Hungary: ‘Unorthodoxy’ Fails, IMF Returns
EUROPE, 12 Dec 2011
Zoltan Dujisin – TerraViva Europe
A year after slamming the door on the International Monetary Fund and announcing that a small country like Hungary could pursue an independent economic policy, conservative Prime Minister Viktor Orban has been forced to kneel to the IMF and ask for help. Was there ever an alternative?
The announcement followed a warning by Standard & Poor rating agency that it was considering downgrading Hungary’s sovereign rating after a new historic low of the Hungarian currency, the Forint.
Governing Fidesz party officials insist they are only requesting a safety net for insurance purposes from the IMF, claiming Hungary will continue to finance itself from the money markets and that nothing will change in terms of economic policy priorities.
These priorities revolve around job creation, support for small and medium enterprises, and provision of family benefits. The government has insisted the burden of the crisis has to be shared by households, the state and the market alike.
Immediately after the announcement critics of the government quickly pointed out that an IMF deal will seal the end of “unorthodox economic policy” in the east-central European country of 10 million that dared to ignore the IMF in 2010.
But if someone thought Hungary had been following some form of Keynesian economic policy in defiance of Washington-consensus based prescriptions, they are wrong: “The policy mix was unorthodox but the individual policies were not,” Hungarian economist Zoltan Pogatsa told IPS.
Lowering taxes was the centrepiece of Orbán’s economic strategy, in line with the prescriptions of one of the mentors of neo-liberal economic policies in the 1980s, Margaret Thatcher.
The lowering of taxes was meant to broaden the tax base in a country where tax evasion is rife while allowing companies to hire at low cost. But the latest data shows that tax evasion remains a serious hindrance to the country’s economic growth.
Similarly to the European mainstream, the governing Fidesz also approved cuts in social expenditure, simultaneously financing programmes in favor of middle class families.
His most controversial policies, that earned him the title of unorthodox, involved the nationalisation of the private pension scheme, complemented by windfall taxes on telecommunication companies, banks and other financial firms.
While these measures were termed by the socialist and liberal opposition as unprecedented, they have been tried before: windfall taxes have been collected in such diverse countries as Britain, Austria, Spain and Russia in moments of economic strain.
It is the last two measures that irritated financial markets the most, which had initially reacted well to Fidesz’s two-third majority victory in 2010, hoping that unlike their socialist predecessors they would commit to reducing the debt burden and unemployment.
Fidesz’s latter propensity for erratic policies soon warranted it a negative reputation amid financial circles, and when Italy’s debt crisis spiraled, international attention turned to other highly indebted countries such as Hungary.
Hungary, one of Europe’s most transnationalised economies and highly dependent on foreign direct investment, has a public debt that stands at around 82 percent of GDP, in contrast to Italy’s 120 percent. More than half of its population is currently indebted.
The country’s macroeconomic vulnerabilities were soon exploited, as threats of downgrading created a vicious circle that lead to an exponentially growing interest from speculators.
Hungary’s economic minister has claimed the decision to downgrade Hungary’s sovereign rating was “groundless” and “part of a financial attack” against the country that allegedly dared defy the financially powerful.
The minister boasted a below average budget deficit and a rate of economic growth that exceeded the European Union’s (EU) average in the third quarter of the year. Yet estimates indicate meagre economic growth or even a slight contraction during the following year.
What went wrong? Pogatsa notes Orban exhibits a personality that refuses to be “constrained by liberal or conservative ideology,” upholding a “country-boy mentality that values common sense against dogmatism.”
“Seen what is happening lately in Europe, going against economic dogmatism was one thing he got right,” he notes. However, “it soon became clear that his policies to balance the budget consisted mostly of one- off measures, such as the appropriation of private pension funds or the bank levy.”
While many mainstream economists insist small, open economies like Hungary’s are condemned to follow mainstream economic policies, Pogatsa argues some unorthodox steps could still be taken under such constraints.
“The focus should be on creating employment. It is important to keep the budget balanced and to reduce debt, but cutting should not be done for the sake of cutting,” he told IPS.
“The fact that currently people understand the need for reform creates opportunities to restructure the tax system, to reform the subsystems of the state and to move resources to what represents investments for the future, such as education. It’s all about communicating it as an opportunity.”
But Viktor Orban may be running out of credit with the electorate, after promising to keep the IMF out of the country. During a recent talk at the London School of Economics, he went as far as promising that “if the IMF comes, I’ll go.”
Polls conducted shortly before the IMF announcement showed 78 percent of the Hungarian public dissatisfied with “the way things are going” and almost half of it unwilling to identify with any political party.
Orban has now conceded he is negotiating with the IMF, but insists “nobody can limit Hungary’s economic sovereignty.” Among other measures, experts expect the IMF to demand a reduction on taxes on financial institutions.
Hungary had already become the first EU country ever to receive an IMF bailout in 2008. The previous governing socialists obtained a 20 billion dollar worth bailout in the form of a standby loan to help it avoid defaulting on its debts.
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