringe on advantage of the time was the agreement to op- the interests of the state or the citizens.”16 erate a joint Ministry of Finance in the areas of This chain of thought was original, thor- military and foreign affairs and jointly cover ough, consistent, and outstanding by interna- their costs.

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The result was that representation of the spe- on the two main principles of complete openness cific interests of the Hungarian financial insti- and absolute responsibility ... these normative tutions became a secondary concern and was rules are not a violation of freedom. Corpora- left to other ministers with less authority. tions exist only because the government permits Given these chaotic conditions, the financial them and they do not have the same freedom as crisis of 1869 hurt the large number of savings individuals who born with them. Therefore, cooperatives and funds that had been estab- the state has the right to monitor these corpo- lished in the meantime, as well as the Hungar- rations and to regulate general areas related to ian banks that became involved in speculation. them.” Novelist, Mór Jókai, who at the time was a By this time, Gyula Kautz agreed: Member of Parliament representing the “Terez- “a) The state should neither hinder nor de- varos” section of Pest, made a proposal adopted liberately promote the establishment of bank- by the legislature to send a separate “national ing corporations. investigations-committee” (committee of inqui- b) The establishment of a normative law that ry) to examine the banking issues and develop carefully regulates the establishment, organiza- recommendations to remedy the problems.18 In tion etc. of banks can be a quite good replace- the following year, the commission faced nine ment for the concession system... issues and considered at least four or five solu- f) The idea of establishing a separate bank tions. It had to come up with responses to, for monitoring committee or office that could in- instance, vestigate whether accounts were correct or in- “3. Can this type of a monetary crisis be correct, and could audit the books of banks overcome at all, and if so, how can it be done? with government authorization etc. A similar 9. What general measures are needed to as- organization as the one established in England sure regular monetary flows in Hungary, and to with the Peel Act is commendable and even de- set domestic credit onto an independent and sirable. firm foundation?” g) It is not necessary to design bank statutes if In this debate Ede Horn, who also regularly the state desires to exert a direct influence. The published in French professional journals, said general bank act was adopted to include the the legislature was to blame and raised the gen- most general regulations in this regard... eral issue of the “responsibility” of state supervi- i) The state bank must not be granted excep- sion in a manner that remains valid to this day. tional position, authorities, prerogatives, and fi- He blamed a portion of the failures on the way nancial advantages. As far as material supervi- permits were granted. Charters have to be sub- sion is concerned, the state should refrain from mitted to the government, and sometimes these excessive intervention and should only exert su- are sent back five or six times for correction be- pervision and control to the extent that it is nec- fore issuing the final permit. That being the essary for the long term higher-level interests of case, should not the public believe that “the society and business life. government, which it finances with extraordi- In summary, the advice to be offered to the nary high sums of money to protect its interests, state is to establish a measure of careful supervi- has certainly found every security hole one can sion vis-á-vis the banks that rests on a principle think of before finally issuing a permit .... that allows them freedom of movement and op- The process of granting the permit simply sup- erations. The state should undertake a passive ports the laziness in thinking that many people rather than an active role, and when it deviates just born with.”19 from these rules the deviation should be thor- He believed that the solution was in the sec- oughly justified and based on reason and strong ond phase of supervision development, in a shift evidence.”21 to a normative system:20 “The legislature should There was perhaps an even more important enact general regulations for corporations based sign that a measure of state control was under

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consideration. Menyhért Lónyay, as a wise poli- satisfactory.24 Ede Horn sarcastically called the tician, no longer objected completely to the idea people supporting the need for state supervision of continuous state monitoring. 22 Lónyay was a “agents of micro-management.” He raised a ques- man who had enjoyed enormous prestige since tion that even today is perhaps the most diffi- the War of Independence, known as “the clos- cult question of supervision: “Do you really est follower of Széchenyi’s economic views,” think you can protect the people from making and who often cited the German Adolf Wagner any mistake, from any financially faulty move, who had undisputed prestige among banking and from all resulting losses?” Later, he formu- professionals. According to him, “the safe- lated the liberal “credo” of supervision: “Study guards should be as follows: strict definitions of of the basic principles dominating this issue the limits to bank authorities, broad-scale pub- have shown us that the nature of matters and licity for business outcomes, expedient organi- the play of free competition, which the Civil zation of state supervision, and strict sanctions Code holds under continuous observation, are for violations of the rules. Experience tends to as sufficient here as elsewhere to prevent ex- prove this need as in America, the land of dar- cesses, abuses, and their hazards.”25 ing speculation, managers who deliberately and After the Compromise Agreement was con- consciously break the law may be punished cluded, a “second phase” of regulation evolved, with up to 15-years of imprisonment.” which was still quite liberal and lead to a However, it required a great deal of time be- three-tiered,“divided system of supervision.” Its fore “the expedient organization of state super- insufficiencies and unsatisfactory nature be- vision” was established. Banking was almost came apparent quite soon, around the 1880’s to completely dominated by centrists who avowed 1890’s. It became clear that laissez faire principles. Thus, despite of the neither “formal” nor “financial control” stock market crash in 1873, – which resulted in could be expected from the “overextended losses of about fifty-five million forints – nei- courts of registration, other courts, or ther the participants of the 1874 national con- business record archives” charged with su- gress that met to design a trade act, nor the pervising the legality of operations, 1882 and 1883 national assemblies of lawyers the supervisory committee members – considered it necessary to enact a separate legis- who were not required to have or obtain lation. Even at that time, some people argued technical skills – were unable to offer pro- that “there are those who just do not foresee the fessional supervision, and hazards and prefer to bury their heads in the the “little people” and participants in gen- sand like an ostrich and do nothing when it is eral meetings who were responsible for clear that a monetary crisis can cost hundreds of ownership supervision somehow managed millions. Therefore, it is absolutely necessary to not to learn about even the most serious remedy this situation and urgently call for en- abuses early enough to counter them.26 23 actment of a law to this effect. As a result of “laissez faire” regulation and At this time, however, the majority was op- “divided supervision,” – despite a credit crisis in posed to state supervision. The professional 1899 that “decimated” them – at the turn of the elite of the time – Gyula Kautz, Ede Horn, János century there were more banks and credit insti- Hantos, Hugó Beck, and Menyhért Lónyay - es- tutions (2,026) operating in Hungary than in sentially agreed that “normative” application of Austria and Germany together. Given the low Act XXXVII of 1875, with general specifica- level of capitalization in Hungary, the only way tions for business ventures that is included in this number of businesses managed to survive the trade act (sections 453-462) was sufficient. was by introducing income-generating non- In addition, they thought that voluntary audits financial activities to such an extent that their in accordance with the English, or the even banking operations appeared to be supple- more popular Scottish practices, might also be mentary or secondary ... A series of failures

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occurred, – which particularly infuriated pub- new cooperatives and reorganize cooperatives lic opinion – since good portion of the new in- established on the basis of the trade act in con- stitutions that sprouted to replace the ones that formity with the cooperative act, and to ap- went under were connected to the same “bad prove amendments to the charters of all cooper- bank managers” who had already “failed” at atives. Without this approval the charters can least once, generating major losses among their not be registered in the business records of the customers. commercial court.”28 Towards the end of the century, profession- (Act XXX of 1920 made it mandatory for all als sought resolution in two directions. One credit cooperatives to join the OKH. With this measure was tightening up the “norms.” Under action, it established the possibility and the ob- the trade act of 1875, the members of the super- ligation for OKH to conduct continuous supervisory committee were required to have the nec- vision and monitoring functions over them). essary skills prior to their appointment, and This is why we rightly consider this institution rules of their responsibilities were introduced to be the direct predecessor to (one branch of) state (Sections 195 and 196). However, it was much and mandatory bank supervision. The facts to more significant that from this time on efforts support this statement are that the main found- of smaller financial institutes to jointly run au- er of OKH was the treasury, that the king ap- tonomous multiple audits received significant pointed the chairman of the institute, and that support. The Central Mortgage Bank of Hungar- the Finance Minister, the Minister of Agricul- ian Savings Banks, which also handled the vol- ture, and the Trade Minister each delegated untary auditing of 29 rural banks, was estab- two members to its board. lished in 1892. It is considered the first inde- However, it was typical of the peculiar type pendent Hungarian – though not yet state – of coexistence within the Monarchy that the (voluntary) supervisor of private financial in- “Solidaritatea Asociatone de Institute Finan- stitutions. (Approximately 391 institutes be- ciare ca Insotire” established in 1898, which longed to this group before 1913. This is about conducted mandatory auditing of 129 Roma- one-fifth of all financial institutions). nian financial institutes by 1901, and a similar However, the National Central Credit Coop- organization established in 1903 to supervise erative (OKH), established on December 23, Saxon savings banks, called “Revisionsverband 1893, became even more significant with Act von Provinz-Kreditanstalten als Genossen- XXXIII of 1898, that passed thanks to the ef- schaft,” had far greater affects on the develop- forts of “the agrarian count,” Sándor Károlyi. ment of Hungary’s financial institutions than Along with its many other tasks, this coopera- any domestic move.29 Therefore, it was ex- tive was authorized to and charged with a large pected and by the turn of the century it had be- amount of supervision. Based on Section 21, “it come clear to many that it is was necessary to could suspend the board of directors or any move forward towards a given direction: “The board member of member-cooperatives until Saxons with their Revisionsgenossenschaft and the next general meeting, if it learned of behav- the Romanians with their Solidaritate managed ior that seriously jeopardized the successful op- a situation in which not one of the nearly 40 eration of the cooperative.”27 In addition, it had Saxon and about 150 Romanian financial insti- the right to supervise the business records and tutions were lost in the most recent crisis ... administration of its members at any time. In While these national institutions operate with fact, the credit cooperative was really a type of excellent homogenous planning, Hungarian professional interest advocacy chamber, acting as a credit circles work in opposite with their spon- primary filter (corporative) toward the non- taneity and absence of uniform manage- member credit cooperatives: ment.”30 The favorable “ethnic” experience – “It had supervisory and organizational au- and the less-than-convincing experience in thorities in that it was authorized to establish 1898 and 1903 with the “voluntary auditing

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groups” within the Hungarian financial insti- healthcare funds saw the evolvement of a many tutes – led to the reorganization of the volun- color and mixed supervisory system based on Act tary system of supervision. This is why the Na- XIV of 1891. tional Cooperative of Financial Institutions in ¦ The district’s, so called, sickness assistance Hungary was established in early 1904. One funds, which operated on a regional principle, task of the similarly named “Corporation”be- were monitored by an industrial authority ap- came the supervision and control of rural finan- pointed by the Trade Minister. cial institutions through “local governments, to ¦ The Trade Minister monitored the com- determine their conformity to the rules and the pany (factory) funds that companies employing reliability of the administrations of institutions more than 100 persons were permitted to estab- that are members of the association.”31 lish. By the early 20th century, the earlier state of ¦ The construction-entrepreneurial sickness “bare-bone regulation” and the “norms + self- assistance funds established for long-term, but auditing” called for in the 1875 trade act were non-permanent construction workers were un- no longer sufficient as the country rapidly be- der the simplified supervision of the responsible came more capitalized. “None of the significant industrial authority. institutions of economic life have been as un- ¦ The industrial facilities that employed touched by legislation as the domestic financial over 200 assistants were allowed to establish in- institutions ... We will be unable to find any law dustrial facility sickness assistance funds, but governing the establishment, organization, op- these required only self-audits. eration, or termination of the financial institu- ¦ The sickness assistance funds for miners tions, no matter how hard we may look ... Ex- remained from the Mid-Ages. They were now cept for a few rules on taxes and fees that men- permitted to expand their activities to areas tion them, the concept of the finance institute other than mining and metallurgy. However, and what it consists of has been left just as am- they were required to adhere to the stringent biguous in legislation as it is in practice. We and high-level service requirements set forth in have no information on what the essential dis- the mining act and to accept the supervision of tinguishing features of financial institutions the mining authority. are, how they are granted rights and assigned ¦ The sickness funds established for the pri- responsibilities as financial institutions,” wrote vate (free) associations were the predecessors of Elemér Hantos in 1906.32 One year earlier in a today’s voluntary health insurance funds. They more general overview, he wrote, “This unlim- had the right to operate a fund if they had over ited operation of the principle of laissez faire in 200 members. The professional supervision was the life of financial institutions is even more subordinate to the Trade Minister. amazing as nowhere else in Europe, or even in ¦ Any employee between the ages of 14 and the United States, the operation of financial in- 35 was permitted to join the family assistance stitutions is as unregulated as it is in Hungary. funds established by Act XVI of 1900, while With the exception of Hungary, there is no civ- “non-live-in domestics” could join only with ilized state that has not established some mea- the permission of their employers. These orga- sure of government or other public scrutiny of nization operated using fees paid by members, 33 the founding and operation of savings banks.” employer contributions, state support, and do- However, the bankers of the time had no in- nations. Local bodies of public administration tentions of looking beyond the walls that pro- including the chief clerk supervised the local tected the sector. They even failed to notice committees of the organization and the Minis- that, for instance, the so-called sickness assistance ter of Agriculture exercised the right of supervi- funds had undergone “revolutionary monitor- sion over the central administration.34 ing” changes. These predecessors of today’s The Hungarian pension and health fund mandatory and voluntary private pension and monitoring system of the recent past has a pre-

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decessor that was established at the turn of the The (first Hungarian) Insurance Bill of 1890 20th century. Within this, there is a wide variety was written at the request of the Justice Minis- of monitoring configurations, ranging from ter, and linked to the name of Finance Minister norms to self-auditing, and to mandatory state Hugó Beck, and focused on putting an end to (centralized) and local or industrial body (de- this nebulous situation. Responding to public- centralized) solutions. Acceptance of the idea of ity, this bill was an attempt to introduce gov- state supervision in this portion of the financial ernment supervision – essentially skipping the sector rested on a psychological foundation development phase of normative controls + au- similar to the idea behind the insurance system, tonomous (voluntary and/or mandatory) audits that “The state cannot allow unskilled laymen that dominated the banking system at the time. to be at the mercy of private enterprise so it has It also deserves mentioning that this was the an ethical obligation to pay attention to insur- first attempt to regulate the financial conditions ance issues.”35 Following the Compromise of insurance contracts derived from private law Agreement of 1867 the Hungarian market was (civil code, and liability law) as well as the public inundated by foreign investors, many of whom law aspects (supervision) of the insurance market had the best of intentions. The Hungarian in- in Hungary. Recognizing the dual edge of gov- surance companies and other non-professional ernment intervention,37 it takes a firm position (laymen) investors established and offered the in principle in favor of material supervision, entire range of modern insurance products. “for the security of the institution, it is neces- They took these products to every outpost of sary that under all circumstances we demand the country. There was, however, a high price companies to offer undisputable guarantees to pay for this exceptional professional develop- that they will be able to meet their obligations ment. The insurance companies that were un- to insured parties.” able to survive on the comparatively small mar- However, the motley and obscure conditions ket either chose bankruptcy or transferred their that evolved in insurance proved to be insuffi- clients, or simply merged with stronger compa- cient as an incentive and did not have the coer- nies. During times like this, there was no one to cive power to move forward, so Beck’s bill was investigate or monitor accountability of what defeated. Not even the major insurance bank- happened to the premiums that had been col- ruptcies of the 1890’s, which caused a great deal lected, the adequacy of reserve funds, the justifi- of anger, were enough to move forward with su- cation for a possible reduction in services, and pervision. One particularly shocking case was the arguments behind demands for supplemen- that of the General Children’s and People’s In- tary payments. Kálmán Huszár, who believed surance Institute, which in three years of “oper- that not everything was the fault of the “selfish ation” spent not only its base capital (its reserve Austrians,” described the confusing and dis- fund), but also the insurance premiums paid by honest situation that evolved as, “before we its customers. After a 250 percent “subsequent shifted from the pre-1848 system to the current payment” – or to use today’s terminology, a one – in which there is neither control, nor per- capital increase attained through additional mit granting, nor publicity – we had a system contributors – failed to help, the company was that preceded the Trade Act in which a com- liquidated (without a successor).38 pany, be it a corporation, insurance firm or No matter how disappointing it may appear, other, could begin operation on the basis of the but the real incentive guiding the more so- charter submitted to the ministry. Well before ber-minded at the end of the 19th century was the Trade Act was adopted it was recognized the desire to access the unified markets of the that the system was sustainable as many insti- Monarchy that became possible by the Com- tutes abused it, so we shifted to a system of lais- promise Agreement of 1867, and not the inter- sez faire in which there was neither control, nor ests of the insured parties. “We must have regu- permission, nor even clear publicity.”36 lations, rules similar to those of the Austrians

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because that is the requirement of affiliation,” Hegedüs, who was the Trade Minister. There- said János Horváth, amidst general agreement at fore, everything remained as it was before, a professional meeting in 1897. At this same within the ill-defined Austrian-Hungarian rela- meeting, Kálmán Huszár, who has already been tionship. The market conditions established by mentioned, using a style reminiscent of the 54 insurance companies made even more Széchenyi, pointed to a series of international complex by the appearance of two cooperative interactions that are valid to this day, but are insurance firms in 1900 and 1901. The Farm- still often overlooked, “there is a proposal be- ers’ Insurance Cooperative and the Hungarian fore the public that ... is aimed at regulating Life and Annuity Insurance Institute were es- the public administration portion of insurance tablished with state shares and an admitted in- law ... a state insurance office can hardly be contention of gaining a competitive advantage, and sidered an objectionable idea, particularly at both became quick successes despite expecta- this time when such offices are to be found in tions to the contrary. Finally, the rest of the in- essentially all nations. This proposal is a fortu- surance companies combined forces against nate combination of government supervision “the common enemy moving along with a and freedom of movement.... But to argue over strong tailwind” of government assistance. what demands we plan to make vis-á-vis Austria Thus, they managed to attain a separate finance when we are not even taking the most essential ministry decree extending the specifications of measures at home is like throwing our words the trade act to cooperative insurers. They even away in the desert ... for ... how can we expect a managed to successfully lobby that good and country like Austria – in which the insurance tight self-auditing be required of the coopera- institution is already so strong – to consider us tive insurers… its equal? So, before we have fair demands from Hungarian banking and insurance issues had Austria, it will be necessary for us to create the to go through World War I and the complete prerequisites ... because we cannot demand that upheaval that ensued for the idea of state super- a country with fully regulated conditions allow vision, already adopted in principle – and in- Hungarian institutions with their wholly un- cluded in textbooks – to become a demand regulated conditions to settle there. At the same upon all banks and insurance companies.41 time, I believe that what other speakers have Most likely a major reason why earlier plans for said about the principles behind the new Aus- reform through increasing supervision failed trian regulations is exaggerated, because the was that under the proposals to supervise insur- main point is ... that every nation wants to ap- ance, the investigations – in contrast to the ply its own laws on its own territory.”39 banking sector – were supposed to have ex- Therefore, at the turn of the century they tended to all insurance firms including the larg- 42 shook off the dust from the Beck insurance bill, est ones which strongly opposed this… which the author modestly called “the best in We also find similar resistance in the bank- the World.”40 An important advance came in ing area. The bank monitoring experts of the 1900 though, when the goal was to have a sepa- early 20th century – and first of all the men al- rate “insurance bureau” to deal with operative ready mentioned, including Elemér Hantos, interactions. This would involve differentiating Lajos Katona, Gusztáv Wandke, and Sándor the various sectors of insurance, maintaining Halász as well as János Bun, Imre Fenyvessy, Imre the management of premium reserves in a state Grötschel, László Hegedüs, Károly Herich, Sándor fund, planning for profit sharing, somewhat re- Neumann, Gyula Schnierer, József Schmidt, stricting the scope of re-insurance, and dealing Miksa Pásztor, and Lajos Várnai,moreoverthe with inappropriate advertisement and (client) finance ministers of the time: László Lukács, János misinformation. Sadly, nothing came of this Teleszky, and Sándor Popovics had recognized that (second) Hungarian insurance bill either, the “supervision formula” of normative control which was connected to the name of Sándor plus voluntary auditing was certainly not a sat-

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isfactory solution.43 At this point, they did not ficult to overcome. “The advantage of autono- see a way out in state supervision, but in manda- mous audits over state ones is that the interested tory self-audit supplementing the norms and re- parties will see that the auditors they use have inforcing the professional and organizational excellent abilities…”47 factors. “Our financial institutes are still uneasy about central supervision and generally only WORLD WAR I AND ITS take advantage of the Union after the trouble has already occurred … Although the task of a CONSEQUENCES real, ideal audit is not to find the causes of It took the terrible conditions of World War I abuses after they have occurred, but to prevent for the Hungarian banking sector to come to them and nip them in the bud. The most valu- terms – (at least) temporarily – with the idea of a able component is the education received when mandatory audit valid for all financial institu- an expert who has heard and seen a great deal tions and conducted by a government body. comes from headquarters. That person speaks “…Hungarian credit organizations will soon to the less experienced officials, management, have to accept regular audits, for otherwise the and supervisory board at the institution and economy of the country will suffer dearly.”48 teaches them a great deal,” stated the secretary The desirable and most strongly supported so- of the Hungarian National Association of Fi- lution was in line with the German law of 1899 nance Institutes in a textbook written for bank and the Austrian law of 1903 that required auditor trainees in a program that started in mandatory auditing, and with earlier Hungar- 44 1904. “Permanent internal auditor” training ian attempts for supervision within the insur- began accordingly. The basic principle that be- ance sector. One part of the goal was limited to came generally accepted was “supervision having financial institutions that operated as should be continuous and all-inclusive.”45 Lajos cooperatives and smaller competitors (where Katona, who had fifteen years of experience as the equity was less than 10 million crowns) ac- an auditor, proposed a central banking institu- cept mandatory supervision. However, the tion “with the task of employing auditors on a larger credit institutions operating as corpora- business basis and essentially at full time. That tions – including the five major financial insti- way, the supervision is conducted by the man- tution groups (actually they were typical fi- agement and the supervisory committee under nance capital holding companies) that held the the leadership of an expert who, for all practical majority of Hungary’s credit and industrial purposes, is an outsider.... This type of profes- property49 – continued to see voluntary audit- sional supervision should be different from ing as the solution. what has been done to date in a sense that it Finance Minister János Teleszky – fully and must be preventive in nature, focused on pre- demonstratively supported by Prime Minister venting trouble and not operating like detective István Tisza – planned to cut through the action to expose trouble that already exists.46 In “Gordian knot” of diverse interests, aspirations, essence, this is the time when the financial insti- and ideas with an elegant move. On April 19, tution and insurance segments of Hungarian ac- 1915 he submitted a proposal to the lower counting as a profession went from being – using house calling for establishment of the Financial the wording of the time – “amateur auditing to Institute Center. A retrospective by the minister professional auditing,” evolving into a separate explaining and evaluating the move offered a profession. The unbeatable advantage in quali- good summary of the shortcomings that made fications, which government officials were de- up the essence of the Hungarian “supervisory” clared to have but which did not require evi- system. “Professionals were not surprised when dence of existence, later became an argument to a greater shake-up on the financial market trig- oppose all Hungarian state supervision that gered crises for a significant portion of the went on for decades and has been extremely dif- smaller financial institutions. On the contrary,

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well before the outbreak of war they knew that wide political scandal.52 In the name of the op- the country’s financial institution structure was position Albert Apponyi had already argued unhealthy and required reform. The liberal against debate of the proposal and had sharply measures in the Hungarian trade law and the protested its appearance on the agenda. He said absence of any preventive monitoring measures “…if an institution was created that made all fi- triggered the establishment of a comparatively nancial institutions in the country dependent large number of finance institutions. Some of on a single center that was wholly in govern- them were not economically viable and some ment power, then even the remnants of oppor- managed outside monies that were dispropor- tunity to take free political positions would be tionate when compared to their own capital. In lost.” The Prime Minister took strong excep- addition, they did not always handle these out- tion to this insinuation. “…at which point side monies, most of which were savings bank Gyula Andrássy said it was an incredible illusion deposits, the way that savings bank deposits, the to think that this center would not be used for way such instruments supposed to be han- partisan politics.”53 dled…There were no real demarcation lines be- The situation was exacerbated by the fact tween savings banks, deposit banks and even that this was the first acute conflict between the credit institutions, these concepts all flowed into political parties in a Hungary since the start of one. In fact, it often happened that smaller fi- the World War, and occurred at a time when nancial institutions that called themselves sav- the country was in a very difficult position. For ings banks and truly collected comparatively that reason, professional public opinion sharply large amounts of savings deposits from small de- objected to granting credit assistance to finan- positors, used this money to finance real estate cial institutions in difficulty, or to any related 50 plot purchases and to support manufacturers. mandatory auditing of them. However, the At the same time, the minister making the group making the proposal was correct in both proposal also saw that it would be tactically in- theory and practice in wanting to see this new correct to call for a comprehensive reform of the type of “financial institution reorganization” structure of financial institutions. “This did not since there was not an independent Hungarian appear to be the time or the place to regulate the central bank or other establishment that could whole of financial institutions affairs through serve as an institute of last resort.54 The mem- legislation. Wartime conditions were not con- bers of the Hungarian bureaucracy were simi- ducive to comprehensive organic reforms. Reg- larly ahead of their time when they dared to ulation through legislation would only have ex- propose (preventive) “democratic” state moni- erted an affect over a longer term. In the given toring that would be mandatory for all financial situation, the result of many long years of inap- institutions. The professional and parliamen- propriate practices, laws passed with even the tary majority, however, refused to do more than greatest circumspection would still have been selectively adopt the idea of post investigations. sufficiently rigid to cause problems severe They only wanted to allow them for the smaller enough to consider that it might have been less institutes that wanted credit from the Center, damaging to do nothing. First, the foundation meaning that they too were ready to recognize needed to be laid and a situation established in the difficult or critical situations that had which, if needed, regulation through legislation evolved in the past.55 51 will not trigger even greater hazards.” The government (with exemplary wisdom) This position, which was unusually objective did not want to push things too far. Therefore, for a finance official and which recognized its citing formal issues – that the charter for the Fi- own limits, was evolved around an expressly nancial Institute Center (to be established to practical (pragmatic) position that proved very give it independent authority) had not yet been necessary. Even the appearance of the first pro- submitted – it withdrew the bill and imme- posals for a monitoring law triggered a nation- diately began serious and real coordination

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(consultations) with the opposition and profes- the countries of the Hungarian Holy Crown. sional organizations.56 Even though every player To do this, the Financial Institute Center: in this series of negotiations and compromises 1. shall offer credit to its member financial was playing with a hidden agenda, the talks were institutions during extraordinary times a success, and on November 30, 1915, during and under special circumstances when the autumn session, the government was able to they have difficulty satisfying their credit resubmit the “voluntarily” amended bill. The needs through regular sources; proposal was debated by Parliament in a lengthy 2. shall participate in re-establishing a thorough and exemplary professional discus- healthy foundation for financial institutes 57 sion that involved additional compromises and or possibly in merging them into others amendments. It was finally adopted and pro- or liquidating them (sic!) when monitor- mulgated as law as Act XIV of 1916. ing finds this to be necessary… The draft for the Financial Institute Center 3. without violating specifications in super- (PK) became an appendix to the framework vision law, shall continuously monitor law, which contained only ten sections. The en- the business and administration of the fi- tire material was twenty-eight pages long and nancial institutions and process the ob- showed that the submitters really had been tained data in appropriate categories; forced into making major compromises. 4. shall participate in establishing, and operat- The Financial Institute Center (PK) was ing under clear and unambiguous princi- set into operation as a cooperative “for a ples for the management of financial insti- five-year trial period” and the state treasury was allowed to buy a share valued at tution business and administration, in or- 100 million crowns (§ 1); der to support the healthy development of the money market, and to evaluate The chairman operating the PK was to be appointed by the King, following a pro- whether the administration and nature of posal by the Prime Minister, for a five- the institution under review, as deter- year term of office (§ 2); mined under § 7, operate under principles PK documents were declared authorized that meet economic requirements.” (§ 5) public documents that carried the eviden- PK was permitted “to conduct supervision tiary power of same (§ 4); from time to time” only for members with PK was to be allowed only to “initiate su- comparatively low levels of capitalization pervision” of members “that request amounting to less than 20 million crowns – or credit or a loan from it, or that expressly to less than 10 million in Croatia-Slavonia – ask to be audited” (§ 5); while for financial institutions established un- When a finance institute “initiates” bank- der separate law (§ 10, Subsection 4) it may do ruptcy proceedings, PK was authorized to so only when instructed by the Finance Minis- play the primary role (§ 7); ter. It may not investigate cooperatives that are Officials appointed by the King or the within the National Central Credit Coopera- government may not be chosen to become tive. (§ 7) part of management, the board of direc- “The audit is restricted to fact based tors, or the supervisory committee” (§ 8); conclusions, and the auditor does not have the No permit for a new financial institution was right to give instructions to the supervised to be allowed until January 1, 1919 (§ 9). institution… however, modifications regarding The Appendix (to the law), which included audit instructions can be performed by the 64 sections and two additional appendices, also leading body, in other words, the general showed that meeting.” (§ 7) The “goal of PK is to support and pro- Only the chairman of PK, the direc- mote the interests, and thus the economic inter- tor-general, and the highest-level officials au- ests, of the financial institutions operating in thorized may learn of the results of the investi-

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gation,” which the director-general shall duly career in public administration. The meeting report to the board of the institute under super- was held in the auditorium of the Finance Min- vision, and “only shall submit a report to the istry and attended by representatives of 1,136 PK board if the initiated dialogues do not pro- financial institutions. The first independent and duce a satisfactory result.” (§ 7) responsible state financial institution began its su- If the dialogues do not produce a satisfac- pervisory operations under the expert and diplo- tory result … the PK board may submit the de- matic leadership of retired state secretary József cision sent to the institution to its general meet- Schmidt, appointed as chairman by the King, ing.” (§ 7) and considered a high-ranking “veritable inter- The institution’s board may appeal the de- nal secret counselor,” who worked together cision to the PK steering committee within fif- with director-general Béla Schóber.58 teen days of receipt and – operating as an appel- The institution really has withstood the test late organization – which may amend the deci- of time. By the proposal of Finance Minister sion. (§ 7) Sándor Popovics, Act XV of 1918 established its The members of PK are the financial insti- permanence and then Act XXXVII of 1920 in- tutions and savings banks that operate as corpo- troduced the requirement to monitor all rations, the Hungary-based branches of foreign smaller members. (Nevertheless, the non-PK- financial institutions, the cooperatives that con- member larger banks successfully avoided mon- duct bank-type operations, the financial insti- itoring by the Center until 1939). János tutions established under separate statute, and Teleszky’s forward-looking idea for gradual the “Royal Hungarian State Treasury” which and, as he termed it, organic development was shall have B series shares (§ 10). However, eventually fulfilled in Act XIII of 1926. At this members may choose to terminate their time, following a proposal submitted by Fi- membership or they may be expelled (§ 17-18) nance Minister János Bud, the authorities of PK on actions of were reinforced and its organizational frame- the leading bodies of PK – the general work was extended. Of course, a major factor meeting, the 21-member board, the direc- making this possible was that the Hungarian tor-general, the 61-member steering commit- Royal State Bank Note Institute, established in tee, the 9-member supervisory committee – 1921-1922 to temporarily serve as bank of is- which are required and permitted to act in keep- sue, was finally replaced by the National Bank of ing with a strict order of procedure (§ 22-53) in Hungary, established with Act IV of 1924 as a which bastion that reinforced the lines of “ultimate the form and content of the investigation defense” for system of financial institution. has been regulated by law and specified in detail At roughly this time, conditions became ripe as set forth in the investigation instructions for establishing the other pillar of the Hungar- found in Appendix 1. (§ 54-64) etc. ian state financial institution monitoring sys- Evidence of the success of the legislators who tem, the independent state insurance supervi- designed and adopted the many compromises is sory authority. Following the short-lived inter- that most of the institutes that were operating as mezzo during the Republic of Councils, Hun- corporations – 1,261 institutes out of a total of gary’s insurance issues returned to the earlier 1,871 – including all the major banks joined the state of chaos. In fact, the insurance issue situa- Financial Institute Center “voluntarily,” mean- tion became even more complex, and at times ing that it accepted the option of government even critical because of the war, followed by the supervision. Relying on an outline of the law, fact that multiple regions of the country were on June 1, 1916 Finance Minister János Teleszky ceded to neighbors under the Treaty of Trianon presided over the ceremonious general meeting (one of the Paris peace treaties ending World that established the Financial Institute Center – War I) signed in June of 1920. The need for or- a ceremony that was qualified as the peak of his der created the rationale for an increase in state

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supervision. This made Act VIII of 1923, “on the chancellery of the Bach era that were fo- the (mandatory) state supervision of private in- cused on putting an end to our independence surers,” which was designed by the Finance and centralizing the empire?60 Can we accept Ministry and the professional interest organiza- the “voluntary financial institutions’ self-au- tion (BIOSZ) and based primarily on more dits” that evolved after the Compromise Agree- palatable Swiss, German, and Austrian exam- ment of 1867 as the predecessor to the state in- ples. Under this law, the Finance Ministry “was stitution, and if so, what about the exemplary authorized to issue regulations on the monitor- professional performance of the Saxon and Ro- ing of private insurance companies until such manian financial institutions? Does the start of time as the legislature passes additional laws. In our supervisory system date from the bill on the particular, it was to issue decrees establishing Financial Institute Center submitted in the the organization and jurisdiction of the author- spring of 1915 that initially covered only the ity supervising insurance companies, the man- smaller institutions, or does it date from the au- ner in which the companies were to contribute tumn submission, or perhaps only from adop- to the costs of this authority, its operation con- tion of the law in 1916, or from the actual es- ditions, and in particular, the insurance fund, tablishment of the Center? Would it be more the premium reserve fund, and the insurance correct to date it from 1920 and the bank companies that were to be maintained by the supervision law that made it possible to moni- public authority…” (§ 2)59 tor all credit institutions, or perhaps from 1923 and the establishment of an insurance supervisory office that “democratically” covered all insurers FINALLY, A “TECHNICAL” DETAIL and marked the start of modern supervision? An attentive reader cannot, of course, be misled The many questions lead to the emergence of by the simple “trick” of avoiding what appears still other questions that become Gordian knots to be a technical issue. If supervision of the of their own. Let us try to cut through them Hungarian financial institutions truly took cen- with the elegance of our colleagues from an ear- turies of moving forward one step at a time, lier age of financing. While paying homage to tripping and slipping and sliding “over hill and all people in the profession for their roles in the dale” in its advance, when can we really consider ideas and practices leading up to it, I propose Hungarian state financial supervision to have that the birthday of independent, responsible, come about? To get a really accurate answer, we state, and modern supervision of Hungarian fi- have to approach this question by asking an- nancial institutions be June 1, 1916 and the es- other series of questions. Let us begin with the tablishment of the Financial Institute Center. By “proud past” of supervision history that we that time all the principles and practical mea- have not even mentioned yet, the bygone era of sures that continue to set examples and define the monarch Charles Robert (r: 1301-1342) and the nature of Hungarian professional supervi- his famous treasurer Demeter Nekcsei, or the era sory operations had developed.61 An interna- of the Queen Beatrix (wife of King Matthias, r: tional financial supervisory conference could be 1458-1490) and her generous court “numbers organized in May or June of 2006 or perhaps a master” Fülöp of Brixia(?). Should we consider ceremony could be held at the gathering of the the institutions of Austria and Hungary and the entire world’s financial supervisory organiza- changes which evolved over the centuries that tions in Budapest next year. That would be a matured by the 1840’s as predecessors to Hun- truly appropriate occasion to pay our respects to gary’s organizations, or the only “real Hungar- the Hungarian pioneers of the audit profession ian” point of departure is the 1848 organization as well as to reinforce the international prestige established by the Finance Ministry under of the 90-year-old Hungarian financial supervi- Lajos Kossuth? How should we judge the mod- sory authorities and their legal successor ernization and creative measures by Josef II and HFSA.62

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NOTES

1 For early history of Hungarian authority, see László the downfall of Police Minister László Madarász. (The György Asztalos, “The History of the Hungarian Fi- diamonds later turned up abroad where intentions had nancial Authority Prior to 1848.” [in Hungarian] (in been to use them for “diplomatic purposes.”) print, 2005). For the global history of financial supervision, see László György Asztalos, “Supervisory Au- 7 An open demonstration occurred in 1849 when the thorities of World” or “The World of Supervision.” [in bank notes issued by Kossuth were publicly burned at a Hungarian] (in print, 2005). As well as the reference central location in Pest. For an engraving of the event, materials used by the author to write these studies. see Pest Hungarian Trade Bank, “The Pest Hungarian Trade Bank 1841-1941: Memoirs of 100 Years.” [in 2 Sándor Halász, “The Security of Deposits in Financial Hungarian] (Budapest: Pest-Buda Youth Cultural In- Institutions, with Particular Respect to Savings stitute, 1941 reprint). Banks.” [in Hungarian] (Budapest: Pesti Printers, 1904): pp. 24-26, 53-54. Elemér Hantos, “Supervising 8 Henrik Marczali, “History of Hungary.” [in Hungar- Financial Institutes in Hungary.” [in Hungarian] (Bu- ian] (Budapest: Atheneum Printers, 2000 Reprint), dapest: National Association of Hungarian Financial and (Budapest: Anno Printers): p. II/688. Institutes, 1905): p. 31. 9 Gyula Kautz, “The History of the Development of 3 Elemér Hantos, “Supervising Financial Institutes in National Economic Ideals and Their Influence on Hungary.” [in Hungarian] (Budapest: National Asso- Public Relations in Hungary.” [in Hungarian] (Pest: ciation of Hungarian Financial Institutes, 1905): Gyula Heckenast’s Printing House, 1868): p. 485. See pp. 31-32. The issue of granting permits to operate fi- also p. 511, where later he said, “... while in the past, at- nancial institutions was also connected to the central- tempts to introduce reforms were initiated by national ization and modernization efforts of György Apponyi, public life and evolved in a more of less organic way, who had been appointed Vice-Chancellor in 1844 at this time everything came from above. Everything bore the young age of 35, and who was involved with the the stamp of the government and the police and often tasks of the royal administrators. The latter were appeared in mechanical and coerced form.” against the initiatives for allowing the independence of counties and modernization of rural regions, therefore, 10 The various county offices have to submit 232 peri- they were despised. See Henrik Marczali, “The History odic reports a year to headquarters in Buda ... Szekfü, of Hungary.” [in Hungarian] (Budapest: Atheneum “The Biography of the Hungarian State.” [in Hungar- printers, 2000 reprint) and (Budapest: Laude Publish- ian] (Budapest: Manó Dick, 1917 Reprint), and (Bu- ers): p. II/642. dapest: Maecenas, 1988): pp. 210-213. In the public administration that took over after the revolution, 4 József Földi, Judit Gondos, István Hetényi, “The Fi- measures of “Hungarianism” began appearing in 1853, nance Ministry, 1848-1998.” [in Hungarian] (Buda- the period of greatest oppression, for instance with pest: Finance Ministry Publication, 1998): pp. 9-14, “The Rules on Wearing Uniforms.” In the financial 70-73. Domokos Kosáry, “Kossuth’s Finance Ministry administration, officials were mandated to wear uni- in 1848,” in The Hazards of History [in Hungarian] forms, the items of which included traditional Hun- (Budapest: Magvetõ Publishers, 1987): pp. 279-320. garian capes, caps, and a curved sword with a mother- Földi, József, “Hungary’s First Finance Minister, Lajos of-pearl hilt on weekdays, and uniforms reminiscent of Kossuth.” [in Hungarian] (Budapest: Finance Minis- the medieval Hungarian nobility on holidays, but try publication, 2002). bearing the two-headed eagle on lapels, buttons, and 5 István Sinkovics, “Kossuth, the Man Who Established sword hilts, to portray the unity of the empire. Full an Independent Financial Regime.” [in Hungarian] beards were prohibited for they brought forth memo- (Budapest: Akadémia Publishers, 1952): p. 142. Note: ries of the “rebellion” as opposed to beards covering This was a memorial volume to mark Lajos Kossuth’s cheeks only, which were the symbol of loyalty. MT, 150th birthday. National Bank of Hungary, (1993) “The History of Hungary.” [in Hungarian] (Budapest: “The History of the National Bank of Hungary.” [in Gondolat Publishers, 1867): p. II/14. Hungarian] (Budapest: Közgazdasági és Jogi Publish- 11 Menyhért Lónyay, the man who eventually became Fi- ers): p. I/142. nance Minister and Prime Minister remembers these 6 Sebestyén Szõcs, “The Evolvement of the Institute of times like this: “I made a last attempt to found Government Commissioner in 1848.” [in Hungarian] one. I initiated establishment of a savings bank in (Budapest: Akadémia Publishers, 1972): p. 192. Fur- Nyíregyháza, which ran into so many obstacles that ther research is needed to determine the role played by I was not able to extract a permit until the early 1860’s. Lajos Duschek, who succeeded Kossuth as Finance “On Banking.” [in Hungarian] (Budapest: Atheneum Minister, as well as by the staff of the time regarding Publishers, 1875): p. 539. Sándor Milhoffer, “Hun- disclosure of the “disappearance” of a number of dia- gary’s Economics.”[in Hungarian] (Budapest: Franklin monds confiscated from Ödön Zichy, which caused Society, 1904): pp. 533-535.

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12 Compare Jenõ Csury & Imre Marosi, “The History of in 1867 exists as an air bubble but not in reality,” wrote Hungarian Insurance Affairs.” [in Hungarian] (Buda- János Horváth in a debate of the period. “We, too, need pest: Gyarmati Ferenc Publishers, 1931): pp. 35-40. regulation and to establish a set of rules similar to those 13 Imre Sándor, “The Financial World of Transylvania.” of the Austrians, because that is the requirement of rec- [in Hungarian] (Újhelyi and Boros Press, 1910): iprocity agreement. According to Vilmos Gaár, “the pp. 3-4. Gergely Sándor Lukács, “The History and parity guaranteed in tariff and trade contracts by § 8 of Modernization of Hungarian Savings Cooperatives.” Act XXII of 1878 was not employed for financial insti- [in Hungarian] (Budapest: National Association of tutions as it was for other corporations and coopera- Savings Cooperatives, 1994): p. 35. ET, “History of tives.” Pál Róth, “The Legal Situation of Hungarian Transylvania.” [in Hungarian] Ed. László Makkai and Insurance Companies in Face of New Austrian Regula- Zoltán Szász of the second edition. (Budapest: Aka- tions,” [in Hungarian] in Papers from the Association of démia Publishers, 1987): p. III/1509. Hungarian Lawyers 126, 14, Book 3 [in Hungarian] (Budapest: Book publishers of the Franklin Society, 14 Sándor Halász, (1904) op. cit. pp. 166-175. 1897): pp. 19-21, 25. 15 János Tallós, “State Supervisory Tasks Regarding Pri- 18 For information on this less well-know activity by this vate Insurance Companies.” [in Hungarian] (Buda- great Hungarian author, it is worth quoting Ede Horn pest: Published by the author, 1932): pp. 2-3. Imre (1870) op. cit. p. 3, and the (slightly exaggerated) dedi- Csécsy, “State Supervision of Insurance,” [in Hungar- cation of his book. “A goodly portion of the Hungarian ian] in the Encyclopedia of Economics [in Hungarian] banking movement is the result of your work, my (Budapest: Atheneum Publishers, 1929): pp. friend. You were the one whose arguments in Parlia- I/542-545. Ede Horn, “Banking Freedom with Partic- ment led to official recognition of the issue, and you ular Respect to the Hungarian Banking Movement.” were the one who won the right to send the committee [in Hungarian] (Pest: Atheneum, 1870): pp. 12-32. of inquiry which is keeping the issue on the agenda.” 16 Gyula Kautz, “National Economy, and Financial For more information on Jókai’s role and on assump- Studies with Respect to Practical Industrial Life, the tions of the committee that are thought provoking to Need for a High-level Study, and the Tasks of State this day, see Menyhért Lónyai, “On Banking.” [in Government and the Legislature.” [in Hungarian] Hungarian] (Budapest: Atheneum Publishers, 1875): (Pest: Gusztáv Heckenast, 1863): pp. 490. In the next pp. 243-268. Also, see Andor Táray, “On Banking.” edition, that is the second revised and improved edi- [in Hungarian] (Budapest: Property of the author, tion of the book: Gyula Kautz, “The System of Na- 1874): pp. 118-201. tional Economic Studies.” [in Hungarian] (Pest: Gusztáv Heckenast, 1870): pp. 482-483. Perhaps 19 Ede Horn (1870) op. cit. pp. 10 and 15. The debates “Hungary’s greatest financial expert” – the person who on gradually terminating permit requirements for in- played a key role in preparing the practical economic surance products that took place among the Hungar- foundation for the Compromise Agreement, who ian supervisory authorities of the 1990’s and the les- chaired the joint bank of issue after 1892, and who sons thereof literally supported the conclusions of this even won the praise of the elderly Lajos Kossuth had colleague of ours 120 years ago. Ede Horn, who was advanced his theories and supplemented his ideas in thoroughly grounded in financial theory, wrote the this volume. Béla Földes, “Remembering Gyula first professional work that, on the one hand offered Kautz.” [in Hungarian] The Hungarian Academy of proof of the need to evaluate credit risk and on the Sciences’ held ceremonious meeting marking Gyula other, to evaluate the possibility and need for credit in- Kautz’s 100th birthday, and this remembrance was surance in Hungary (pp. 104-107). published by the Hungarian Academy of Sciences in 20 Jenõ Gaál, “The National Economic System in Two 1929. The essence of the change in his position was de- Parts.” [in Hungarian] (Budapest: Atheneum Publish- liberate and open to “material supervision.” “From the ers, 1899): p. II/349; and János Tallós (1932) op. cit. point of view of the future, he concluded that “a sepa- pp. 2-4, distinguish among three phases or types in the rate banking supervisory committee or medium within advance of supervisory systems as follows: an authority should have the right to learn of bank procedures, accounting, and business operations at any I. Publicity, when only business results need to be time.” Gyula Kautz published a book the following published, perhaps with come commentary, year that again marked a turning point. Gyula Kautz, II. Normative, when responsibilities mandated by law “Institutions in Partnership in the National Econ- must be adhered to on a continuous basis and must omy.” [in Hungarian] (Pest: Mór Ráth, 1871). When be monitored through “self-supervision.” dealing with insurance issues, he stated “that Parlia- ment have the time and the power to adopt legislation III. Government supervision, linked with financial su- covering regular supervision in conformity with the pervision. standards of our times.” op. cit. p. 254. 21 Gyula Kautz, (1871) “Corporate Institutions in the 17 Our colleagues from that period gradually evolved the National Economy.” [in Hungarian] (Pest: Mór Ráth, courage to voice their criticism. “The parity established 1871): pp. 115-117. This competitive effort was

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rewarded with the Hungarian Academy of Sciences 30 Elemér Hantos (1916) op. cit. pp. 68 and 89. Also, see Fáy Award. Imre Sándor (1910) op. cit. pp. 8-12. His (just) criti- 22 Menyhért Lónyay (1875) op. cit. pp. 547 and 560 re- cism of Hungarian financial institutions in Transylv- spectively. This was more or less typical of the condi- ania is so harsh that their publication would result in tions at the time and was a warning of problem. “The scandal even today. most important part of the Prime Minister’s brief but 31 Sándor Halász (1904) op. cit. pp. 337-338. MPOSZ momentous statement is in the following words:” “the Corporation changed its name to “Central Credit banking issue is not political – it is merely a matter of Bank of the Hungarian Financial Institutes.” Financial economics and expediency.” The other Finance Minis- Institute Center – PK (1941) op. cit. p.31. ter of the era, Kálmán Széll, voiced a similar “pro-regu- 32 Elemér Hantos (1916) op. cit. p. 29. His views are lation” position following 1876. supported by, for example, Kornél Exner, “Hungarian 23 Elemér Hantos (1905) op. cit. p. 34. For specifics of Financial Law.” [in Hungarian] (Budapest, Atheneum the supervision model called “autonomous audits,” see Publishers, 1910). This is a very thorough textbook Elemér Hantos (1905) op. cit. pp. 15-25. For financial used in law schools, which was first published in 1901, supervision, see János Tallós (1932) pp. 36-352. For a and later revised and reissued in 1910, however, we will comparison of the two models, see László György not find a single word in it on finance institutions. On Asztalos, “Monitoring Insurance Issues.” [in Hun- the contrary, we will find evidence in the material of garian] (Monitoring Review No. 4, 1998), op. cit. Károly Kmety (1902). His nearly one thousand page pp. 35-38. textbook is about public administration law that was 24 When debating the Trade Act, there had already been reissued three times in five years. This textbook ex- a proposal to tighten supervision of financial institutes cluded the material on public administration finance more than for other corporations, but it was rejected. law, for by then it “was a mandatory core subject in the See Financial Institute Center (PK), “The First faculties of law and state science, as a section of public Twenty-five Years of Financial Institute Center Opera- administration law of exceptional practical impor- tions, 1916-1941.” (Budapest: PK, 1941): p. 30: tance.” Károly Kmety, “Manual of Hungarian Public “State supervision has neither goal nor authority. This Administration Law.” [in Hungarian] (Budapest, system failed in all other countries where it was intro- Zsigmond Politzer, 1902). See third, revised edition, duced. In Hungary, it does not even have the advocacy “Introduction to the Third Edition,” and footnote 167 of anyone within the profession.” The publication on pages 679-684. printed this in 1905, exaggerating slightly and a bit 33 Elemér Hantos (1905) op. cit. p. 53. Compare with prejudiced on the issue, because Elemér Hantos (1905) Milhoffer (1904) op. cit. pp. II/431-433. op. cit. p. 45, as secretary of the National Alliance of 34 Károly Kmety (1902) op. cit. pp. 459-469. Hungarian Financial Institutions had written similarly on the matter. However, he recognized that he contra- 35 János Tallós (1932) op. cit. p. 1. dicted himself in his introduction on page 9: “at this 36 The dispute is cited by Pál Róth, “The Status of Hun- point in time there are differing opinions in Hungary garian Insurance Companies in Contrast with the New on whether economic laissez faire will tolerate inter- Austrian Regulations,” [in Hungarian] Papers from the vention in institutional management. However, the Hungarian Bar Association, 126. XIV. Book 3 [in Hun- variety of views only yields a clear position when ...” garian] (Budapest: Franklin Association Book Printers, 25 Ede Horn (1870) op. cit. pp. 274 and 288. 1897): pp. 22-23. 26 Frigyes Korányi, Director of OKH (the national bureau 37 “Where this system has been introduced, the state has of small stockholders), stated a long-known truth in a deep-reaching influence on the evolvement, organi- 1914: “The little people are the last to know if there is zation, management, and operations of a company. trouble.” Elemér Hantos quoted it in his second en- The conclusion from these actions is that these states larged edition of “Reforming Financial Institutions.” undertake moral responsibility for the operations and [in Hungarian] (Budapest: National Association of Fi- business of the companies in question.” Hugó Beck nancial Institutions, 1916): p. 66. Also, see Elemér (1890). “Legislative Reforms in the Insurance Field,” Hantos (1905) op. cit. pp. 26-29. [in Hungarian] Records of the Hungarian Bar Associa- 27 Gusztáv Wanke, “Credit Cooperatives in Hungary tion 27. V. Book 6 [in Hungarian] (Budapest: Franklin and Abroad.” [in Hungarian] (Budapest: Pátria Print- Society, 1890): p. 4. ers, 1935): pp. 15-43. 38 Marosi-Csury (1931) op. cit. pp. 77-78. 28 Gusztáv Wanke (1935) op. cit. p. 17. Also, see Lajos 39 Quote taken from Pál Róth (1897) op. cit. pp. 23-24. Katona, “Reconstruction, and Revision of Financial Also, see Sándor Milhoffer (1904) op. cit. pp. II/467. Institutions in Practice.” [in Hungarian] (Budapest: 40 “... No better insurance law exists than the Hungarian in- Pallas Corp Printers, 1916): pp. 22-24 and 75-85. surancebillwehavedesigned.Ourinsurancebillis 29 For details, see Lajos Katona (1916) op. cit. pp. 73-86, progressive compared to the past,” was the conclusion and Sándor Halász (1904) pp. 339-348. drawn by this eternal representative of the ethos of the

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Hungarian Finance Ministry during a professional debate audits that include all institutes, mainly because there in 1896 Quoted by the Hungarian Bar Association is a shortage of professional state officials. The rare (MJE) “The Bill on Private Insurance Companies,” [in state audits also tend to be formal.” Elemér Hantos Hungarian] Hungarian Bar Association, debate May 1895 (1905) op. cit. pp. 9-14. MJE, “The Reports 112. XII. Book 5 [in Hungarian] (Bu- 45 For details, see Alfréd Kormos, “Continuous Monitor- dapest: Franklin Society, 1896): pp. 48-49. ing of Financial Institutions for the Management of Fi- 41 No matter how little known and unusual it sounds af- nancial Institutions and Corporations, Members of ter the regime change, for the sake of historical accu- Supervisory Committees, Officials, Legal Counselors, racy, we do need to mention that the first independent and Shareholders.” [in Hungarian] (Budapest: Apolló insurance supervisory body was established following literary and printing corporation, 1908): p. 13. For a Austrian law by People’s Law No. 29 during the 1919 similar view, see Elemér Hantos (1905) “Everything Republic of Councils. However, it took until February and Everyone should be Monitored; that is the Motto 1919 before the National Association of Insurance In- of Thorough Supervision.” Op. cit. p. 59. stitutes (BIOSZ), following difficult and heated de- 46 Lajos Katona (1916) op. cit. pp. 94-95. The essence of bates, was able to convince the members of the insur- the issue raised by the author and the portion still wor- ance directorate (more or less), that private insurance thy of consideration today is that the “audited” parties did have a place. Compare with Marosi-Csury (1931) (by themselves) should not be the ones to pay their ac- op. cit. pp. 193-194. László György Asztalos, “Basic Is- countants. Instead, an institution that they jointly fi- sues of State Insurance Supervision,” [in Hungarian] nance should send each of them a truly independent (Monitoring Review No 2-3, 1986): pp. 47-49. auditor. MTPR “The Financial System of the Hungarian Re- public of Councils.” [in Hungarian] (Budapest: KJK, 47 Elemér Hantos (1916) op. cit. p. 15. Béla Vadnai & 1959): pp. 175-206. Sándor Fenyvesvölgyi, introduce their book “The Au- diting of Private Insurance Companies” [in Hungar- 42 “…where insurance has been larger in scale and where ian] (Budapest: Madách Press, 1932): p. 14. by saying numerous private companies are involved, a separate that “the institution of auditing the Hungarian insur- national supervisory bureau shall be established to pre- ance profession is in its adolescence.” For information vent insurance firms from spreading and undertaking on the role of the National Association of Auditors in general activity, and to prevent abuses” – writes Jenõ financial institutions, see Financial Institute Center Gaál (1899) in a textbook. He adds: “This type of in- (PK) (1942) op. cit. p. 5. tervention by the state is completely justified, because 48 “Extensive operation of state government and govern- professional knowledge and experience are necessary to ment power in the various centers is in accordance with judge the operations of large companies, which the the exceptional economic policies required by war- public in general cannot be expected to have.” op. cit. times.” Elemér Hantos (1916) op. cit. pp. 5 and 8. p. II/346. 49 By the early 20th century, the Hungarian General 43 For detailed information on the finance institute de- Credit Bank (connected to the Rothschild and the bates taking place simultaneously in at least 10-12 pro- Creditanstalt groups), the Pest Hungarian Commer- fessional interest groups, which suggests an enviable cial Bank (in the Deutsche Bank and the Wiener level of diverse and thorough professional knowledge, Bankverein groups), the Hungarian Accounting and see Sándor Halász (1904) op. cit. pp. 231-321. Money Changing Bank (a member of the Union 44 Elemér Hantos (1905) op.cit. p. 46. He wrote this, al- Laender group), the Pest Domestic Savings Bank, and though he already knew that state (central) supervision the Hungarian Bank became the controllers of the fi- in Prussia required monthly self-audits of funds, which nancial and industrial holding companies (conglomer- were monitored by state officials, similarly to what was ates) that evolved. MT, “History of Hungary.” [in done in Austria after 1844. As of 1880, the Interior Hungarian] (Budapest: Gondolat Publishers, 1967): Minister in Denmark was charged with supervising the pp. II/107 and II/163-164. savings bank sector. In Italy, as of 1888, these authori- 50 János Teleszky, “Financial Issues of the Hungarian ties and responsibilities went to the ministers of agri- State During the War.” [in Hungarian] (Budapest: culture and trade. As of 1891, England established a Hungarian Academy of Sciences, 1927): pp. 355-356. standing savings bank committee whose costs were paid by the government. In France, starting in 1895, 51 János Teleszky (1927) op. cit. p. 357. every credit institution was audited at least once a year 52 Most likely, they were aware of the advice issued by under the supervision of the Trade Minister. For exam- Jenõ Gaál (1899). He said that “There is no bank able ple, see Sándor Halász (1904) op. cit. pp. 3-180. How- to resist the state if it really exerts its willpower. For that ever, general opinion on these international develop- reason any protests against unjustifiable obstacles ments was negative. “Experience in the other countries within the bank organization that also recognizes their has certified that government agents only exercise their comparative validity will have to find the real evidence right to supervise if some disorder, negligence or short- of such obstacles in the government and not the bank- coming arises. No one conducts regular, repeated ing framework.” Op. cit. p. 324. As far as insurance

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supervision was concerned: “…state intervention must thought provoking to this day. For ten years he had ar- be transitional only, for excessive protection of the gued that the “issue of auditing had to be treated sepa- public would simply lead to a drop in attention and a rately from that of a central bank, and auditing should decline in the institutions’ own sense of responsibility. be left to an autonomous financial institute.” Never- Excessive paternalistic behavior involves a great moral theless, now he adopted the proposal … “because we responsibility even though it may be unintended, for believe that the universality of financial institutions, the public will tend to consider the insurance firms with target-oriented efforts, will manage to develop the given operation permits and monitored to be unques- Finance Institute Center into a fully autonomous orga- tionably reliable, and will not pay attention to protect- nization whose auditing activity will be free of all state ing their own interest.” Op. cit. p. 349. power and government influence.” p. 78. For this reason, he said the following in a contribution to parlia- 53 Financial Institute Center (PK) (1941) op. cit. p. 6. János ment in January 1916, “The entire fate of this institu- Teleszky (1927) also mentioned other thought-pro- tion depends on whether we find the appropriate provoking arguments. “The opposition was strongly fessionals to implement the institutional ideals …” against the proposal. They believed it contained hid- (Acceptance): p. 82. There is very little for us to add to den political goals and an attempt to extend govern- this statement… ment power. In fact, some people charged that the government wanted to establish a reserve fund to cover 57 For more detailed minutes on parliamentary debate, losses so that it could use the money for its own parti- see Elemér Hantos (1916): pp. 95-112. san purposes or to pay off its own debts.” Op. cit. 58 The PK began operations in a building located at p. 358. 3 Szentkirályi Street. In November 1916, it moved to a 54 Ferenc Eckhart was one of the few, and perhaps the building at 1 Deák Ferenc Street, in what was then first, in Hungarian professional literature to recognize District 4. (This was the same building where Deák the relationship between a central bank (of issue) and himself had spent the final decades of his life in what the monitoring of finance institutions. Ferenc Eckhart, used to be the “Queen of England” hotel). “The Hungarian Economy over one Hundred Years, 59 The tasks were defined in Prime Minister Decrees 1841-1941.” [in Hungarian] (Budapest: Posner Graphics 196/1923 and 4730/1923, and in Finance Minister’s Institute, 1941): pp. 218-219. decrees 48718/1923, 48692/1923, 48718/1923 and 55 We can be proud of the professionalism of these early 130623/1923. For details, see Finance Ministry (1924), colleagues of ours. “An institution that – as János “Collection of Legal Regulations in State Supervision Teleszky said – connects the role of the critics, the of Private Insurance Companies.” [in Hungarian]. (Buda- managers, and that of the supportive credit provider, pest: Hungarian Royal Printers, 1929). For interpreta- not only defining the problems but immediately offer- tions, see Marosi-Csury (1931) op. cit. pp. 200-204; ing to help, can be found nowhere else even though László György Asztalos (1986) op. cit. pp. 48-49; Béla state supervision or mandatory auditing of financial in- Schack, “The Révai Encyclopedia of Trade, Finance, stitutions has been operating for a long time in other and Industry.” [in Hungarian] (Budapest: Révai Liter- countries. However, there can be no doubt that some ary Institute, 1929): p. I/276; KE, “Encyclopedia of new foreign legislation did influence the organization Economics.” (Budapest: Atheneum Publishers, 1929): and operation of the Financial Institute Center.” PK p. I/544. (1941) op. cit. p. 6, and National Bank of Hungary 60 Our historical consciousness has a particularly difficult (1993) op. cit. p. 78. In connection with the German time swallowing the duality of the Bach era that fol- and Austrian foreign exchange centers established in lowed the defeat of the 1848 War of Independence. early 1916, see pp. 373-374. After the regime change, “Summing up all these factors, we might say that the considering the principles, organization, methods, and measures of this period were aimed at freeing up agri- results of bank consolidation, it is particularly worth- culture, attaining less restricted use of rural estates, pre- while to think about the professionalism of our prede- venting obstacles to purchases and sales, allowing the cessors. Compare: Government Audit Office Institute sale of only parts of an estate, and making it easier to of Development and Methodology, (2004) “Privatiza- obtain credit. In other words, it was attempting to put tion in Hungary” [in Hungarian] (Budapest: State Au- an end to institutions rooted in the medieval and feu- dit Office Institute of Development and Methodology, dal era and to replace a cumbersome crop-based econ- June 2004): pp. I/35-59, and pp. 217-221, and pp. omy with a new monetary economic system. These were II/188-200. Éva Várhegyi, “Banking World in Hun- definitely laudable moves. The only problem was that gary.” [in Hungarian] (Budapest: Helikon, 2002): their point of departure was not that of our national in- pp. 22-68. terests and they contained standards that governed us 56 For this reason, Elemér Hantos (1916), who sup- but without asking us, and that had a decisive influence ported the bill during negotiations, proudly noted that on our entire economic life.” Gyula Kautz (1868) op. “some of his proposals had been accepted.” p. 6. The cit. p. 514. author, who was considered a supporter of the “bank- 61 To cite an example of the advanced level of the PK, ing lobby,” had some expectations that continue to be one of the three divisions of the subsequently estab-

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lished “Royal Hungarian State Supervisory Authority tration Laws.” [in Hungarian] (Budapest: Attila Print- for Private Insurance Companies,” the insurance tech- ers, 1941): pp. 91-103. nology department, was transitionally housed within the Finance Institute Center until the 1930’s. See Béla 62 It might also be possible, a quarter century after 1980 Schack (1929) op. cit. p. 279. Another sign of its pro- and the “re-creation” of the Hungarian supervisory fessionalism was that even in 1936, Center staff system, to have a conference at last. This, – as we have – working in cooperation with the insurance supervi- learned has been expected for over a century now – in- sory authority – was assigned to design and implement cludes an open and professional debate in which the resolutions used to this very day when the Phoenix Life specifics, lessons learned, development trends, etc. of Insurance Corporation declared bankruptcy. This trig- the Hungarian and international supervisory systems gered repercussion that was felt throughout Europe are compared and evaluated. We already know that the and was subsequently liquidated. Not too many people Austrian insurance supervisory authority has taken ad- realize that in 1939, the Financial Institute Center vantage of a meeting like this to do exactly that the helped to establish the “Institute for the Regulation of same. The meeting of the International Alliance of In- the Hungarian Money and Capital Markets,” the insti- surance Supervisors (IAIS) in the autumn of 2005 in tute that was charged with monitoring the Hungarian Vienna was an exemplary demonstration of cleverness capital market. See Financial Institute Center (1941) and achievement, celebrating “the 150th anniversary op. cit. p. 106. For a concise description of the institu- of the foundation of the oldest Austrian state financial tions responsible for the security of the Hungarian fi- supervisory organization.” Perhaps they were also cele- nancial system between the two World Wars, see brating the foundation of the “oldest Hungarian finan- Gusztáv Ladik “Basics of our Itemized Public Adminis- cial supervisory authority...?”

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43rd Economic Convention Sustainable Growth in the Hungarian Economy Almost every article of this journal spotlights the interrelated factors and background connections of (sustainable) growth, competitiveness, and public finance reform. So does the “WORKSHOP” section that focuses on significant events of professional public life, and contains articles related to these topics. During the 43rd Economic Convention, speakers analyzed the factors of sustainable economic growth, and the most important findings of the two doctoral dissertations on the topic are enlightening as well.

The rate of economic growth in Hungary did Separate sessions dealt with the experiences not change significantly during its first year of Hungary as a member of the European of membership in the European Union; it re- Union, the utilization of communal grants, and mained about two percentage points higher preparation for absorbing the resources ex- than the average of euro-zone countries. pected in the period between 2007 and 2013. This pace could be considered as a significant In association with the latter topic, several lec- achievement, if our balance of trade and pay- tures summarized the lessons learned from the ments as well as the central budget did not show development policy in recent past. a considerable deficit. Both, the persistent im- The Convention did not introduce Hungary balances of present and recent past, and drag- only as a member of the European Union, but ging reform of large distribution systems, re- also as a participant of the world economy. quire asking the question: What should we do Another sessions discussed Hungary’s “other” to maintain our economic development in the foreign economic relations. long term, so that it would not encounter bal- The most acknowledged and most competent ance constraints? expertsspokeattheplenarysessionsaswellasin The Economic Convention of the Hungar- the sessions of the Convention. Moreover, this ian Association of Economists discussed these year, participants had the occasion to meet an in- questions in 2005. In addition to the usual spiringly large number of promising young ex- econo-political lectures, tasks originating from perts who introduced themselves at the first time the Lisbon Strategy of the European Union on this convention. – competitiveness, social and economic cohe- At a professional meeting where seventy sion, increase of employment – also came into speakers introduced their opinions and several the spotlight at the meeting. There was a dozens of the nearly four hundred participants common consent that the key to restore the commented on the lectures, it was expected balance of the central budget is to reform the that a complete consensus could not be reached state oranization structure and public ser- in respect to either judging the situation or de- vices. This, however, cannot take place with- ciding on duties to be fulfilled. However, this is out a reduction in the number of public em- exactly why economic conventions are attrac- ployees. Promotion of development and tive. Representatives of various opinions and rollout of the information society has been on schools (horribile dictu: opposing political theagendaintheEuropeanUnionforalong forces) can show up with an intention and re- time. The session on information technology quirement of understanding each other, and covered relevant national achievements, posi- debates can remain strictly within professional tive examples, and future tasks. channels. This is how it happened this time as

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well. (The work of the various sessions is sum- is not sufficiently developed. Therefore, com- marized below, based on written reports of the prehensive tasks of development, institution session chairmen). modernization, and gap-reduction have to be carried out through increased state involvement. Without this, it is not possible to realize a ¦ comprehensive action plan and to revitalize hu- Academic, and President of the Hungarian man behavior and economic performance. Association of Economists, Béla Kádár, provided an extensive summary of potential growth in the World economy, the European ¦ President of the Hungarian Chamber of Union, and Hungary. His opening speech was Commerce and Industry (MKIK), László titled, “Sustainable Growth – How Are We Parragh, outlined the competitiveness of the Doing?” In his opinion, the European Union Hungarian economy. His lecture was based on needs a long-term, comprehensive strategy to several international performance rankings un- find a solution for the basic questions of devel- der the title, “Competitiveness: Day-dream or opment and adequately react to external chal- Reality?” According to some of the referenced lenges. A society that is tired of daily political rankings, our situation has been deteriorating; survival exercises and lives without the Euro- according to others, it has been improving pean vision is turning away from new initia- when considering the average of recent years. tives. In fact, it does not even exploit integra- (Unfortunately, the more recent analysis shows tion opportunities. However, sustainability of the worse tendency. It appears that our progress development depends rather on social than eco- is not following the best direction). Despite all, nomic and environmental factors. every institution warned of the threats originat- Hungary did not experience any great shocks ing from imbalance. during its first year in the Union. In most cases, With respect to most macro-indicators, our negative developments were independent of the situation is not particularly worse than that of integration. At the same time, the tripling of other Central Eastern European countries. In foreign capital inflow is the direct result of 2004, only the economic growth rate of the Hungary’s membership. Unfortunately, the Czech Republic was lower than that of ours. gap between the income-generating capacity Most problems appear in respect to the balance and distributed income has not yet diminished. of the budget. Gross public debt is high com- Under the current political cycle, the promise pared to national income, and the base inter- of reducing public finance deficit has not been est-rate is very high. Although real wages and met at any year. This has undermined the trust salaries increased at the highest rate in Hungary in economic policy, and by now, regaining this during 2002 and 2003, they declined in 2004. trust has become the number one duty of the Imbalances have typically appeared in areas state. Tax reduction is not the right way of elim- where intervention by the state was too exten- inating the deficit. It has been proven many sive. times abroad as well as in Hungary that tax re- According to László Parragh, many events duction does not result in increase of revenues. indicate that the state operates in a dysfunc- At first, state expenses need to be decreased, and tional manner. He qualified the element of the only subsequently could centralization of the “100 steps” government program outrageous national income be diminished. that allows authorities to keep and use 40 per- An important requirement for maintaining cent of the collected penalties. Outsourcing a long-term economic growth in Hungary is of activities is a common way of reducing not restricting economic policy to fiscal and headcount, but it ends up costing even more monetary policies, but incorporating an effi- for the state. Higher education, adult training, cient development policy as well. In countries and language teaching all fall short of market with mediocre development the infrastructure requirements.

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MKIK has taken over public tasks success- cantly increased public debts and the debt- fully in several instants. For example, the train- servicing burden. This is such a high burden on ing of skilled workers was taken over in 2000, the central budget that some international credit which resulted in the doubling of such con- rating institutions deteriorated Hungary’s debt tracts in the past five years. He recounted the rating. outstanding success of the “Széchenyi” card; In consequence of these factors, according to half of the public resources have been granted Mihály Varga, foreign investors’ interest in to entrepreneurs in this form. Hungary has decreased. The situation is further According to the President of the Chamber, deteriorated by the government’s confidence- economic policy would primarily need a clear decreasing measures, such as withholding of tax future image, a character. There is no need for refunds claimed by exporters and delaying pay- new programs constantly; rather, the existing ments of land-based subsidies. ones need to be realized. He would require a Since 2002, Hungary’s growth rate has not new regime change in 2005-2006. In 1990, the reached the average of other countries in the re- change of the Hungarian social, political party gion. In respect to economic growth, we have and economic system took place. However, become the last in line, and unemployment has many areas have remained intact, such as state started to increase once again. Our situation administration, distribution systems, educa- is not better regarding the performance of tion, and research and development. These ex- Maastricht convergence indicators. From the ist as anachronistic structures and nobody has countries joining the EU in 2004, Hungary is the strength to change them. the only one that could not meet at least one of Only one area of the Hungarian economy is these conditions. competitive, the multinational companies. On the It would be useful if after the election some other hand, small and medium enterprises (SMEs) kind of consent could be reached among party struggle and stumble, and they barely survive one representatives as well as economic experts in day to another. Public administration (primarily respect to the macro path, fiscal discipline, how at the local government level) is definitely uncom- to restore competitiveness and establish the petitive;itdoesnotserveenterprises,itratherre- conditions for introducing the euro. strains their operation. ¦ Minister of Finance, János Veres, started his ¦ Ex-Minister of Finance and Chairman of the lecture titled, “Sustainable Growth and Com- Budget and Finances Committee, Mihály petitiveness” by introducing the strength of the Varga, urged a change in direction of economic Hungarian economy. Economic growth rate al- policy for several reasons. According to him, the ways exceeded the average of the euro-zone most serious problem is the deficit of current in the last ten years – although it followed payments that exceeded eight percent of the almost perfectly the fluctuations of the area. GDP every year since 2002. Budget deficit has The growth rate of Hungary was the highest in become a permanent escort of the deficit of the average among the Visegrád countries between balance of payments. The most important 1997 and 2004. In other words, Hungary could cause of the latter is overspending by the state approach the average level of European Union for its own operation; worst of all, these remember states most rapidly. Although Hun- sources are not even utilized efficiently. gary departed from the path of sustainable Household savings are less than desired, and growth in 2003 (investments barely grew and this – together with the state’s high demand for residential savings decreased), since then, it financing – resulted in a high interest-rate. found the right path again. The best indicator During the period between 2001 and 2005, ex- of Hungary’s competitiveness is that Hungar- ternal resources turned out to be more expen- ian exporters gradually gained market-share in sive than previously expected, which signifi- the rest of the member states. Every year exports

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increased at a higher rate than the total imports (competitiveness, more rapid economic of our main markets. Since joining the EU, growth, more and better jobs). The National public debts have been reduced to the greatest Development Policy Concept is in the course extent in Hungary among the Visegrád coun- of preparation with due regard to these tasks. tries. Changes in the extent of debts and the in- In the Concept, strengthening the competitive- flation rate are also going in the right direction. ness of the country (and not just of the econ- However, it is true that the interest rate of omy!), increasing employment, supporting in- long-term government bonds somewhat innovation, and developing social cohesion and creased this year. While introducing tax mea- solidarity have equal importance. Objectives re- sures in the framework of the “100 steps” gov- flecting our special circumstances are the im- ernment program, János Veres indicated the provement of the population’s health condi- objectives of the amendments: tions and the development of the means of Create a more transparent, simple, fair transportation. These objectives derive from and efficient tax system; the fact that health indicators are so negative in Accelerate economic growth and increase Hungary that they are the worst even among competitiveness; the Visegrád countries, and it is public knowl- Make the economic environment better edge that the density and quality of the road suited for business planning and more and railway networks are well below the Euro- predictable for enterprises. pean average. Other objectives in the Concept Changes entering into effect at the beginning are the rollout of the information society as well of 2006 stipulate tax regulation for five years, as the protection and sustainable utilization of which is an exceptionally long period. It appears natural resources and environmental assets. that the proportion of revenue collection by the These are timely duties in every member state of statewillcontinuetodecreaseyeartoyearinthe the European Union. future. While about HUF 700-750 billion less The 2nd National Development Plan under will have to be paid in taxes for five years, the preparation (the basis for which would be the state undertakes an additional HUF 100 billion National Development Policy Concept) does in expenses by increasing allowances for families not only serve the most complete and efficient and the minimum wage. According to the gov- use of grants provided by the European Union ernment, these measures with an overall effect of between 2007 and 2013, but it also aspires to about HUF 800 billion will not (further) deteri- portray a long-term image of the future of Hun- oratethebalanceofthebudget,butratheritwill gary. This plan is elaborated with the broadest have a positive effect on economic growth. In ad- social cooperation to date. Every region has pre- dition, the government will attempt to counter- pared its own development plan based on the balance the lost income by reducing the head- contribution of local governments and civil count in public administration and streamlining conciliation forums acting in their territory. their work. The principle of partnership is asserted on a national level as well; numerous chambers, pres- ¦ Non-portfolio Minister with responsibility sure groups, civil organizations and their “su- for European Affairs, Etele Baráth, examined preme organization,” and the Council for Eco- the concept of sustainable growth from the per- nomic and Social Affairs can also express their spective of development policy. According to opinion. The experts of state administration the division of labor within the Hungarian gov- will individually process these opinions and ernment, the Minister of European Affairs is re- proposals. Of course, it cannot be expected that sponsible for the strategy of sustainable growth suggestions from every proposal will be incor- as well as the adequate implementation of the porated in the final document, but the planners so-called “Lisbon goals” of the European Union will evaluate each proposal individually. Every

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respondent will receive a written reply to its ¿ The proportion of public debt to the submission in which it will be informed of what GDP should be decreased until it disap- happened to its proposal, and how it was used pears, during the planning process. ¿ Revenues must not be over-planned Due to the fact, that from 2007, three and a and expenses must not be under-esti- half times more subsidies will be granted to mated, Hungary every year than what is received today, ¿ If the planned budget deficit is ex- preparations should begin for many projects ceeded, the Minister of Finance should right away. Appropriations of HUF 7.5 billion resign; for expenses and an additional HUF 20 billion Taxes and charges payable to the state for guarantees are included in the 2005 budget must not exceed 30 percent of the GDP; to finance project proposals for this purpose. The tax system should be simple, transparent, and stable. Tax rates must be low, ¦ At the 2005 Economic Convention, the lec- but the basis of taxation must be as wide as ture with the greatest effect was the one deliv- possible; ered by Zsigmond Járai. The President of the The state should undertake less tasks and National Bank of Hungary delivered his opin- the number of public officials and em- ion as a private person on questions of mone- ployees should be proportionately re- tary and budget policy of public interest. In his duced; opinion, a duality had appeared in the economy Public institutions should operate rigor- a few years ago that turned economists’ atten- ously (tax collection should be carried out tion to the problems of public finance. This du- by a tax police, if necessary); ality shows that the private economy operates People should be incited to take jobs or relatively well and develops rapidly, while the public sector has recently become an impedi- start enterprises. ment to this development. In connection to monetary policy, Zsigmond Járai defined the following requirements: Public finances struggle with permanent and structural imbalance that has growingly inten- Price stability should be realized, and its sive effects on the economy as a whole. realization should be the single duty of the The overly extended public finance, its debt, National Bank of Hungary. For this pur- and structure have become an anchor of eco- pose, the bank of issue should actually be nomic growth. Imbalance results in balance of independent without a need to coordinate payments issues, high interest rate, and trigger with other institutes; uncertainty. Therefore, many economists agree The euro should be introduced as soon as that extensive reforms, in fact, a fundamental possible; change is required. The system of exchange rates should be clear and transparent; This change should target the following out- Communications related to monetary come: policy should be authentic; The balance of public finances be restored Social consent is required about the high and state debts be totally eliminated; importance of price stability and financial Budget rules be even more stringent than discipline; those stipulated by the Maastricht Treaty, Education of finances should be strength- such as: ened, in order to provide a basis for the ¿ Deficit of the central budget should be above requirements. allowed only during economic reces- Realization of the above listed changes is hin- sion, which should be immediately bal- dered not only by non-action, but also by counter- anced in the years of growth, interests. However, we will not be able to catch

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up with the front-ranking nations of the world Economic management should remedy nu- without this extensive transformation. merous problems simultaneously, but good results cannot be expected if the tasks are not pri- oritized. For example, increasing competitive- ¦ President of the State Audit Office and ness can hardly go hand in hand with enforcing Vice-President of the Hungarian Association of social justice. Economists, Árpád Kovács, led the session on state organization and public finances. Lectur- It is paradoxical that a smaller state is required ers in this session agreed that a reform of the for strengthening competitiveness, and yet, the state could be realized only in a comprehensive responsibility of the state is rather increasing manner, and state revenues could (and might) than decreasing. The primary goal of the state is be only reduced if state commitments are also the achievement of a more favorable position in decreased. Execution of decentralization has the world economy and the promotion of the in- been on the agenda for a long time, but has tegrationoftheeconomyandsociety. never been realized, and just as important. State actions are not yet firm enough in this respect; ¦ Academic, University Professor, and Vice- they are better characterized as “going with the PresidentoftheHungarianAssociationofEcon- flow.” The whole system is falling apart and omists, Ádám Török, chaired the session that dis- there has not even been an agreement on the cussed the issues associated with Hungary’s principles of the reform yet. Current measures catching-up. In this session, the thematic frame- in place will not stop the functional and moral work of the lectures was the Lisbon Strategy in- erosion of the operation of public institutions. troduced by the European Union in 2000. This Long-term principles should be agreed upon strategy focuses on economic growth and in- and regulations, system of institutions, and crease of employment, and due to the poor re- method of government should be transformed sults of the first four years, it was reformed in in line with these principles. However, before March 2005. doing this, distribution of tasks between the Despite of the not particularly positive over- government sector and other economic players all picture, performance of the northern mem- must be determined; clarifying what would re- ber states deserves recognition. In the fields of main public task in the future. Determining the research and development (hereinafter referred method of financing and clarifying the report- to as R&D) as well as education, many of their ing structure with its framework can follow this indicators are better than those indicators of the step. United States. Moreover, due to strong social Lack of long-term setting of public tasks re- cohesion, their labor markets are also more bal- stricts economical and efficient asset manage- anced than in other member states. In these ment. This is the underlying factor why there is countries, the extensive welfare and rebalancing no approved concept for managing state-owned role of the state gets along with a competi- and treasury assets. Audits of various treasury tion-friendly economic policy and efforts made assets are ineffective, carried out inconsistently for economic modernization. Hungary should and independently from each other. follow the example of these member states that Lecturers also agreed on the necessity to perform well, by utilizing potential synergies. strengthen profit-oriented (market-oriented) The general recipe for this is that endeavors for management on the local level of the state. catching-up by member states should not only However, this requires more funds to be be harmonized on the levels of the integration, granted to municipalities. Under the current and by involving the often cumbersome bu- system and the present situation of the munici- reaucracy of Brussels. palities, nearly all of their funds are spent on The conditions of successful catching-up are not maintenance. Consequently, development is only lacking at the EU level, but also in most granted less importance. member states. There is no one in charge of

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elaborating and realizing strategies. This role The advantages of location are factors of should be positioned between government catching-up that have been neglected for a long leaders and ministers. Its role in the hierarchy of time. With the most recent expansion of the decision-making could be similar to what Cen- European Union, the geographic and economic tral Planning Bureaus used to have in member gravitation center of the Union moved to Cen- states of the Council for Mutual Economic As- tral-Europe, and Hungary could use this to a sistance (Comecon) before 1990. Today, how- significant extent to increase its competitiveness ever, prime ministers attempt to resolve con- and economic performance. Hungary could flicts of interests between the various ministries, become one of the main logistical centers of but these decisions do not always rely on ade- Europe, and a major one in Central-Europe. quate professional and strategic basis or compe- Numerous multi-national companies are already tence. present in our country, even though the infra- New member states consider community structure is relatively underdeveloped. More- grants as one of the most important factors of over, we expect the settlement of several more their catching up. However, in several new logistical service providers. This activity should member states the grant-absorption capacity is receive extra support from the Hungarian gov- limited. It is likely that they will not be able to ernment. A necessary, but in it itself insufficient use all of the already available resources, not condition of this is the infrastructure; primarily even mentioning the efficiency of their use. Not the accelerated development of the transporta- even the most successful cohesion negotiation tion network, including railways. can replace an efficient strategy for catching up. The agricultural policy of the European Union Content requirements often become inferior is not considered as being part of the strategy in research and development. In several member for closing the gap. In the contrary, many ex- states, the three-percent goal set by the Lisbon perts believe that the over-financing of the Strategy is attempted to be achieved by increas- farming sector hinders the more rapid fulfilling state expenditure for R&D. However, these ment of the Lisbon objectives. However, the resources can only be efficiently utilized if com- content of the common agricultural policy panies provide two-thirds of the funds. R&D is changed a lot during the years following 2000. only a tool anyway; it must serve innovation be- A diminishing part of agricultural subsidies cause that is the basis for economic catch- serve the production of unmarketable excess ing-up. produces, while maintaining a rural population The state and composition of human re- and preserving the landscape have come more sources is on the agenda of Hungarian as well as into the spotlight. These subsidies do have lit- EU econo-politicians as the ageing of the Euro- tle, directly perceptible economic use. How- pean and Hungarian population, the decrease ever, we should not forget that the balance of of their rate of activity, and the gradually deteri- the labor market would further deteriorate orating structure of vocational training place se- without the common financing of agriculture rious limits on increasing competitiveness. It is and rural population. Without this, this sector well known that, in general, the import of oper- would lose the ground from under their feet ating capital and entrepreneurship are already and start flooding the cities once again. restrained in Hungary by the insufficient sup- The updated Lisbon Strategy does not deal with ply of trained workers. In 2005, the Hungarian issues related to energy either, although interna- economy would already require a boost of tional economic developments in 2005 indicate trained workforce by about 100,000 and this an increasing likelihood of an energy crisis that number could increase to 300,000 by 2010. could essentially change the prospects of Eu- In addition to material incentives, moral ones rope and Hungary for catching up. The 2005 would also be needed to re-erect social interest increase in oil prices is fundamentally different in the training of workers. from the price explosions of the seventies as it

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was triggered by changes in the demand side amount of the latter two objectives already instead of the supply side. In addition to the somewhat exceeds the sum of CAP expenses. burst of oil consumption in China and India, de- The finalized 2007-2013 budget will not show mand has also increased due to low price elastic- significant variations from these figures. ity on traditional major markets such as the Several lecturers emphasized that a basic ele- United States and the European Union. Because ment, in fact, a precondition of development of state pricing policy in China, price increase is policy is foresight, the conscious foundation of lower there in the main sector of oil consump- the future. tion and in transportation that do not reflect the Strategic planning does not mean daydream- market price increase of oil. On the other hand, ing, jabbering or state voluntarism. Rather, it is in the United States extremely low taxes imposed a series of rational decisions affecting the future. on energy consumption lead to insensibility by The political mission is to set objectives and pri- enterprises and households to the changes in fuel orities, establish social support for these, and to prices as the cost of fuel consumption is still a provide the apparatus and conditions for their nearly marginal item in their budgets. Due to the realization. However, it should keep its distance rigidity of the demand side, introduction and from execution. Separation of these functions is rollout of new energy resources is still slow, and not crystal-clear yet in Hungary. the advanced countries do not yet have a strate- Regional development policy is not a novelty in gic answer to the permanent and potentially irre- Hungary. It has a legislative basis, precedents versible increase in energy prices. and experiences, and a new regional development concept is under preparation that will set ¦ Professor of the Central-European Univer- the goals until 2020. After joining the EU, re- sity and the Budapest Corvinus University, and gional harmonization – defining the poles of in- Vice-President of the Hungarian Association of novation, developing the network of cities with Economists, Péter Balázs, chaired the session the competitive Budapest in its center, manag- dealing with the issues of EU subsidies and ing internal and external peripheries, focusing planning. This session examined, in the broad on environment protection and border-region context of development policy from multiple cooperation – have to be carried out in a new perspectives, how the grants received for devel- geopolitical arena. There are significant differ- opment from the European Union could be ences between the eastern and western frontiers, used most efficiently. but these regional differences are not only well Development policy must serve catching up known, but are also manageable from the as- by internal peripheries and increase of common pects of regional development. competitiveness in the European Union. EU Joining the EU has tested development pol- grants that can be used for such purposes are icy in general. Regional differences within the still less than the sum of agricultural subsidies. country have become prominent. Furthermore, (It is possible that exactly the brave reform of it became known that EU grants received for the common agricultural policy (CAP) will the purposes of the National Development Plan open the road for more rapid elimination do not ideally fit with Hungarian development of our temporary competitive disadvantage). resources. Eight ministries manage the utiliza- According to the last compromise-seeking bud- tion of EU resources, but the functions and re- get proposal of the Luxembourg-presidency in sponsibilities associated with this development the first half of 2005 (the sum total of which are not clearly separated. was 871 billion euros, i.e. 1.06 percent of the There is a debate over whether an improved Union’s total GDP), CAP is still at the first or a new regional development concept should place totaling 377 billion euros, followed by be included in the National Development Plan. catching-up (305 billion) and increase of com- The appearance of “growth centers” indicates a petitiveness (74 billion). However, the total change of paradigm in this respect. Such centers

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are primarily characterized by a diverse eco- ¦ Chief Executive Officer of MAHART and nomic structure and the existence of a multi- Chairman of the Foreign Economic Depart- functional university. It was also mentioned ment of the Hungarian Association of Econo- – and not just incidentally – that the decentral- mists, Iván Nyíri, organized and led the work of ized and disciplinary structure of the Hungar- the session called, “New Directions – Opportu- ian higher education is not ideal either. In order nities in the World.” This session focused on to counter-balance the predominance of the our economic relations outside the European capital city, every region would need an inde- Union, or more precisely, on the opportunities pendent and integrated operational program. It for re-establishing these relationships. In part, would also be worth to make diplomatic and owing to comments by the audience, partici- economic efforts to establish a transnational pants of the session formed an opinion about macro-region within the Carpathian Basin. exchange rate policy, concluding that it was not With respect to public expenditures for devel- particularly useful in the last two to three years. opment, Hungary – together with Estonia – be- This is because the Hungarian economy is not longs at the front in the ranking of the new developing in the structure and along the path member states. Their indicators significantly described in textbooks. That is why exports exceed, for example, Czech and Polish indica- could be increasing every year, despite of an un- tors. The state must carefully select what to de- favorable exchange rate policy. In 2004, perfor- velop and why, or to what extent it should in- mance was good in an absolute sense as well as tervene in market processes. State intervention in the competitive sector can be generally al- compared to imports. Moreover, it appears that lowed when profitability or competitiveness export results will be excellent in 2005 as well. needs improvement. Then, a capital injection is However, the monetary and exchange rate pol- required or measures must be taken to safe- icy of the National Bank of Hungary has not as- guard supply. Therefore, the state can under- sisted in the increase of exports, economic ex- take the correction of certain market failures if pansion, and entry to new markets. needed, but otherwise, its primary duty is the At the same time, the export-financing system development of public services. (including the Eximbank, the Export Credit In- Information was provided on the pillars of surance Company and Corvinus Ltd.) helped the National Development Policy Concept, that the export sector. This assistance could have includes competitiveness, cohesion, and secu- been even more significant, if it had been more rity. Another important objective is to profit extensively backed-up by the state. It was the from the logistic opportunities, in other words, success of these specialized institutions, which the location of the country. The regional struc- led to the conclusion that it would not be ap- ture is based on the development of the nation’s propriate to consolidate them and place them capital, and five large cities. In association with under the authority of one development bank. the well-known internal disputes of the Euro- (After all, international credit is available for the pean Union (i.e. whether the foundation of a Eximbank on more favorable terms than for the knowledge-driven society or infrastructure de- National Bank of Hungary). velopment is more important), Hungary is also Several lectures examined development trends inclined to opt for development projects fi- in Latin America, South- and Southeast Asia, and nancing “less concrete and more knowledge.” in Africa, and the possibilities of Hungarian Proposals for the operative programs of regional companies getting involved in this develop- development show preferences for developing ment. It will be very difficult to reestablish posi- attractions for tourism, metropolitan rehabili- tions eroded because of the changes in the tation, and strengthening of public administra- 1990’s. The most prominent and painful exam- tion and civil organizations. However, the bid- ple of this erosion is how we were ousted from ding process is still too slow and complicated. the Russian market to which insufficient gov-

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ernment and inadequate central bank policy During debates on the second National De- also contributed a great extent. velopment Plan that is under preparation, rep- Finally, an interesting comparison was pre- resentatives of the sector proposed that sented on the connections between the import The state should change direction and at- content of exports, export-related import re- tempt to realize the concept of the “service quirement and related added value, and the def- provider state” as soon as possible; icit of the balance of trade and payments. It is a The economy should concentrate on threatening tendency that while the export sur- knowledge-intensive sectors; plus realized by the Hungarian agriculture and Thealreadystartedchangeinculture food industry could regularly balance imports should be carried out to develop a “dig- of energy in earlier decades, this situation has itally prepared” open society in solidar- changed by now. The surplus of agricultural ity. and food exports was only 900 million dollars The innovative commercial solutions of the in 2004, while the value of imported energy Praktiker and Metro Group were also pre- amounted to 2.6 billion dollars. The balance of sented. It is typical that even though the group payments cannot be restored unless we system- services 1,000 million customers on 12 mil- atically re-think how we want to manage and lion square meters of its 2,440 stores, and em- direct the foreign economy sector. ploys 250,000 personnel, it still develops jointly with Wal-Mart and Tesco! Their oper- ¦ Chief Executive Officer of Siemens and ation in Hungary is most restricted by the lack Vice-President of the Hungarian Association of of simple and unambiguous legislation and the Economists, Gábor Beke-Martos, led the de- underdevelopment of the business environ- bates of the information technology session. ment. For example, the costs of payment in The first lecture of the session stated that the cash are one-tenth of the costs of payment by a reason for the failure of the Lisbon Strategy is banking card, and despite of the availability of that the majority of EU expenditure still serves the a full-scale digital archival, the group has to common agricultural policy, instead of developing keep and store documents on paper as well. a knowledge-driven society. Of course, knowl- The representative head of Graphisoft used edge in itself is not sufficient for catching up; his own company as an example to introduce the results of scientific research must be con- the impact of information technology on the verted into practice. The member states of the economy. Contrary to the industrial revolu- European Union (including Hungary) are in a tion, the digital revolution does not automate very poor position in this respect. In Europe, manufacturing processes, relieve workforce, utilization of information and communication save costs, but provides complex information. technologies contribute half as much to the in- The new version of their product concentrates crease of productivity than it does in the United on processing time, cost planning, and controls States. One of the most important elements of solutions instead of technical ones. Although, the Hungarian catching-up can be the transfor- this presentation is very successful in the Euro- mation of the obsolete way of thinking in public pean Union, the company’s sales are staggering. administration and organization without concept. While in the United States, where its greatest In this area, the dynamic leadership of the Min- competitor dominates the market, sales are istry of Economy and Transport leads the way. rocketing. An exciting lecture examined how the econ- A revolutionary new topic, genomic, has omy and the society can be boosted by the na- emerged among the lectures of the section. tional info-communications sector that produces Genomic is the technological language of bio- significant added-value, but in which the mar- logy. International research opens great per- ket share of small and medium enterprises in spectives for “personalized” medicine by com- Hungary is still low. bining information technology and genetics.

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Accordingly, this is a prominent issue in the Subsidiying methods that are harmful to the European Union and the stock exchange is very environment can be found in economic and de- sensitive of related new discoveries. Technology velopment policies, income, taxation and pricing is assisting the development of this branch of policies or in the deficiencies of the regulatory science by providing software that analyzes ge- system. Economic policy over-estimates the role netic samples and international databases. of road infrastructure, while neglects environ- An adequate indicator of results in this field is ment-friendly alternatives and the maintenance that it took only two weeks to produce the vac- and modernization of the existing road network. cine against SARS vaccine! In 2004, the main recipient of environment damaging subsidies was transportation, with an ¦ Professor of Corvinus University and Chair- amount of HUF 2,400 billion. The second man of the Environment-Economy Depart- largest amount, totaling HUF 108 billion, was ment of the Hungarian Association of Econo- granted to agriculture, followed by hydrocar- mists, Sándor Kerekes, chaired the environ- bon production with HUF 100 billion granted ment-economy session. Three macroeconomic in the form of non-collected mining dues. lectures and two on the problems associated Unfortunately, in recent years the never too with carbon dioxide emission were presented high social support for environment policy has on this session. further decreased. Growth requirement in the Economic and political regime change has economy is higher than ever. Ruling paradigms been advantageous from an environment pro- have not changed. For example, we have not tection perspective as well. The Hungarian succeeded in changing the ratio of cost factors. economy has approached an economic struc- In advanced countries, the price of labor force is ture fitting its natural endowments. The pro- still relatively high in proportion to equipment portion of economic activities utilizing high and energy resources. Consequently, the econ- material and energy resources has decreased, omy is over-conscious of sparing the labor force and therefore, the per-unit (in fact, during the that has become the major cause for unemploy- decade after 1990, even the absolute value of) ment. On the other hand, the economy is defi- burden on the natural environment has been re- nitely wasteful with raw material and energy duced as well. Of course, troubles have not sources that result in their depletion. ceased immediately in this field either. For example, Hungarians are less ready to accept Although environmental indicators improved higher prices in the interest of using cleaner during the last one and a half decade, this is (healthier, more “ethical” etc.) products than mainly due to the change in economic structure. some other nations. This is reflected in the pric- The effect of environment protection measures on ing of energy resources and the postponement the reduction of emission is negligible. Unfortu- of introducing residential eco-taxes. nately, not only the effect of environment pro- Unfortunately, subsidies, which are – either tection measures (catalyst program, support to directly or indirectly – damaging to the environ- withdraw Trabants from circulation etc.) is neg- ment continue to exist in the Hungarian econ- ligible on the environment, their economic effi- omy. (The proportion of indirect subsidies is ciency is also unfavorable. While the change in much higher). Consumption of natural re- economic structure has definitely resulted in the sources under their real worth, non-internalized spreading of cleaner manufacturing processes (in environmental damages, and infrastructure de- these marginal costs of pollution prevention are velopment heading in a harmful direction are negative), every environment protection mea- all forms of these damaging subsidies. Clear ex- sure has operated with “tube end” solutions in amples for the first type are the under-valuation which the marginal costs of pollution prevention of land in case of investments, low mining dues, are high. and low water supply usage fees. Tamás Halm

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Éva Voszka Encouragement of Competition – with Negotiation Researcher of Financial Research Ltd. Éva Voszka, defended her doctoral dissertation under the title, “ENCOURAGEMENT OF COMPETITION – WITH NEGOTIATION” (Demonopolization and State Redistribution during the Transition in Hungary) at the Hungarian Academy of Sciences on June 9, 2005. Opponents were Mihály Laki, Katalin Szabó and Erzsébet Szalai.

The dissertation examines the process and char- redistribution in Hungary during the transition acteristics of establishment of the basic institu- period? tions of Hungarian market economy, focusing There has not been a generally approved on the state’s role in encouraging as well as re- strategy for the transformation of centrally stricting competition during the period of tran- planned economies that could be used as a base- sition. The description analyzes two areas of line for evaluating the various steps of the this complex subject, the market structure from changes. Therefore, the dissertation follows the among the topics of encouraging competition, method of positive exposition instead of a nor- and state redistribution from the means of re- mative approach by analysis. It also continues stricting competition. the Hungarian tradition of empirical economic research associated with the concept of new institutional economics. Formation of Market Structure and State Subsidies are Similar Dilemmas Paradox of the State’s Role In addition to the identical structure of decision dilemmas, selection of the market structure and ¦ The dissertation is permeated with the idea state redistribution is justified by the basic context that the state essentially plays a controversial of centrally planned economy, according to role in the transformation of centrally planned which central redistribution of state property, the economies. The contemporary wording of this centralized corporate organization system and in- statement on the paradox of the State’s role is that come are inter-dependent matters. One would as- while higher than usual state activity is inevita- sume, in theory, that changing the various char- ble, even in theory, during the transformation acteristics result in reverse effects, or in other of market economies (in the interest of disman- words, the expansion of private property will tling old structures and establishing a new insti- strengthen the establishment of a competitive tutional framework), this unusual situation market structure and incite withdrawal of redis- rather confirms than invalidates the well- tribution, while dismantling monopolies will en- known disadvantages of intervention. This is hance the privatization of state-owned compa- actually a generalization of the statement refer- nies as well as the reduction of subsidies. Hence, ring to privatization, according to which gov- the dissertation examines the following hy- ernment failure is an incentive for transforma- pothesis: Has positive feedback existed between tion while, at the same time, it is an obstacle to demonopolization, privatization, and decrease of its efficient realization.1

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¦ The dissertation defines state redistribu- losses and/or indebtedness. The other type tion in a unique way and defines its relationship – which is disregarded by the mainstream of re- with the concept of soft budget constraints. Ac- search on soft budget constraints – is irrespec- cording to this definition, state redistribution tive of vertical relations and it is the preferred within the economy is one base mechanism type for improving growth and profit potentials for softening corporate budget constraints. Ac- of successful private companies. cording to the most recent and extended defini- ¦ Exact definition and systematic examination, it is a mechanism that is potentially pres- tion of market creation by the state, a method ent in every financing system, but separate from classified as an instrument of redistribution, is a paternalism and bureaucratic coordination. Its novelty. This definition also important in a cen- specific purpose is to prevent financial failures, trally planned economy, but scarcely mentioned and it is interpreted as a dynamic and authentic in professional literature. It originates from the problem of commitment2 – which specificity is principle that a government can redistribute in- determined by the identity of the participants come that is already made as well as opportuni- and the relation of the state and profit-oriented ties for acquiring future revenues, in other business associations (companies). The disser- words, profits. Creation of markets to increase or tation considers the methods of regulating the redistribute sales opportunities is a method that opportunities and revenues of companies being softens – similarly to income distribution – cor- – not necessarily on the basis of hierarchic rela- porate budget constraints. This method affects tions – state redistributions within the econ- the opportunities of a company to acquire and omy. The methods in question are those that keep a market share – among others – through serve – besides providing artificial sustenance to international agreements, public orders, export state-owned or private companies – the im- incentives, and protection of the internal mar- provement of growth and profit opportunities. ket. The impact of this method finally appears in These are achieved through market creation public and corporate incomes, but only indi- and normative tools of fiscal, quasi-fiscal and rectly and with a delay. credit subsidies that are open, hidden, individual, collective, and/or negotiable; but at the Partial Demonopolization without same time indifferent in the objectives, the Clear Principles manner, and time of occurrence of the financial 3 consequences. However, this approach enables ¦ Raising market competition and the competi- revelation of the changing state redistribution tiveness of companies are not necessarily inter-de- in a broad sense, and the switch-over/replace- pendent; conflicts could arise between them. ment impacts, while distinctively connecting This contradiction is an important subject in the theoretical literature on soft budget con- the debates on competition regulation that ac- straints to the practice-oriented examination of companies the establishment of the structural state subsidies – mainly in relation to inciting base for competition. The dissertation demon- foreign investments and preferring small and strates that one of the typical, basic dilemmas of medium enterprises. state redistribution has an identical structure: ¦ Based on the aforementioned definition, market creation and subsidies restrict competi- the dissertation differentiates between enter- tion, but might increase competitiveness, at prise-saving and profit-increasing subsidies –as least according to the assumption of decision- the traditional versus new types of redistribu- makers and the promises of petitioners. tion methods – since their operation and out- Transformation multiplies and intensifies di- comes could be significantly different. The for- lemmas of redistribution compared to the usual mer type involves government funds based on intensity in market economies. One of the di- hierarchic dependence that are provided as arti- rect reasons of economic recession following re- ficial sustenance to companies with financial gime change was market creation and with-

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drawal of state subsidies. The necessity of fun- with the sale of a company did not have either a damental structural change requires competi- transparent process, or a uniform system of re- tion as well as subsidies to slow down destruc- quirements for decision-making. Formation of a tion – moderate the series of impacts, or extend market structure has only been one element of the period of adaptation – and strengthen new the contradicting objectives of the State Prop- structures including the protection of small pri- erty Agency and its legal successors that were vate enterprises and inciting foreign invest- enforced in individual decisions influenced by ments. Consequently, redistribution is required unstable privatization programs, party policies, to overcome the crisis – created explicitly by its the companies in questions, and the customers. decrease – at the same time when resources have Thus, demonopolization remained a side-prod- been depleted, and the regime change – involv- uct of privatization decisions. Even subse- ing the withdrawal of state intervention – ques- quently, it is impossible to find a group of eco- tions its basic principles and legitimacy. nomic factors that could explain by itself the extent of organizational decentralization, and ¦ The dissertation supports the finding of would outline the areas of its implementation professional literature, according to which the or absence. Competition Act and the Hungarian Competi- ¦ tion Institute (“GVH”) did not play a signifi- The fundamental – but not exclusive – di- cant role in the public decisions that directly af- rection of the organizational decisions of suc- fected the market structure, such as the revision ceeding governments was decentralization, of the inherited structure or merger audits asso- starting at the beginning of the 1980’s and last- ciated with privatization. The conclusion lately ing for one and a half decade, in which the re- is that a formal expansion to the scope of the gime change did not cause a serious break. As a GVH’s authority would not have had a signifi- sign of direction-dependence, the government cantly different result by itself. Mass application that entered into office in 1990, found already of merger control would have only delayed the set arguments, interests, and institutions for decision-making process and further weakened demonopolization that were strengthened by the foundations and authenticity of the deci- new political features: distrust in large social sions of the GVH, while barely affecting the companies and their management and adapta- market structure under the existing interest and tion of the supply for privatization to the insig- power relations and inconsistent – especially nificant means of domestic investors in order to before the first amendment was made to the create a middle class of proprietors. (Contrary Competition Act – judgment methods. to the general belief, rather the targeted groups of potential customers than the resulting reve- ¦ The demonstration of the relations of pri- nue had priority in the decision of the state on vatization and demonopolization measures – that whether to separate business units or sell the covers a broad sphere of corporate cases – con- company as a whole). There is continuity in firms that privatization had priority over mar- these decisions as well: political rationality con- ket structure during the entire period of trans- tinued to play an important role in state deci- formation in Hungary, similarly to the prac- sions affecting the organization of companies. tices of other ex-socialist countries. This was the Due to the bargaining powers of companies for main reason why the most important decisions, sale and some of their buyers, these decisions that affect the structural conditions of competi- had a limited success just like their predecessors tion, were made by central privatization institu- had in the centrally planned economy. tions. Since this principle was neither declared nor institutionalized, it could be only enforced after its reconstruction, and the relationship be- Cyclical and Unstable Redistribution tween competition and privatization remained unregulated. The analysis shows that separation ¦ The statistical extent of state redistribution of business units prior to or simultaneously within the economy sharply decreased in Hun-

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gary as well as in other ex-socialist countries at of market creation” was reversed: industry pro- the turn of the 1980’s and 1990’s, then varied tection strengthened with the customs sur- between two and six percents of the GDP de- charge for assisting half-ready structures be- pending on various measurements. (According came – as an unintended side-effect – the es- to international benchmarks, during the second sence of the stabilization program. Tax allow- half of the 1990’s Hungary was among the ance, – one of the basic elements of hidden transforming countries with high subsidies). methods – preferred large, primarily foreign Taking into account the estimated value of investors. The third phase favored domestically the quantifiable part of hidden subsidies, the owned companies in theory – in addition to the dissertation states that redistribution did not quasi-fiscal support of state-owned companies – continue to decrease concurrently with the by creating markets via state orders rather than strengthening of market institutions, however, industry protection and non-refundable funds belying early anxieties, it was not rebuilt as a distributed in the framework of development comprehensive mechanism of integration either. plans. Although the top limit of funds granted to small enterprises increased and new meth- ¦ One of the basic features of state redistri- ods emerged, neither small enterprises, nor bution within the economy was its cyclical char- those in domestic ownership obtained a signif- acter during transformation; it fluctuated in icantly higher share of the subsidies. In 2002, Hungary during every government cycle in the the new government promised preferences to 1990’s, irrespective of the ideology of the par- every category of entrepreneurs except for ties being in power. On the top and bottom turning-points of cycles, the process is brought state-owned companies, subsidies of which it into motion directly by parliamentary elections, attempted to limit. The continuously multi- indirectly by the economic impact of previous plying programs became the main instruments measures, internal division of the government, for redistribution. and pressure by companies. The extent of redis- ¦ Subsidies for saving companies were tribution has mostly remained under political mostly limited to a certain part of state-owned control. Competition for power, and conse- companies in the 1990’s. Succeeding Hungar- quently, the vulnerability of parties is the driv- ian governments proved authentically that they ing force as well as the obstacle of the boost: up- were not going to save every company, but they coming elections incite not only the welfare, could not state that they were not going to save but also – in a narrow interpretation – the eco- any of them. On one hand, this ambiguous au- nomic segment of wealth shared in order to ac- thenticity contributed to disintegrating old quire votes, while turnover of government mechanisms, while made the rules of the devel- – regularly taking place despite of the welfare al- oping market economy dubious on the other. lowances – improves the probability of (tempo- Concurrently with the withdrawal of rary) corrections. life-saving preferences, profit-increasing subsi- ¦ The other major characteristic of redistri- dies, that also soften the budget constraints, be- bution during the period of transformation is came conspicuous. The two types often suc- the instability of target groups and instruments, ceeded each other within companies; while which does distinguish between governments beneficiaries were the same, the owners were with diverse political background. After the different. Thus, the analysis confirms the find- 1990’s, the instruments of centrally planned ing of professional literature, according to economy (another sign of direction-depend- which privatization is not a primary require- ence) were applied to consolidate the beneficia- ment of hardening budget constraints. More- ries of the first period, the state-owned compa- over, it also shows that the objectives and means nies and banks. This action finally resulted in of redistribution are modified as a result of change cash-saving waves of consolidation. In the mid- in owner . While the impact on the behavior of dle of the decade, the school of “subsidy instead distributing and beneficiary organizations, the

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interrelation of government and business, and detail the phenomenon of switch-over from one distortion of competition – i.e. criteria of selec- instrument (such as budget subsidies, tax allow- tion – are unchanged, economic impact de- ances and market creation) to another. Profes- pends on the methods and procedures applied. sional literature mostly refers to this phenome- ¦ Starting from the requirement of the Eu- non as a substitute for credit- and fiscal type ropean Union for allowing the provision of methods. The new finding of the dissertation is state subsidies for reorganization, the disserta- that switch-over is possible not only between the tion considers the strengthening of the groups various means of redistribution, but also between of companies concerned and the non-repeated, redistribution as a whole and general regulations. withdrawing character of state support, all in (For example, while establishing institutions for all, the sustainability of the process as the criteria hardening budget constraints and increasing of success of the various methods of redistribu- companies’ fiscal discipline at the turn of the tion. Based on the judgment criterion of indi- 1980’s and 1990’s also established the condi- vidual preferences, it can be stated that the suc- tions for the relaxation of this discipline, the cess of such types of preferences proved to be stabilization program of 1995 – although this provisional due to the abundance of profit-in- was not its fundamental objective – provision- creasing subsidies during the period under really decreased the pressure on increasing prefer- view. In order to evaluate redistribution that af- ences by providing a beneficial, normative mar- fect a broader spectrum and planned for a lon- ket protection for a broad spectrum of compa- ger period from its origin, the dissertation ex- nies). Therefore, the conclusion is that the most tends the definition of market-substituting and efficient obstacle to extending redistribution is the market-building subsidies to the development modification of general regulation in such a way programs of small and medium enterprises in a that is favorable for business partners, and in a unique manner. These enterprises accept high broader sense, the establishment of an institu- production and transaction costs, and they are tional environment encouraging competition more likely to accept market failure. At the and competitiveness as well as guaranteeing same time, market building has a positive effect predictability and safety. on the permanent improvement of efficiency, or in other words, – and in accordance with the ¦ The dissertation states as a conclusion that original criterion of success – the prospects of there was not a positive feedback in the process of redistribution considered only to be provisional. transformation between reinforcement of the structural bases of competition, the changes in The analysis states that the market-substitut- ownership and the withdrawal of redistribu- ing form dominated in Hungary during the tion. Decrease of state-owned property was not 1990’s. From these, normative and temporary systematically related to demonopolization, tax allowance associated with market perfor- and redistribution was not reduced in conjunc- mance has the highest probability to meet the tion with the progress of these two changes. criteria of sustainability and improvement of Thus, the theory, according to which privatiza- competitiveness. While the other extremity in- tion increases competition by improving mar- volves opportunities for development and ket structure, moreover, in conjunction with trade, and establishment of market participants the expansion of private ownership state redis- strengthened by orders and individual capital tribution will gradually dwindle, has proven to injection from the state. be an illusion. Politics influenced the establishment of the structural basis of competition and Switch-Over and Rebuilding the fluctuation of redistribution not only by de- of Distributive Coalitions veloping the general framework, legislation, and oversight of compliance with the rules; ad ¦ The analysis based on the extended defi- hoc intervention by the government and short- nition of state redistribution demonstrates in term interests of the political parties also had

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their direct influence. Depolitization of the com- vation of competition-restricting state redistri- panies’ operation remained limited, even in this bution. narrow sense. ¦ By using Mancur Olson’s terminology, we ¦ Examination of competition and subsidi- can interpret the change in the role of redistribu- zation policies supports the finding in institution during the transformation of centrally tional economics that large scale institutional planned economies as the disintegration and re- changes can hardly follow a conscious and har- construction of distributive coalitions. Political monized strategy. Expert Hungarian literature regime change, entanglement of economic rela- also shows the controversy between the entire tions, and the beginning of large-scale change economic policy and its various parts, empha- of institutions shocked old structures and posi- sizing primarily the disadvantages and involun- tions. These factors contributed to the disman- tary measures substituting them for a deliberate tling of the significant portion of redistribu- and consistent strategy. Contrary to these tion, a characteristic of socialism. However, the works, the dissertation defines a hypothesis method of privatization – primarily the insuffi- – taking into account potential misdirected ciency of demonopolization and the important commitments for maintaining inefficient insti- role granted to cash payment in the fame of in- tutions – according to which it is exactly the flux of foreign capital that finally dominated pragmatic approach and the continuous cor- the replacement of state ownership – created rection – often appearing as a simple improvisa- new and influential lobby groups. The sphere tion – that produced a better result of transforma- of large enterprises is relatively small even after tion than what we would assume based on the transformation; however, their role in the econ- analysis of the decision-making system. omy remained significant which is equivalent In other words, the adaptive efficiency of the to- to good lobby positions according to the logic tality of government decisions was high in the of collective action. Thus, the relations between last one and a half decade – at least in the short the state and companies have become tight term. Their effect in the long run will depend again, although the participants changed. on the quality of the structure and the system of Repeated turnover of governments made diffi- institutions formed by them. cult to strengthen the various distributive coalitions for a long term, – since different groups ¦ If there was no positive feedback between were associated with the different parties in privatization, demonopolization, and redistri- power – but some of the participants stabilized bution in the process of transformation, this their position and for the time being, the system does not mean that the continued existence and itself appears to be permanent. rebuilding of the structure of large enterprises and that of state redistribution are not con- ¦ As a result of the rebuilding of distributive nected to future mechanisms of operation. coalitions, the proprietary, regulatory, and mar- According to the assumption of the disserta- ket creating decisions by the state could be sub- tion, that requires further examination, large ject to a strong influence by large enterprises, enterprises – a prominent part of which is di- and we can already see the signs of bias by the rectly managed by foreign investors – remained state (state capture). The state can encounter a over-represented among beneficiaries despite of “catch-twenty-two” situation, similar to that of the changes in the preferred groups of redistri- the centrally planned economy. Vulnerability bution. The dissertation defines the paradox of of the government and large enterprises was ownership structure on this basis: according to mutual at that time as they were inter-related in other empirical research, the ownership struc- a closed system. Today, the field of motion is ture that is the most favorable in respect to asymmetric in favor of companies due to open- competitiveness and the revitalization of the ness and strength of power. structure of production and efficiency is Pressure by companies and state confine- indeed, the driving force behind the preser- ment could be prevented by the power of inter-

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national communities. Joining the European attain as much external fund as possible. Union promotes market competition and re- However, this endeavor and public opinion stricts redistribution by stringent balance and maintain the claims and expectations of compa- procedural requirements. Nevertheless, the Eu- nies, and consequently distort behavioral pat- ropean Union also presses for and finances large terns and might even increase domestic public scale support programs. Obtaining funds from spending. The impact of EU and related do- the community is one of the most important mestic funds on the extent of redistribution de- – or at least most often mentioned – results of pends on – in addition to the total amount of accession by the new member states. Accession funds spent – the portion spent that softens could also be interpreted as market creation and budget constraints, and the portion of addi- acquirement of funds for redistribution, conse- tional funds spent by the Hungarian state on quently, every government as the “lobbyist” of subsidizing companies based on its sovereign domestic companies must make an effort to decisions.

NOTES

1 For the statement on privatization, see George Yarrow 3 The definition incorporates, but the dissertation does and Piotr Jasinski eds., ”Privatization. Critical Perspective not analyze the totality of the redistribution of wealth on the World Economy.” (Routledge, London, New and rights of disposal, only its specific part that di- York, 1996): p. 18. rectly relates to organizational changes in companies. 2 János Kornai, Eric Maskin, Gerard Roland, “Under- standing the Soft Budget Constraint.” Journal of Eco- These basic sections of transformation deserve separate nomic Literature (2003): www.sss.ias.edu/papers. analysis due to their importance and complexity.

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Éva Várhegyi Transformation, Development, and Characteristics of the Hungarian Banking Sector Researcher of Financial Research Ltd. Éva Várhegyi, defended her doctoral dissertation under the title, “TRANSFORMATION, DEVELOPMENT, AND CHARACTERISTICS OF THE HUNGARIAN BANKING SECTOR” at the Hungarian Academy of Sciences on May 31, 2005. Opponents were Iván Bélyácz, Tamás Sárközy and György Szapáry.

The dissertation is based on a research that was The term “enlightened banking reform” aimed at defining the most important features used in the dissertation refers to the statement of the transformation of the Hungarian bank- that the reform measures, even though they are ing sector that began in the 1980’s, and acceler- originated in necessity, were mostly progressive. ated after the regime change by the opening of The reason for this is not that Hungarian gov- the market, reinforcement of fiscal discipline, ernments were more “intelligent” than others and privatization. Moreover, the thesis exam- were, but rather, the “need” led decision-mak- ines the consequences of this transformation as ers towards deepening international integration it relates to the competitiveness of the banking in the economically open Hungary as early as sector and social welfare. The research focused the 1970’s; and consequently, they had to take on a comprehensive examination of the ques- into account the inevitable fact of globalization tion whether the path taken by the Hungarian no matter if they wanted it or not. In retrospect, banking reform had a successful effect on the and compared to the development path of simi- sector’s performance. The most important lar Central-Eastern-European banking systems, findings of the dissertation are summarized as the main virtue of the Hungarian banking re- follows. form is that it made the banking sector – and the financial system, in general – the driving Banking Reform force of the international integration of the Hungarian economy. ¦ Assessment of parliamentary-governmental ¦ Establishment of the two-tiered banking decisions as a process, and the evaluation of system in 1987 was a caesura in the most recent their future impact – contrary to current time history of the Hungarian banking sector. and partial analyses – as well as comprehensive Although the dismantling of the mono-bank- international comparison put the Hungarian structure that fit into the model of centrally banking reform in a new light. In this light, the planned economy was a logical consequence of internationally appreciated success of the Hun- the reform of the economic mechanisms, the garian banking reform is not only due to its idea maturing since 1968 was postponed for early start, but also to the fact that economic ne- nearly two decades. The delayed reform of the cessities resulted in econo-political virtues. Hungarian economic environment was still

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considered early compared to Eastern-Euro- international comparison. Legitimacy of the pean conditions, and its positive consequences Act was “increased” by the support of opposi- could be detected in the subsequent transfor- tion parties; moreover, it was even drafted mation of the banking sector. The doctoral dis- based on consent. sertation shows the replacements of bank man- The dissertation confirms that the regulation agers with those of expertise among the “posi- of the Act on bank ownership was favorable in tive consequences,” even though these became three respects, as reflected by subsequent devel- profitable mostly only later, after the transfor- opments and international comparison: mation of ownership structures. Neither the Act on Financial Institutions, Based on the analysis of consequences, the nor the practice of the BRSA put obstacles dissertation considers the formation of the – exceeding professional requirements – two-tiered banking system – despite of all its to the foundation and acquisition of deficiencies – as a historical milestone. It is con- banks by foreigners. sidered as a fitting part of the reform process during the late-Kádárian era that was willing to Compared to Eastern-European coun- take over market economy “accomplishments” tries, an important feature of the Act was in order to preserve the operation of the econ- the restriction of acquisition of bank omy and the political regime, and the favorable shares by non-financial investors that in- results of which could be detected in many areas hibited the acquisition of deposits by during the transformation following the regime “bank robber” proprietors and restricted change. the development of cross-ownership ¦ The other historical step in the Hungarian structures between banks and companies. banking reform was the enactment of the Act Due to these restrictions, there have been on Financial Institutions and Financial Enter- hardly any “bank robbing” type bank- prise that regulates the foundation, ownership, ruptcies in Hungary, while these were typ- direction, and operation of banks. It was im- ical in almost every other Eastern-Euro- portant that the original verbiage of the Act al- pean country in the first half of the ready followed the requirements of advanced 1990’s. Moreover, hardly any cross-own- banking systems, such as the directives of the ership structures were detected that would European Economic Community (EEC), and curb the prudent operation of banks. the recommendations of the Bank for Interna- From the perspective of the banking sec- tional Settlements (BIS). Subsequent amend- tor, the third important element of the ments to this Act and the new Act on Credit In- Act was that it restricted state ownership stitutions and Financial Enterprise gradually in banks. It clearly conveyed the political harmonized the Hungarian legislation with intention of starting bank privatization in that of the European Union; thus, enhancing the near future (within five years). the Hungarian banking sector’s entry to the ho- ¦ A new finding of the dissertation is that mogeneous internal market of the European the most important requirement of establish- Union without any serious shocks. ing competition in the banking sector was met ¦ The concept, which the rules of bank by the simultaneous liberation of market en- ownership was based on, as well as – contrary to try, banking activities, acquisition of clients, many countries – their practical implementa- termination of the single account system, and tion by the Banking Regulation and Supervi- free choice of banks. Neither the dismantling sion Agency (BRSA) responsible for their au- of the mono-bank-structure, nor the founda- thorization and the government, were progres- tion of banks could increase competition sive features of the Act on Financial Institutions under these restrictions. However, oligo- enacted at the beginning of the 1990’s, even in polistic positions (which characterized the new

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“entailed properties” established by the petty ¦ However, the doctoral dissertation points monarchies of the National Bank of Hungary out that the partially privatized banking sector is andOTP)erodedextremelyslowlydespiteof not free of political influence either. The com- these measures. Paradoxically, the best incen- parative analysis of the behavior of various gov- tive for restructuring market positions was – in ernments in respect to banks states that govern- addition to the market entry of foreign banks ment actions are greatly dependent on their po- and Postabank that challenged OTP – the sur- litical style and set of values; however, the success facing of a banking crisis that forced banks to of political pressure depends primarily on the es- stop credit expansion. tablished conditions of the economy and the state’s range of power. ¦ There is also a reverse relationship be- Banks and Politics tween banks and politics. Management of important banks can also influence politics – and ¦ Due to the interdisciplinary approach, the this possibility can prevail even after the de- dissertation covers some phenomena affecting crease of state ownership if market conditions the relationship of politics (governments, par- are not sufficiently balanced. One of its types is ties) and banks that are usually outside the the enforcement of the thesis “too big to fail,” scope of research in respect to the banking sys- which is obvious privilege of large banks. tem, even though they have an important im- In transforming economies, “state capture” pact on banking operations. A new result of the could also be detected, when economic players dissertation is the confirmation of the hypothe- attempt to manipulate basic legal rules accord- sis according to which caesura in the relation- ing to their interests. Government decisions re- ship of politics and banks was not the regime sulting from transformation also offer a large change, but the transformation of ownership scope for “hunting for funds.” An important structures. There was not a government after statement of the dissertation is that because eco- the regime change that weakened the political nomic liberalization and modern legislation dependence of state-owned banks; at best, the took place rapidly in Hungary, there has been a dependence became more obscure than it was relatively narrow space left for state capture. during the period that preceded the regime Opportunities for hunting for funds were change. Government influence on the opera- granted – even if only to a limited extent – by tion of the Hungarian banking sector remained bank consolidation by the state and privatiza- decisive as long as privatization reached the tion as well. banks that had the greatest economic weight. Governments (parties) could exercise control Bank Crises and Their Management in the most direct way by selecting the management of state-owned banks and through the ¦ Both types of crisis defined in the profes- oversight boards. “Cadre policy” did not only sional literature surfaced in the Hungarian affect the operation of banks, but also the costs banking sector in the 1990’s. The systematic of subsequent consolidation measures and op- crisis was characterized by symptoms and rea- portunities for privatization. The dissertation sons mainly similar to those that took place in states that there was not a “landslide” in bank numerous developed and emerging countries in management after the regime change; and the world during the 1980’s and 1990’s. How- state-owned banks did not get rid of political ever, two unique features could be differenti- influence. The result of overall improvement in ated in this area. One is the result of the ambig- quality of senior management is derived from uous reforms preceding the regime change, af- legal requirements for expertise and not from ter which undercapitalized banks granted cred- the self-restraint of governments. its to undercapitalized companies. The other

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unique feature was associated with the regime costs of consolidation could have been lower if change, which included legislation serving the it had taken place sooner. Including the more reinforcement of fiscal discipline (acts on ac- recent costs of consolidation of Postabank, the count-keeping, bankruptcy, and financial insti- 1998 current value of total costs amounted to tutions), stringency of requirements for pru- thirteen percent of the GDP. dence, the transformation crisis of the Hungar- ¦ The dissertation also shows individual ian economy, and competition encouraged by bank crises and their management through the the opening of the banking market. examples of Postabank, Realbank, and some ¦ An important finding of the dissertation is smaller financial institutions. Their crises had that only one-third of bad and doubtful debts nothing to do with either heritage from the cen- were associated with credits granted prior to the trally planned economy or the regime change. regime change at the beginning of the 1990’s; Furthermore, their bankruptcy would not have the larger part originated either from political resulted in a domino effect in the banking sec- influence on and professional mistakes of bank- tor. The dissertation has several new findings ing decision-makers or they were related to based on the analysis of significant individual moral hazard. Governmental “ostrich policy,” crises and consolidation policies. the conflict of shortsighted budget interests, By comparing to the consolidation of and aspects of prudence worsened the situation Banesto that has several similarities with of irresponsible credit policy by banks. the Postabank-case, it states that the pro- ¦ New scientific evidence by the dissertation cess of consolidation was much more is that it provides an account of state funds transparent and efficient in the case of the granted – in various phases in various forms – Spanish “national champion” than in the for credit, debtors, and bank consolidation as case of its Hungarian counterpart. While well as their effects. The conclusion on the pro- in Spain, the public funds spent on con- gram is that the crisis management that was solidation were fully recovered by the im- launched belatedly, and incorporated a lot of provement of banking activities and the anomalies and surplus expenses has restored the sale of the bank, only one-third of the crediting capacity of banks after all, which is an public funds spent on Postabank – the indispensable requirement of economic opera- 2003 current value of which amounted to tion. This can be stated despite of the fact that HUF 300 billion – was recovered from most of the consolidated banks remained under the purchase price. funded, continued operating inefficiently, and Based on the analysis of various factors, it only regained their vitality by privatization. states that even in light of the successful ¦ The doctoral dissertation is the first in act of privatization, the justification of national literature that measures the method, consolidating Postabank is questionable. timing, and costs of consolidation within the “Silent” exit from the market (by indem- international field. This comparison is rela- nifying depositors) would not have been tively favorable; while economic recession and more expensive than consolidation as re- the proportion of bad debts at the peak of the flected by the capital injections in 1998 crisis approached those of Southeast-Asian cri- and the subsequent expenses by the state. ses, the costs of its management (equivalent An important lesson learned from the cri- to eleven percent of the GDP) was signifi- ses of Postabank and Realbank is that they cantly less than in Southeast-Asia (in fact, it called attention to problems and responsi- was similar to those of Scandinavian coun- bility of supervision (“toothless” supervi- tries). The costs of the Hungarian bank crisis sion). During the Postabank-crisis, the is- are not significant compared to Central-East- sue of auditors’ responsibility – that later ern-Europe either. Although, based on the became the spotlight during the Enron Polish example, it could be stated that the total bankruptcy – surfaced.

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Bank Privatization and Its Impacts structure characterized the majority of EU candidate countries. ¦ A variety of needs determined the timing and ¦ A new finding is that green-field bank method of the sale of state-owned banks, such foundation and increase of their stock capital as under funding, central budget constraints, played a greater role in boosting the proportion lack of funds by potential domestic investors, of foreign share of stock than in sales of banks. and the strict rules of the Act on Financial Insti- This feature is – a Hungarian characteristic as tutions restricting ownership. The dissertation well – mostly due to the aforementioned liberal summarizes Hungarian bank privatization as a Act on Financial Institutions and practice of “virtue born of necessity” both in respect to the authorization as well as the early dismantling of development of the banking sector and from activity-related restrictions (in 1989-1990). the perspective of international comparison. Foreign banks entered earlier and were more ac- Governments of the 1990’s – setting aside their tive in Hungary than in rest of the countries in political scruples – finally chose a solution that the region. passed the test of time. ¦ The doctoral dissertation employs new as- The majority of Hungarian banks have been pects in analyzing the connections of ownership sold to foreign investors which have also been and performance – compared to the approach participants of the sector (mostly banks), while used in international practice – that proven OTP has been turned over to scattered foreign to be more realistic when explaining the phe- and national financial investors. The facts nomena. The model incorporates three new support that political/econo-political scruples explanative variables: concerning foreign strategic investors were un- The method of acquisition by foreigners founded; one-sided dominance has not oc- (purchase or green-field foundation), curred, and the signs of “dependence” have not The duration of foreign ownership (for been detected. Professional anxieties in respect how many years the majority of the bank to the scattered ownership structure of OTP has been owned by foreigners), have not been justified either. The method of management (proportion ¦ Bank privatization followed two direc- of Hungarian and foreign Board members tions, the sale of state-owned banks, and the and CEOs within the nation). foundation of new, “green-field” private banks. The new approach appears to be successful in The ownership structure of the banking sector explaining the differences in the performance of was further modified by the significant increase the various banks. Estimates of the model ex- of stock capital in former state-owned banks amining the ownership structure and method sold to foreign strategic investors, and by the of bank management versus bank performance faster increase of the capital by the new banks brought numerous new results. than that of national banks. Banks in foreign ownership realize higher The dissertation is the first in national litera- profits. However, these profits do not ture that points out that the four types of act originate from a higher interest margin. have not only accelerated privatization, but also Therefore, they are not realized at the ex- created an – at that time – almost unique own- pense of clients. Contrary to this state- ership structure in international comparison. By the end of 1997, two-thirds of the bank cap- ment, in many countries it has been veri- ital operating in Hungary had been passed to fied that the higher profits of foreign foreign strategic investors. The dominance of banks is directly associated with a higher foreign owners was also outstanding in the interest margin. banking sectors of other Central-Eastern-Euro- Model estimates confirmed the hypothe- pean countries in the second half of the 1990’s, sis, according to which the higher profit- but by the millennium, a similar ownership ability of foreign and green-field banks

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was mostly the characteristic of banks that behavior of banks, it can also be stated with were founded some time ago, and conse- high probability that there has been an ex- quently and they were operating with sig- tremely strong price competition at the suppos- nificantly less costs and personnel. edly homogeneous credit market where the de- It could be stated that the crediting activ- mand for credit reacted to relative changes in ity of foreign banks was higher than that interest rates by various banks. This trend is in of national banks – independent of the line with the logic of a competitive market. way of acquisition, the duration of posses- ¦ Model estimates have not conclusively sion, and the style of management. confirmed the theory according to which market power has been converted to the realization of an oligopolistic rent. However, the author Competition in the Banking Market was not in a position to reject the assumption with due regard to the pricing behavior that ¦ The dissertation illustrates changes in the could be detected in various market sectors. structural characteristics of the banking market Competition conditions are – demonstrated from a perspective that is new in national re- through models assuming a homogeneous search. It does not only examine the market credit market – a basic characteristic of the busi- structure based on the number of players and ness market where – according to elasticity their concentration; it also incorporates two equations – banks apply a pricing mechanism new aspects in the structural analysis of the con- aligned with changes in interest rates by the fi- ditions of competition. One of them is the pro- nancial market. However, loan interest rates cess of the rebalancing of scale structure that is show such little elasticity in respect of financial important, because – according to recent re- market interest rates in the residential loan mar- search – the difference between the market leader and other players following it explains ket, which had an insignificant weight during competition better than the extent of concen- the period under review, that they enable the re- tration. The other factor is increasing compe- alization of an oligopolistic rent. tition, which threat appeared by the early ¦ An important new finding is that the ex- market entry of foreign banks in Hungary.1 tremely high profitability – compared to effi- Based on the structural examination of com- ciency – of the Hungarian banking sector was petition, the dissertation states that, although not principally due to the inelasticity of residen- the favorable changes of market structure could tial loan interest rates (as these were not yet be detected in the improvement of bank effi- dominant in bank revenues) during this period. ciency and the reduction of interest margin, On the contrary, this profitability was rather high profitability associated with – in interna- due to the fact that – opposite to the assump- tional comparison – poor efficiency in the tions of the models – the Hungarian deposit Hungarian banking sector indicates the limita- market is not price accepting even in respect to tions of competition. savings-type products. Non-banking competi- ¦ Examination of the competition of banks tion has also increased in Hungary in vain; the via behavior models were completed by using interests of savings deposits remain inelastic in methods not yet applied in national research. respect to financial market interests and turn Estimates by the H-statistics measuring cost out relatively adhesive. factor elasticity of interest revenue confirmed ¦ Consequently, the pricing of deposits as the hypothesis according to which increase of well as credits offered opportunities at the resi- competition had a part in the reduction of the dential market for collecting oligopolistic rents interest margin. Model estimates indicate a me- caused welfare losses on the social level. The dis- dium-rate, moderately increasing, and monopo- sertation is the first in national literature that as- listic competition for the period of 1995-2002. sumed the existence and estimated the extent Based on the model, testing the cartelizing of social loss originating from restricted compe-

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tition. Comparison to banking/financial market ationofthebankingsectorontheother. spreads (positions reflecting “competitive pric- Theroleofbankservicesisexpectedtoincrease ing”) by the European Union reveals that social in the residential and small enterprise segments losses originate from lower deposit interests, and of clients, nevertheless the related impacts could credit interests that are higher than the “compet- be counter-balanced in part by the global phe- itive” rates. Furthermore, they also put a burden nomenon of disintermediation. on residential and small business clients in excess ¦ Based on a comprehensive evaluation of of an average of 0.4 percent of the GDP during the expectable impacts of joining the European the years between 2000 and 2003. Union, the dissertation concludes that the Hungarian banking sector could be integrated Joining the European Union into the homogeneous market with a relatively and Globalization insignificant shock. Based on the analysis of the motivations and tendencies of transnational ¦ The banking sector’s economic penetration services, it can also be stated that foundation of in Hungary is much less significant than it is branches by foreigners at the Hungarian bank- in other countries with similar development. ing market is unlikely to become typical. More- The dissertation explains that despite of the sig- over, the expansion of transnational direct ser- nificant development of the sector, the “depth” vices is limited by the extensive loans that have of the Hungarian banking sector has hardly in- been already obtained by companies from for- creased. This is due to the income/revenue posi- eign banks or their owners; in addition, the lo- tions and behavior of households and companies cal banks are less subject to information asym- as well as early capital liberalization on one hand, metry that provides more efficiency in the resi- and the aforementioned deficiencies in the oper- dential-small enterprise segment.

NOTE

1 On the importance of the two factors, see P. Molineux, “Increasing Concentration and Competition in European Bank- ing: The End of Anti-trust?” in EIB Papers Volume 4, 1 (1999)

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One Book – Three Reviews ”Can Sustainable Growth be Maintained?” Experiences of Economies in Transition By László Antal Economic Review Foundation; Budapest, 2004

Review by ISTVÁN HETÉNYI

László Antal is a habitual reformer. He dedi- Even the title of the book is descriptive: Can cated (wasted) half of his life advising on eco- Sustainable Growth be Maintained? The book nomic policy issues. After getting through nu- is a scientific analysis of the new (?) paradigm of merous difficulties, he continues – sometimes sustainable (by maiden name: permanent) on the field, sometimes on the sideline and growth, based on a wide-range of bibliography sometimes from the distance. His analytical and – first of all, Tibor Erdõs’s theoretic work1 of a advising articles are always to the point, and similar subject. The title of the book refers to only as passionate as required by the given the evergreen dilemma of economic policy, em- cause. When he finds econo-political challenges phasizing that practical attitude is what really and answers to these are chaotic enough; he tries matters. to set things straight; first in his own head then As a result, the reader gets actually two books in others’ as well, by writing a lengthy book. in one: one about the operations concept (the- That is how his new book was born 14 years af- ory + application) and challenges of sustainable ter the regime change. growth, and another about the economic his-

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tory of the one and a half decade during the re- which, drawbacks gradually became clearer. In gime change in Hungary, focusing on the addition, globalization created new limits to questions of growth. economic policy aimed directly at economic The main purpose of this review is to make growth. readers interested in reading the book. There- Presumably, the spreading of democracy fore, I introduce a short content of the book by played an important part in the prominence of taking due care not to give such a complete pic- growth policy, since it encouraged governments ture that the reader might think it is not neces- – as a side-effect of frequent parliamentary elec- sary to read it anymore. At the same time, being tions – to base their aspiration of power on fast a reviewer myself who has been sneaking growth, and its alleged counterpart of increas- around economic policy for several decades, ing prosperity. Election-time economic policies I cannot avoid evaluating the work as well. did not only incite growth competition, but also hindered – in the opinion of many experts The book consists of five parts. The first part – required reforms to address the changing en- explains the definition and significance of sus- vironment (technology, World economy, de- tainable growth. The second part analyzes the mographics). Usually, – except in extreme cases performance – growth, balance relations – of – voters prefer alleged stability to more rapid post-socialist countries. After this, the author changes and promises for the future. summarizes the “equation-structure” of sus- The author appropriately describes the polit- tainable growth and then discusses the role of ical characteristics of sustainable growth in a institutions with utmost attention. The book narrow interpretation when he emphasizes that concludes with an admission and recommenda- this is a medium-term, macro-level decision, tions that prove the author’s constructive inten- and that governments must confront their am- tions. bitious social objectives with the reality of their constrained opportunities that is often accom- ¦ In Part One the author defines the concept panied by diminishing growth. During this of sustainable growth by a narrow interpreta- process, there is significant temptation to go tion of the definitions of fiscal sustainability, too far – due to intentions of catching up, and sustainable growth, and sustainable develop- creating a new society – based on certain theo- ment that are frequently applied in interna- ries that overestimate the state’s involvement tional literature. He focuses on the balance of and – at last, but not least – due to unreasonable the economy, as in his opinion, this is required expectations by the voters. in order to manage the new paradigm and seize Of course, those definitions chosen by the economic analysis. Interpretation of sustainable author that can be used exactly as they are, such growth is the closest to fiscal sustainability and is as definitions that spotlight finances, can be related to the state’s involvement in financial subject to criticism as they do not have a PR matters. The author finds – implicitly – the value for politicians. László Antal is fully aware broad definition of sustainable development too of this, he even lists these self-explanatory defi- obscure, because it extends to the less explored nitions as: unsophisticated theory of growth; fields of ecology and social development. The complicated methodology; not “long enough author would like to stand on firm ground; term;” uncertainty of potential growth and therefore, he highlights the operational, mea- trend valuation; no clear separation from cycle surable aspects of economic policy. Actually, management in occasion; different evaluation during the second half of the twentieth century of the starting point that could result in uncer- – after the dethronement of gold, crisis and tainties, etc. He puts less emphasis on the thesis wars, mass independence of underdeveloped of communal-choice theory, according to countries, and the establishment of “the two which, sometimes governments do not even World orders” – most states often followed an strive for sustainability and strengthening of overwhelmingly ambitious growth policy, of stability as they more focus on the element of

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power. Despite of this, the author believes that abroad, and on-going adoption of the Euro- uncertainties and limits do not affect his procla- pean Union’s achievements. Nevertheless, the mation of handling this narrower, but well transformation of the public sector – that pri- quantifiable view as a prominent question, op- marily operates under political influence – and, posed to the distorted short-term and uncertain especially, fiscal policy remains to be seen. long-term considerations. The fact that the au- Before the objective introduction, the chap- thor did not constrain himself to the nar- ter primarily focuses on the results of macro- row-minded policy on process-regulation is evi- economic indicators during the transformation denced by his later arguments, for example, on and whether these express what is credited to the role of institutional policy. From the au- them in more advanced economies. We can see thor’s explanations, we can see his optimistic that they hardly express anything before 1995. conviction that governments will act according This is not only due to statistical deficiencies to the principles of fiscal sustainability, if they and distortions, but also to the fact that the sig- are aware of them. The accuracy of this view re- nificance of a deficit is different in a mature mains to be decided by the reader. financial and credit system than in an immature one. The so-called, “under-the-line” items make ¦ Part Two covers about one-third of the the picture fuzzy and the size of state subsidies re- book, where the author departs from the theo- sult in structural distortions. Probably these be- retical framework of definitions, (he returns to came clearer after 1995. The figures are more re- this subject in Part Three) and tries to intro- liable on inflation-rate and the balance of inter- duce the decade of regime change in the Central national payments. However, even these figures Eastern European countries, relying on data have shown short-term distortions caused by the supplied by them. By doing this, the author state. goes beyond the scope of sustainable growth The author also analyzes flawed macro-eco- and fiscal stability. However, for the reader it is nomic decisions made during the first few years clear that there is an objective reason for the ex- of transformation. It is really difficult to explain istence of this part. This reason is the author’s why politicians qualified the economy as being intention to find out how long the stormy pe- bankrupt and a pile of garbage on one hand, riod of crisis management and institutional and on the other hand, they envisioned a dy- structure policy will last outside of the frame- namic development after “a couple of difficult work of macro-economic policies, and when years.” Indifferent to the logic, that might not and how will the time of that macro-economic policy arrive that provides stable, permanent make sense, it is a valid concern that an objec- and sustainable growth. tive measure for assessing macro-economic pro- This chapter has several merits. The first one cesses during the crisis of the transformation is its concise form and richness of data. The sec- was non-existent, not even mentioning the dif- ond one is the wealth of literature used. ficulties of estimating the GDP or growth po- Thethird,andformethemostagreeableaspect, tential. is the approach of evaluation from many-angles. The rich content of this chapter is demon- Thisshowsthattheauthordoesnotwantto strated by the elaboration on – in addition to overwhelm the reader with insignificant declara- the description of macro-economic processes – tions or collections of recipes. the “philosophy” of crisis management, a het- It is inferable from the book, that the author erodox approach to the “Bokros-package,” and considers the first-half of the nineties as the cri- the state of household savings. It also refers to sis-period of transformation, and the second- the importance of the financial sector that is half as the beginning of dynamic catch-up with discussed later on. At last, but not least, it de- the Western-European economies. The sec- scribes the roles of multinational, small, and ond-half is characterized by an export-oriented medium enterprises under the transformation economy, the inflow of operating capital from of the corporate sector.

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After all, the corporate sector was approach- then the requirement of sustainability. The ing European standards during the ten years of author provides extensive information on the transformation. Internationalism has become difficulties and uncertainties of potential output powerful – as indicated by the fluctuation of and the output gap, including the structural def- GDP that followed the trend of the European icit of public finances. Currency appreciation economy. While the public sector has been only and depreciation also receives a significant scope, partially transformed (e.g., reform of pension which is demonstrated by the large volume of regulation), and surrounded by controversy data. The extensive amount of information does (municipalities etc.). The state financial policy not allow much to remain. Perhaps such remain- – and perhaps the logic behind it – is election der would be the not drastic enough separation and power-driven and it stuck between com- of potential GDP and (trend of) growth poten- prehensive reforms, small steps, compromises, tial, supply and demand shocks, or the negli- and political lobbies. gence of automatic fiscal stabilizers. The latter issues do not seem to be part of the scope of sustainable growth, but any economic politician ¦ In Part Three the author leaves lively anal- facing growth related questions knows that these yses to focus on the “equation-structure” of sus- are more or less recurring disturbing factors. tainable economic growth. Obviously, the reader Their misjudgment can bring about the failure expects to find detailed, dry quantitative mod- of a consistent policy, which is recently evi- els full of formulas. However, this expectation denced by the “new economy” and its bubbles, is only partially met. First, the author is unin- or the separation of cyclical and structural prob- terested in abstract growth-models. Second, lems in Europe in recent years (i.e., the problems what we receive here is an expert selection from with answers to challenges.) the immensely complicated tangle of methodical bibliography that focuses on practical problems. – By the way, he does introduce some real ¦ Part Four discusses the relationship be- complicated models as well. The main topics tween sustainable growth and institutions. are: potential output, growth trends, sustain- Western literature primarily focuses on fiscal able fiscal policy, method of accounting by sustainability when discussing sustainable age-groups, and the relationship between sus- growth, and consequently, it most often exam- tainable growth and international balance of ines the tax system and welfare expenses from payments. Besides the aforementioned main institutional issues. However, it is understand- topics, he also discusses competitiveness, ex- able that in the drift of one and a half decade of change rates, and the Balassa-Samuelson effect. regime change, the author gives greater impor- Thus, the chapter goes beyond the methodol- tance to institutional factors, which are more often ogy of equation-structures, by stating that “it addressed in connection with sustainable development can be easily decided, based on common sense, in the West. whether the economic path is sustainable or The chapter starts with the introduction of not.” Fortunately, the chapter extensively dem- globalization and its evaluation, and discusses onstrates from many angles that this can be true the changing tasks, opportunities and difficul- only if fiscal policy is considered in its narrowest ties of the state from this perspective. The au- sense. The value of the chapter is that it demon- thor continues to analyze the roles of the state strates the fact that this problem is incompara- by showing and justifying the changes of redis- bly more complex for an economic politician. tribution in Europe. Finally, an insertion (writ- Labor aspects are not fully satisfied within the ten by Katalin Mérõ) shows how tight is the re- ideologies of NAIRU; and not only equa- lationship between growth and the depth of the tion-structures matter in respect of sustainable financial sector. According to the author, deep- growth, but also the rate of growth. In fact, ening the financial sector is one of the condi- growth-rate is often politically more important tions and effective means of dynamic growth.

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¦ Part Five bears the modest title of “In Con- view of the recent past. I hope that he will not clusion.” The author’s three decades of practi- take it personal, but those experts of economic cal experience enables him to provide conclu- theory and economic policy over a certain age sions and recommendations. The first recom- can remember the important messages of László mendation is about establishing the practice Antal, who is considered a representative of the and ranking of medium-term macro-economic reform-economists generation in Hungary and financial planning. The rest of the chapter since the nineteen-seventies. Well, today in a describes the process of destabilization between different time, perhaps being farther removed 2000 and 2003, and then draws some conclu- from direct political and econo-political influ- sions. He emphasizes the structural problems of ence, and in possession of the lessons learned the budget, the necessity of harmonizing mone- during the past decades, the author could pro- tary and fiscal policies, and the role of the stabil- vide a perception after the fact. ity of economic policy in creating international confidence. He finally recommends a policy If this is what the reader expects, he/she will aimed at increasing the investment rate. He ex- receive plenty of information not only on the pects a positive effect from the increasing expe- topic referenced in the title of the book, but on rience of economic politicians and the disci- numerous related economic issues as well. plinary measures of the European Union that At the same time, László Antal attempts to accord priority to sustainability. avoid any side-tracking to discuss personal aspects and self-reflections. This makes the book The extensive database provided in the ap- somewhat “dryer”, and more academic than pendix and the publisher’s good work resulted what might be expected by those readers who in a nice typographic publication, which also are familiar with the author’s previous work. deserve appraisal. By avoiding direct points of polemics, the author has deliberately narrowed down the scope ¦ In conclusion, we receive a valuable study of potential subjects for debate that would be analyzing one of the most exciting issues of to- otherwise suggested by the selected topic. day’s economic policy in accordance with the However, there are enough topics remaining author’s temperament as being “a hundred-perfor debate, as László Antal undertakes not less cent activist” (Kornai). It is possible that some than summarizing the following extensive topics academic economists will not find this book el- in one book: What are the financial balance-lim- egantly theoretical. But my answer to such criti- its of national economic growth?; Under what cism is that, first of all, they need to read this kind of external (financial) conditions has eco- book in conjunction with Tibor Erdõs’ theoreti- nomic transformation taken place in Central cal work of “Sustainable Economic Growth;” Eastern European countries and in Hungary?; and second, not to forget that this approach Which international institutions and market could attract a much larger audience. players determine the balance limits, index figures and remainders of economic growth, and Review by PÉTER ÁKOS BOD in what way do these indicators affect econo- political actions? Or as the author describes it: László Antal’s dissertation and subsequent pub- how the standardized, accepted analytical in- lication of his book is an important event for struments, criteria, and rules of thumb of finan- those interested in Hungarian economic policy. cial stability will become adequate for “econo- In view of the author’s career, it is justified to political mass consumption”? When thinking expect to read a critically analyzing or analyti- about the European Union’s Stability and cally criticizing opinion on economic policy, Growth Pact (still valid) or the preceding and primarily, on present-day matters of bud- GMU-criteria of Maastricht, it is clear what the getary financial policy. Through this publica- author means by unspecified “mass consumption, we will understand the “mature Antal’s” tion.” He means that even those newspaper

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readers, who are unfamiliar with the nuances of there has been an influential school of thought, economic policy, know that the annual deficit according to which transitory countries should of public finances (calculated in one way or an- and can quicker overcome the crisis of regime other) must/should not exceed 3 percent of the change, if they enforce well-set macroeconomic gross national product or that national debts indicators as soon as possible. According to a (calculated in one way or another) must not be different school of thought, which is considered higher than 60 percent of the GDP. In Chapter more “gradual,” the transition (return) to mar- Three of the book, there is a thorough examina- ket-economy implied a change of social institution of macroeconomic relations of financially tions, assuming changes in norms and customs; sustainable economic growth, which include while institutional changes (e.g., establishment the possibilities of financing the balance of cur- of a system of Courts of Registration and Land rent-account payments, the nature of inflation Offices for the protection of proprietary rights) and deflation processes, and the budgetary po- required appropriate timing. Such institutional litical prerequisites of sustainability. changes include the use of money, establish- Antal is right in having analyzed and comment (restoration) of banks and the stock ex- mented on the econo-political events of the past change, wide-acceptance of the use of money 10-15 years in Hungary, commenting on simi- and the financial culture; and as a consequence, lar (or somewhat different) experiences of fel- financial deepening. As the author of this re- low nations. This is the subject of Chapter view, being an economist myself, I feel closest Two, and obviously this is the topic that results to the school of thought on institutionalism. in most of the debates. I note that even though As an active economic politician, I have been the author seldom speaks directly to the reader, qualified by (not always objective) Hungarian when he does, his remarks are always interesting commentators as a member of the Gradual and thought provoking. In Chapter One, he School of thought; therefore, I have read Chap- writes the following as subject limits of his ter Four on the institutions of economic growth book: “My original plan was to discuss the issue of and development with special interests. In addi- institutional changes only in general, avoiding the tion, this part mentions a lot of interesting detailed examination of the transformation of the examples on naturally disputable econo-po- institutional system. Moreover, I am not attempt- litical, econo-theoretical, and political issues. ing to perform an international comparison in this These are, for example, the so-called crisis of the respect. Eventually, institutional matters received Swedish welfare-model, the constantly chang- a significantly larger extent of scope than I in- ing meaning of the “chance-giving” state, and tended to grant them. It is impossible to appropri- the relationship between global economy and a ately separate issues of quantitative adaptation state that is organized on the principle of na- and institutions.” (Page 54) Accordingly, Chap- tional sovereignty. ter Four deals with the state’s role and its signif- The final Chapter, Five, concludes with les- icance, the range of possible actions by a na- sons learned and comments on the most recent tion-state within a globalized world, and other phase of the financial imbalance in Hungary. associated institutional questions. This part in- At about the same period of time when the book cludes an interesting and thorough analysis by was completed, today’s financial imbalance Katalin Mérõ on the relationship between eco- worsened with a surprising intensity. The sole nomic growth and financial depth. existence of this phenomenon contradicts the As a reviewer, I took notice of and welcomed underlying hypothesis of the book. Specifically, the analysis of institutional aspects in the re- that after great turbulences of the transformation quired extent, because – although this book period, – in other words – under “normal condi- does not present the once popular debate of tions” the macro-financial balance requirements shock therapy versus gradualism from the topic of of stability appreciate. “In keeping financial disci- return (“transition”) to market-economy – pline, international agreements play a part of in-

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creasing significance, such as supranational deci- considered by the author as being evident. One sions (particularly by the European Union and the of them is related to the characteristics of the World Trade Organization) and statements of first phase of Hungarian transition. Most Hun- the International Monetary Fund that serve as a garian professionals in the field seem to agree compass at the international capital market.” with the opinion that, contrary to the Polish (Page 21) If this is true, and it is obviously true, and (maybe) the Czech cases; a more cautious that the above listed institutions – by the way, and gradual economic policy was typical in besides the EU the OECD has more decision Hungary during the first period, after 1990. In power in respect to macroeconomic matters fact, the Antall-government was characterized then the WTO – attach such great importance by delays and postponements that later on led to the indicators of the balance of public fi- to an opportunity for the development of the nances, balanced exchange rates, moderate bal- fiscal crisis. However, a comparative analysis of ance of payment position, when they are super- countries in our region and national economic vising ex-socialist countries, then the fiscal im- facts allow for a completely different interpreta- balance that started in 2001, became more seri- tion. Namely, – not considering the specific ous in 2002 and has not yet improved in Hun- case of East Germany – that the first phase of gary is really surprising. the economic regime change in Hungary was In a short paragraph László Antal turns to the the most extensive, and most consistent in re- reader as follows: “When I started to write, I had spect of the real economic structure and institu- a strong opinion that it is very difficult to get out of tional transformation. This is well proven by the a transformation crisis, stabilize the economy and rapid transformation of the production, employ- switch over to the track of sustainable growth. ment, and ownership structure as well as the However, when this is accomplished, an extreme sudden increase of the unemployment rate after shock would be needed to affect the economy in or- 1990. Based upon macro-financial indicators der for it to leave its track once again. I supposed (inflation rate or budget deficit and the extent that the direct experience of the dramatic crisis was of redistribution), it is possible to argue beside a not-easily forgettable lesson learned by convales- our gradualness as compared to the rest of the cent Eastern-European economies. I was wrong, Visegrád-countries. However, it only can be ar- the memory of the crisis was forgotten in a surpris- gued if we attribute the Czech and Polish eco- ingly short period of time and it was replaced by nomic recession, which took place at the end of a strong belief in rapidly closing-the-gap and the second-half of the 1990’s, to individual fac- the miraculous will-power of economic policy.” tors and not to the consequence of the first-half (Page 43) Among Hungarians, there are quite of the decade. From the perspective of restruc- evident political explanations for the develop- turing of the corporate sector, viability of the ment of the record-breaking 2002 budget defi- banking sector, severity of bankruptcy proce- cit. For a more general examination of the issue, dures,andabsorptionofforeigncapital,the a regional survey will be helpful. By mentioning Hungarian take-off can be considered as “shock- the recession in the Czech Republic in 1997 like;” while the other cases mentioned above are and the weakening of the Polish economy dur- rather “gradual.” At least the Czech banking ing the same period of time, the author refers to crisis and its real economic and growth conse- the fact that secondary or ensuing crisis seem to quences do allow such an interpretation. be possible. In fact, as he shows elsewhere, sec- The other related case is the judgment of the ondary imbalances took place in various degrees 1995 stabilization package. László Antal de- almost everywhere, perhaps except for Slovenia. clared here and elsewhere that from econo-polit- Without intending to give a simple answer to ical actions serving sustainability, he can identify questions about economic behavior that is dif- himselfmostofallwiththeBokros-package, and ferent from the author’s hypothesis, it is worth he accepts the common evaluation that this ac- to cite two conditions to contrast findings tion was the one that switched the Hungarian

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economy over to the track of economic balance. show a different picture on the state of the In the preface of the book, he mentions his par- 1994-1995 Hungarian economy and the pro- ticipation in elaborating the 1995 stabilization cesses of subsequent years; about which, due to program as an important part of his practical its somewhat dramatic appearance, László econo-political career; therefore, it is expected Antal could also feel that we were rushing to- that he uses this program as a good example in wards a crisis. the few direct references quoted. As he writes in The author’s emotional situation report is connection with the government program: “It is also interesting, because during the years pre- interesting that maybe the Bokros-package was the ceding the stabilization package Hungary did only concept that could truly be called a program, go through a crisis. Perhaps, the extent of this to the extent that it was a comprehensive and co- crisis quite fits in with regional trends shown by herent idea, and in an exceptional way it did serve the data in Chapter Two. According to this, the as a compass for macroeconomic decision-mak- 1993 GDP data is the lowest – about 80 per- ing.” (Footnote No. 37, Page 59) In fact, he cent – when compared to the 1989 official must have attributed a revolutionary signifi- GDP. At the same time, the lowest point for the cance to this package, as it can be indirectly un- Czechs showed 79 percent, the Slovenians derstood from another interesting footnote, 84 percent, and for the Ukrainians 61 percent. which also refers to the enormous difficulties However, in order to analyze the real signifi- for him to recognize important trends: “For ex- cance of this data, we should learn more about ample, I considered – in agreement with many the difficulties of measuring national revenue. other experts – the introduction of the new eco- Despite of all, a recession of this extent is cer- nomic mechanism in 1968 as a renewal of the cen- tainly a serious crisis during and as a result of tral-planned economy and realized the limits of which, it is impossible to maintain well-tailored such reforms only several years later, after much financial ratios. Several financial indicators did struggle. Similarly, responsible decision-makers at reach intolerable values in Hungary around the beginning of the nineteen-nineties, till nine- 1995 and a correction was then necessary. teen-ninetyfour, together with many researchers, We could also see, however, that decision-makers of that time used arguments with the were not aware of the fact that the economy is al- potentially dramatic characterization of the situ- most inevitably running towards a crisis, although ation to make the decisions, and have them ac- in retrospect this is quite evident.” (Footnote cepted by the population. In retrospect, Hun- No. 3, Page 10) garian econo-political and political governors What is presented here as evidence is not evi- did not completely identify themselves with the dent for everyone. Here, I do not refer to his po- feeling of “we are running to crisis.” This is litical-publicist reception in the past – and proven by the fact that today, under a similar maybe even today – being between the extremes coalition government, a macro-financial imbal- of total devotion (“I love Lajos”) and possible ance similar to that of the 1995 proportions deliberate evilness. However, on the anniver- could appear once again; but this time under sary of the 1995 stabilization package we heard “normal” conditions, without real economic or a lecture that considered – with due regard to institutional crisis in the preceding years. the structural changes that just begun at the However, topics exposed above do not be- time – the stabilization program premature or long to the mainstream of László Antal’s work, perhaps even unnecessary (Tamás Mellár). so much so that most of them appear only in Other analysts were led to somewhat de- footnotes. It might have been more valuable to heroizing conclusions in respect to the depth, in discuss these explicitly, as I am certainly not particular, the sustainability of the correction. the only one who considers these as important Certainly, the balance of foreign trade and pay- subjects for debate. I can also see other prob- ments data today – since they were corrected lems in the prominence. The concept giving and revised by the National Bank of Hungary – title of the book is sustainable growth, but it

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much rather means – sustainable development cators, ratios, factors and measurement points has a similar meaning as well – coexistence by the visible, and invisible hands of the inter- with the natural environment and problems national world of finance. Therefore, the indi- associated with natural resource management cators of financial sustainability do have to be within the mainstream of economics and soci- includedinthecommoninterpretationofeco- ology, than the narrow financial interpretation nomic policy. Unfortunately, due to our present of “sustainable growth” that is verbiage used circumstances, it appears that decision-makers primarily by the IMF. Of course, László Antal interpret national economic policy quite ”volun- knowsthiswellandyetthedistinctionisonly tarily”. Consequently, introducing and attaining expressed under Footnote 6 on Page 11. Eco- acceptance for the concepts of the book is an im- logical aspects are excluded from the analysis portant mission of Hungarian economics; ac- the attached criteria are considered as less exact knowledgements are due to László Antal for than those of financial sustainability. (Pages publishing his work. 30-32) It is, of course, understandable that László Antal restrains his research to the financial balance, but the argument given for the ex- Review by ZOLTÁN TÖRÖK clusion of ecological sustainability – that it László Antal, an outstanding figure of Hungar- cannot be as exactly measured as the balance of ian economics for decades, published a remark- the budget or payments – is just not convinc- ably up-to-date book in 2004 under the title ing enough. Particularly, knowing that the “Can Sustainable Growth be Maintained?” It is rate of the annual budget deficit of a country an enjoyable, high quality reading providing couldbeby2percenthigherorlowerofthe plenty of information in the fields of both theo- GDP, depending on the methodology used, as retical economic issues and the analysis of the it is also argued by the author himself. (Foot- econo-political history of the past one and a half note No. 19, Page 38) decade that is not reduced to only the econom- However, let us get back to the underlying ics of transition. However, the author intends topic of the book. Do national and regional de- to tell more than that in his book. As an econo- velopments that are contradicting to the start- mist who feels at home in practical issues of ing hypotheses of László Antal’s book weaken elaborating on economic policy as well as in his statements on the present importance of theoretical questions of macro-economics (in macro-financial planning or on the increasing fact, he admits that he enjoys the most when he econo-political weight of financial balance? can take part in theoretical and practical activi- Since the book begins with the – somewhat parties simultaneously), Antal is looking for an an- adox, when first heard – statement that market swer on whether or not considerations had been economy is the right environment for planning given in Hungary to carry out a disciplined eco- (referring to fiscal planning in this case). nomic policy that ensures sustainable growth By reading through the book and thinking on (and in other new EU member states that have a what they have read, the readers will conclude similar, successful economy in transition); in that the underlying base-thesis of the book is other words, whether sustainable growth can be very appropriate. By financial deepening and maintained or not. participation in the international flow of financial means and capital, each ex-planned econ- ¦ In Chapter One (“Sustainable Growth: a omy experiences that a government’s real eco- Brand-new Paradigm or Just a Slogan? Hypoth- nomic regulatory apparatus is fiscal and (if it re- eses”) the author exposes his assumption of sus- mains) monetary policy. Institutions in control tainable growth being a nascent new paradigm, of these are the real possessors of public econo- an accompanying phenomenon of changes in political power, even if their scope of control the nature of economic development (i.e. glob- over the apparatus is restricted via various indi- alization and its results). The author focuses on

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the connections between sustainable growth and ¦ Chapter Two (“Performance and Balances econo-political planning (or rather on economic as Reflected in Numbers of Countries in policy of which the output is sustainable growth). Transition that are Admitted by the European This is where he explains that “institutional Union”) contains a comparative analysis of adaptation is not a result, but rather the cause of economies in transition. This is one of the consistent rapid growth”. (Page 52) The defini- chapters that offers, best reading; László Antal tion of institutions is wide; it includes state or- introduces the long decade of the nineties with ganizations, rules, business organizations, and deep knowledge and detectable pleasure. customs of social behavior. The ability of insti- These 130 pages are a brilliant example of his tutional adaptation can develop mainly as a re- publications on the economy in transition that sult of necessity. (Page 53) Consequently, “the could even stand alone. It can provide new pace of sustainable growth is primarily determined information even for those readers who are fa- by the ability of institutions to adapt,” or rather miliar with the issue and its novelty is exactly “if the process of institutional adaptation is slow or the central question of the selected topic, i.e. hindered for some reason, the growth process will the presentation of transition from the perspective of sustainable growth. One of the corner be broken and the previous path of development stones of economic policy in the pursuit of sus- will immediately become unsustainable”. (Pages tainable growth is operation. The author sin- 53-54) Sustainable growth requires sustainable cerely admits this problem being an obstacle of economic policy. (The author does not exam- analyzing (and comparative analysis of) transi- ine economic policy in general, only as an issue tion: “we must accept the fact that indicators of relevant to the topic discussed, such as “the es- economies in transition do not necessarily mean sence of economic policy is an activity of harmoniz- the same as those in advanced market economies ing revenues available at a given time with the – that are implicitly used for comparison – and major directions of utilization which is full-scale, this naturally leads to different results originating continuous, practical, and which must be carried from econo-political intervention that are the out under uncertain conditions”. (Page 66) same or somewhat different…” (Page 95) However, the author considers economic The author divides the conditions of success- policy – relying on his obvious practical experi- ful transition into the following three catego- ence of several decades – as rather an organized ries: prompt participation in the order of inter- drifting than a deliberate and foreseeing activ- national division of labor; forms of behavior ity. According to László Antal, the recipe for and rules enforcing financial discipline; moder- sustainable growth is that economic policy be- ate fiscal policy. László Antal demonstrates comes capable of adopting its drifting charac- macro-economic connections reflected by the teristics to external compulsion in accordance economic processes of the recent past in an in- with the goals of sustainable growth. In this genious way. (Pages 170-177) way, the criteria of sustainable growth become part of financial planning and econo-political ¦ Chapter Three (“The Equation-structures practice of decision-making, which makes the of Sustainable Growth”) is a theoretic excursion deviation from this growth/path even more dif- back to the basics flavored with numerous prac- ficult. It is ironic (particularly for an economist tical case studies. After having drafted the re- who lived for decades in a central-planned quirements of sustainable growth he attempts economy) that genuinely efficient macro-plan- to introduce the relationships between poten- ning develops under the conditions of market tial output, growth trend and output gap in a economy. Yet, this can be considered as the lengthy description of sustainable fiscal policy most important and irreversible transformation (explaining theories such as the system of ac- in the economy – paradigm change – of our counting by age-groups) as well as the criteria of time. financeable external debts and the current

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deficit. The part dynamizing the equation- of recession have shortened and they are less structures of sustainable growth (by an exten- deep as a result of globalization. sive analysis of the validity of the Balassa- The author is admittedly subjective when he Samuelson effect) is especially exciting. The au- emphasizes these two fields (transformation of thor is exceptionally well prepared in theory the role of the state and financial depth). and relies on a wealth of literature. This chapter Transformation of the role of the state, the obviously does not intend to carry out a inevitable reform of the model of a welfare state self-contained theoretical analysis, rather a is demonstrated by citing appropriate examples pragmatic attempt to take us closer to imagin- (such as the transformation of the Swedish ing the economic policy required for sustain- model) and the author goes as far as outlining a able growth, specifically, to the equation-struc- superficial draft of the chance-providing state. tures of sustainable growth. In other words, he Sub-chapter with the title “Economic Growth is looking for the answer to whether the criteria and Financial Deepening” is written by Katalin of sustainable growth can be specified in such Mérõ. Her assumption is that financial deepening details that economic policy could rely on is not the result or accompanying phenomenon of them. The issue of the constraints of statistical a relatively fast and stable growth; it is its cause. Consequently, diminishing of the economic lag data application is mentioned here as well. and economic gap must imply a significant finan- (Pages 230-235) The author also asks such cial deepening. For example an economic policy up-to-date questions as the rate of sustainable intending to maintain growth must enhance growth in Hungary, the necessity of coopera- financial deepening. The sub-chapter, is well- tion between fiscal and monetary policy, the written, theoretically solid, well reasoned and possibility of reducing inflation to a perma- correct, and makes use of the tools of practical nently low level, and the ideal schedule for in- analysis in line with the mentality of the whole troducing the euro. book.

¦ Chapter Four (“Institutional System and ¦ In Chapter Five, the last chapter, the au- Sustainable Growth”) consists of two sub-chap- thor summarizes his opinion on economic pol- ters. The author demonstrates the adequate icy based on macro-planning that is required transformation of the institutional system un- for sustainable growth, and analyzes the derail- der the conditions of globalization from the ment of the Hungarian economy from these perspective of sustainable growth focusing on tracks that started in 2001. the areas of state role and the financial sector as Sustainable growth is not only a subject of a liaison. After all “institutional adaptation is not research in developed countries; it is also pres- a result or requirement of permanent rapid ent in some form in the practice of macro-fi- growth; it is its provoking factor.” (Page 306) nancial planning. The author is interested in Typical tendencies and not a specific institu- whether or not the assumptions and considerations expressed in the concept of sustainable tional system is the subject of analysis. The au- growth have an influence on macro-level thor takes his time to examine globalization in (econo-political) decision-making, and if they which the limitation or relativization of the do, than by what kind of mechanisms this takes econo-political role of the state (Page 308) ap- place. His attention is focused on income pro- pears in conjunction with global convergence cesses, financial balance relations, inflation and (Page 309) and the acceleration and globaliza- evaluation of the financial problems of eco- tion of capital flow. (Page 310) In his evalua- nomic growth, and related monetary and fiscal tion, globalization has made world economy questions; moreover, the recurring reasons for sensitive to crises (a “crisis epidemic” has ap- departing from the sustainable growth path peared for which he cited the Russian crisis as and the common characteristics of financial cri- an example). It is true that even the author is ses. Sustainable growth is after all a collec- cautious. This is due to the fact that periods tion of criteria and rules of thumb created for

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econo-political mass consumption – attempt- of the author, as – due to globalization – ing not only to determine the desired directions opportunities are much more limited than de- of change or preferences, but also the critical sired in the fields of interest transmission and measures. Planning of macro-level processes is exchange- rate management. In my opinion, it the result of revolutionary changes that took is not necessarily useful to spotlight financial place in the widely interpreted system of insti- deepening. Despite of Katalin Mérõ’s excel- tutions – which is globalization. The major lent analysis, and even in agreement with her question of the book is whether sustainable conclusion, I think that there are such exten- growth has relevance in present day practice of sive structural obstacles of financial deepening decision-making in Hungary, in other words, in Hungary, due to which our lagging behind whether considerations inciting a disciplined more advanced countries will be permanent, economic policy that ensures sustainable and thus the real extent of development will growth are enforced to some degree in Hungary remain obscure. Partially I mean that our capi- (and in countries in a similar situation). tal market has serious limitations of economies It is inevitable to homogenize data so that of scale – it is simply too expensive and uncer- they become operational and comparable. tain for the great majority of companies to en- The European Union’s regulation for preparing ter the stock-market; and partially that multi- economic statistics is very strict. Nevertheless, national companies with a significant presence events of the recent past (loosening of Stability in production mostly do not borrow from the Pact requirements this year, subsequent revi- banking sector, but rather from their parent sion of public finance deficit in Italy, Portugal companies. On the other hand, I mean that and Greece, significant exceeding of the per- theauthordidnothaveanopportunitytoana- mitted budget deficit in France and Germany lyze the residential credit expansion that took in recent years, continued damage to the trans- place just in recent years. parency of Hungarian fiscal statements) suggest Possibly one of the most exciting questions is that the stipulated criteria might not be able to what the author thinks about derailment from serve their purposes completely, while even the sustainable growth path in Hungary with those purposes are judged by the author – with regards to growth rates between 2001 and 2005 good reason – as limited. Consequently, it can (and especially the drastic improvement in the occur to a practicing economic analyst that the growth structure in the last two years) and the statements of the book idealize to some degree well-known, not particularly disciplined eco- the practice of advanced countries carrying out nomic policy. a planned economic policy in the interest of It is impossible not to agree with László sustainable growth. For example, the statement Antal’s final conclusions. Hungarian economic according to which “it is almost impossible to policy has no alternative to active promotion of deceive the ESA – European System of Ac- institutional transformation that would serve a counts – transparency requirement,” (Page 43) sustainable growth path. There are existing ex- might be considered as somewhat exaggerated. ternal incentives (membership in the European László Antal finished the book one and a half Union and fulfillment of the strict require- years ago, before Hungary’s accession to the ments needed for the introduction of the euro European Union. Consequently, we can find in Hungary as soon as possible). Globaliza- some conclusions or statements that have be- tion requires long-term economic planning not come obsolete by now, but these are, in my only from companies, but national economic opinion, issues of minor significance in most policy must also take steps in that direction. cases (such as his skeptical opinion about the The sooner decision-makers recognize that possibility of reducing the Hungarian inflation budgetary operations (public institutions) must rate to 2-3 percent in a short time on Page 277). also be transformed, the more efficient sustain- In practice, the task and possibilities of Hun- able growth will be, thus improving social wel- garian monetary policy fall short of the require- fare. This is what László Antal’s book primarily ments of both standard economics and those serves.

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Articles about the Pension System

Economic Review [Közgazdasági Szemle]: Social Insurance Systems as Public Goods by József Mészáros, March of 2005 Population, Employment, Pension by Mária Augusztinovics, May of 2005 What is/will be the Situation of Private Pension Services? by János Stahl, June of 2005 Are Social Insurance Pension Systems Public Goods? by György Németh, June of 2005 Foreign Economy [Külgazdaság]: Essay about Pension, Pension Systems and Pension Reform, Part I and II, by György Németh, issues 1 and 2, 2003 Mini Opinion Poll about the Pension System, Answers by Mária Augusztinovics, Péter Ákos Bod, Ágnes Matits, Péter Mihályi and András Simonovits, issues 7 and 8, 2003 Postscript – but Not the Final Words – to the Debate on Pensions by György Németh, issue 1, 2004 Statistical Review [Statisztikai Szemle]: Successful Pension Reform? by Farkas Hamar, issue 12, 2003 Company Management [Cégvezetés]: BytheTimeWeGrowOld…WorldPensionSystemsinCrisisby György Németh, March of 2004

Public finance reforms, that are generally con- attention verifying their authenticity. In our sidered indispensable by economists, have not opinion, he proves his point in three out of the been carried out since the regime change. Possi- four cases without a doubt. However, we con- bly the only significant progress made has been sider specifically the first thesis disputable. Ac- the initiation of the pension reform by the in- cording to the author, the decrease in troduction of the second pillar of the pension childbirths is inevitable in case of a pay-as- system. Even this step has been accompanied by you-go (mandatory contributions and central loud disputes, doubts and criticism. Many experts distribution) pension system. In this surprising regard the private pension system as a success context he establishes a relationship between story, – for example, Farkas Hamar in his article two reasons; on one hand, he accepts the theory published in the Statistical Review in December that parents intend to secure support for their 2003 – but its real test will take place in the near old-age by having children; on the other, he future when the first payments will be made. agrees that in a pay-as-you-go system entitle- Debates on the problems associated with ment to and the amount of pension is inde- pensions, and in a broader sense, the solution of pendent from the number of children raised by old-age income security, and the development a person. József Mészáros just references the of the pension system do not cease. Their new other widely-known approach – which I con- phase is reflected in a series of articles in the Eco- sider as (fortunately) more typical in our time – nomic Review this year. according to which the incentive for having First, we can mention József Mészáros’ litera- children is simply the value of the children ture from a theoretical – more exactly, game themselves. We can fully agree with the rest of theoretical – perspective (called, “Social Insur- his statements, such as the obvious and lack of ance Systems as Public Goods”) in the March confidence in the Hungarian pension system, issue of the review. In this article, the author which incite minimizing contributions to the proves four statements in a somewhat formal pension fund; or that the flexibility of the pen- theoretical framework, but he also pays utmost sion regulation tempts politicians to make un-

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founded promises in respect to pensions in or- Augusztinovics takes a strong stand for a base der to maximize their votes. Finally, that the pension and enforcing the principle of solidar- same objective results in the postponement of ity. The importance of her statements is long-term reforms. Of course, these statements confirmed by an also unusual thesis, according could be considered as being correct even without to which the two pillars of our pension system, references to game theory and Selten’s thesis. the social insurance and private pension systems are essentially “twins. Both of them collect contri- New articles were prompted by the debate butions from the (reported) wages and salaries of under the title of “Population, Employment and those employed (legally) and consequently, provide Pension” that was organized by the editors of the old-age pension – even though disproportionately – periodical and the Professorate of Comparable only for these employees.” (Page 443) Eventually Economics of the Faculty of Economics of it means that after all both are based on the in- Corvinus University on February 10, 2005. surance principle of risk sharing and neither of The opening speech of the debate was pre- them is related to the principle of solidarity. sented by Mária Augusztinovics; the study on which she based her speech on and a description During the extensive debate – summarized of the debate were published in the May 2005 by Katalin Szabó – four co-references were issue of the periodical. The lecture by Mária stated. Péter Ákos Bod warned – among others – Augusztinovics breaks down the topic into two of the large role played by the grey-black sector parts. First, she introduces the common demo- in the workforce structure. In his opinion, vol- graphic approach with arguments against it, and untary contribution should get a much more then she examines the characteristics of the Hun- significant part in social insurance. Demogra- garian pension system with its numerous contra- pher László Hablicsek called attention to the sig- dictions and unresolved questions. She makes nificant increase of life expectancy expected in mature, significant and apparently undisputable Hungary. János Köllõ explained the complexity statements in both parts. When outlining demo- of the answer to the question of “who supports graphic changes, she points out that the lengthen- who?” and then listed a few aspects for forecast- ing of life does not only cause the ageing of soci- ing future changes in employment rate. Actuary ety,butalsoanincreaseinthenumberofyoung Ágnes Matits stated that the pension of the people as the expansion of higher education post- “alphas” always received priority consideration pones the age of entering the labor force and hav- when decisions were made about the pension ing children. In short, the period of time when a system. At the same time, she warned of prema- person is productive shortens. However, the au- ture judgment of the current mixed system in thor considers the changes in employment more Hungary. In her co-reference she analyzed the crucial in respect to the origin and solution of the factors on which a private pension relies on and problems, not necessarily this demographic the hidden intricacies of such factors. The de- trend. She has a unique perspective on this as bate-summarizing article provides information well. She divides employees into two groups in on seven comments as well as the replies given an innovative manner. The first group, “alpha,” by the speaker and the co-referents. includes the lucky or permanently employed, In the June issue of the periodical, János Stahl and the second group, “beta,” includes all oth- examines legislative duties associated with the ers who only find temporary jobs or are perma- private pension system. He starts with discus- nently compelled from the labor market. sion of the deficiencies of the current regulation The most significant factor here is the employ- and the amendments required for their correc- ment level. In case if it is diminishing “the em- tion, with special focus on the use of the so- ployment density of “betas” will necessarily deteri- called unisex mortality tables. Then, he offers orate and the difference between the incomes of mathematical programming models that could “alphas” and “betas” will increase in a frightening assist in further enhancing the legislative rules pace.” (Page 441) All these speak against a fully on private pension services. insured pension system as it would result in In the July-August issue, András Gömöri pensions near starvation for a significant seg- comments on József Mészáros’ article published ment of the population. Therefore, Mária in March. From the perspective of game theory,

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he corrects the apparatus of concepts used in wards the position making the amount of pensions the article and their connections with state- dependent exclusively on the amount of contribu- ments made on the pension system. tions.” (See same page) A polemic article was also published in June. Németh criticizes the system of definitions György Németh – whose writing published in related to the pension system as well, stating the periodical “Company Management” in that the pay-as-you-go versus capital-backed March that compares the Hungarian system differentiation is not appropriate for describing with several foreign systems – provides com- the possible alternatives. In this, respect we call ments on József Mészáros’ article. He has strong the readers’ attention to the two-part study objections related to the conclusion of the thesis published earlier by the same author in Foreign on having children. According to Németh, it Economy. (Essay about Pension, Pension Sys- has been verified exactly by the general pension tems and Pension Reform by György Németh; system that parents’ pursuit for old-age security Foreign Economy, issues 1 and 2, 2003). is not critical in respect to wanting children; The first part of this essay is specifically dedi- this is only affected by valuing children for cated to clarifying definitions and to offer his themselves. In his opinion, evading the pay- views on them, supported with broad literary, ment of contribution is a logical strategy, be- theoretical, and econo-historical background. cause the pension system has still preserved its The second part of the study is essentially a crit- social origins, the distribution assisting low in- icism of the prevailing pension system, with come employees. (In other words, this means special attention given to the measures of the that the winners will be those who appear to be 1997 pension reform. According to the writer, having a low income). Here we get a complete the most important measure was not the estab- program: “This can be avoided by eliminating the lishment of the second capital-backed pillar, redistributive elements of the pension system.” but rather the hiding of a significant part of the (Page 611) Then in the footnote he says: “Redis- implicit public debt behind the first pillar. tribution aimed at relieving or eliminating old-age poverty should be a part of the social wel- The editors of Foreign Economy took a mini poll of several experts in reference to this study. fare system. The so-called degression that makes re- th th distribution possible will disappear from the Hun- (The replies were published in the 7 and 8 is- garian pension system – by “straightening out” the sues of 2003). From those experts who replied, pension scale, eliminating the minimum pension Péter Mihályi entered into direct debate with – in the near future, as provided for by the prevail- György Németh. The rest of the experts asked ing regulation.” (Same page, footnote No.12) – Mária Augusztinovics, Péter Ákos Bod, Ágnes Based on this same point of view, he agrees with Matits, András Simonovits – also answered from Mészáros’ statement according to which pen- different perspectives and different approaches sion systems have over-promised all over the from those of György Németh. They addressed World and the time of withdrawing the prom- the questions on the political aspects of the pen- ises has arrived. In line with his program he sion debate, the usefulness of other countries’ states: “I cannot imagine what argument could be experiences, the evaluation of the pension sys- used to refuse an offer that would make the tem and directions of change. We believe that amount of pensions dependent exclusively on the re-reading these opinions can also be useful for amount of contributions.” (Page 612) And later providing a basis for the endless, restarted de- on: “The dilemma of the political class is no more bate on one of the most important social, eco- than to what extent they should take the promises nomic and political issues. back from the various generations and move to- I. S.

NOTE

1 It is to be noted that Erdõs based the chapter of his book about the growth path of regime change in Hungary on an earlier study by Antal.

134 Authors of the Issue:

László György Asztalos Ph.D. in Economics, Member of the Supervisory Board of the Hungarian Financial Supervisory Authority Péter Balázs Professor of Economics at Budapest Corvinus University and Central-European University Péter Ákos Bod Professor of Economics at Budapest Corvinus University Tamás Halm Vice-President of the National Development Office, General Secretary of the Hungarian Association of Economics István Hetényi Professor of Economics, (Ret.) Minister of Finance Árpád Kovács Professor of Economics, President of the State Audit Office László Parragh President of the Hungarian Chamber of Commerce and Industry Zoltán Török Senior Consultant, Raiffeisen Bank Rt. Mihály Varga Titular Professor, Chairman of the Budget and Finance Committee of the Parliament Éva Várhegyi Ph.D. in Economics, Financial Research Ltd. János Veres Minister of Finance Éva Voszka Ph.D. in Economics, Financial Research Ltd.