Market reform and fiscal laxity in Communist and post-Communist Hungary: A path-dependent approach

Benczes, István (2011) Market reform and fiscal laxity in Communist and post-Communist Hungary: A path-dependent approach. International Journal of Emerging Markets, 6 (2). pp. 118-131. DOI 10.1108/17468801111119489

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The paper was presented at the conference “Beyond Transition” at Liverpool Hope University, June 16-17, 2009. The author is indebted to the audience's constructive comments. The project was supported by the János Bolyai scholarship of the Hungarian Academy of Sciences.


Purpose – The purpose of this paper is to present a conceptual framework in order to analyse and understand the twin developments of successful microeconomic reform on the one hand and failed macroeconomic stabilisation attempts on the other hand in Hungary. The case study also attempts to explore the reasons why Hungarian policymakers were willing to initiate reforms in the micro sphere, but were reluctant to initiate major changes in public finances both before and after the regime change of 1989/1990. Design/methodology/approach – The paper applies a path-dependent approach by carefully analysing Hungary's Communist and post-Communist economic development. The study restricts itself to a positive analysis but normative statements can also be drawn accordingly. Findings – The study demonstrates that the recent deteriorating economic performance of Hungary is not a recent phenomenon. By providing a path-dependent explanation, it argues that both Communist and post-Communist governments used the general budget as a buffer to compensate the losers of economic reforms, especially microeconomic restructuring. The gradualist success of the country – which dates back to at least 1968 – in the field of liberalisation, marketisation and privatisation was accompanied by a constant overspending in the general government. Practical implications – Hungary has been one of the worst-hit countries of the 2008/2009 financial crisis, not just in Central and Eastern Europe but in the whole world. The capacity and opportunity for strengthening international investors' confidence is, however, not without doubts. The current deterioration is deeply rooted in failed past macroeconomic management. The dissolution of fiscal laxity and state paternalism in a broader context requires, therefore, an all-encompassing reform of the general government, which may trigger serious challenges to the political regime as well. Originality/value – The study aims to show that a relatively high ratio of redistribution, a high and persistent public deficit and an accelerated indebtedness are not recent phenomena in Hungary. In fact, these trends characterised the country well before the transformation of 1989/1990, and have continued in the post-socialist years, too. To explain such a phenomenon, the study argues that in the last couple of decades the hardening of the budget constraint of firms have come at the cost of maintaining the soft budget constraint of the state.

Item Type:Article
Series Number / Identification Number:10.1108/17468801111119489
Uncontrolled Keywords:Budgetary control, Economic reform, Hungary
Divisions:Faculty of Economics > Department of World Economy
Subjects:Economic policy
ID Code:341
Deposited By: Ádám Hoffmann
Deposited On:09 May 2011 13:07
Last Modified:18 Oct 2021 08:47

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