Financial experts reflect on the Bokros package of 1995

March 12, 2015


It was twenty years ago today . . .

“The IMF underestimated the impact the original Bokros package would have on future prosperity” – Leszek Balcerowicz, the father of Poland’s economic stabilization

Budapest’s Reform Institute hosted a conference this week at which a panel of speakers reflected on the so-called Bokros package–economic and fiscal stabilization measures introduced in 1996 under the Socialist Administration of Gyula Horn named after Minister of Finance, Lajos Bokros.

Horn’s first finance minister, László Békesi, was scheduled to appear but was unable to do to illness. Instead, Bokros read aloud Békesi’s written comments.

“In the middle of 1994 Hungary’s economic growth was weak.  On the other hand, inflation was high and competitiveness was low.   By that time it had lost most of its Comecom markets.  Money was spent on various prestige events, the forint was artificially supported, purchasing power was also artificially increased, which ruined the country’s competitiveness when it came to exports” wrote Békesi.

Békesi recounts how shortly after being named finance minister

“The Horn government submitted a supplementary budget in order to decrease the deficit.  The forint was devalued 9 percent.  There was a cut back in unnecessary expenditures, and they cancelled the World’s Fair.”

The IMF was willing to support Békesi’s own program of fiscal reform, but “the government was hesitant to introduce it.  Finally, under considerable German pressure, a stabilization package was prepared.  However, afraid of the trade unions, the MSZP parliamentary caucus did not support it” writes the former finance minister.

At the end of January the MSZP parliamentary faction met in Siofok where “conflicts between Horn and Békesi came surfaced” and Békesi resigned.  Horn asked the minister to lead the Ministry of Finance through the end of February, and Békesi agreed.

Békesi’s successor, Tibor Draskovic, began his presentation by recounting how, in the autumn of 1995, the deputy chairman of the National Bank of Hungary, Sándor Czirják had called Draskovics to tell him that the central bank could not fulfill its financial transfer obligations.  “He had a good sense of humor and I thought he was only joking” recalls Draskovics.  “From then until the spring of 1995 we lived from day to day, at best week to week, like a small company” reported the former finance minister.

By the beginning of 1995 they had prepared a stabilization package. “We explained how we saw the situation, what the objects were, what the means were, and what results we expected” recounts Draskovics.

“Surprisingly the first Orbán government continued what we started, especially the first two years.  For symbolic reasons they restored free high education and the conditional family support, but fundamentally they continued on the road designated by the stabilization package.”

Introduced on March 12, 1995, the package increased inflation. Growth, consumption and real wages decreased, but there was no recession either in 1995 or 1996.  And afterwards the economy took off until 2001.  The state deficit decreased from almost 90 percent of GDP to 52 percent in 2001, said Draskovic, observing by way of criticism of the current government, that “it is possible to conduct a successful war against the national debt.”

Csaba László, who served as undersecretary under Draskovic, told those attending the conference “necessity is a great master.” According to László, “it was only possible to introduce reforms when there was no other alternative.  (He would go on to serve as finance minister).

In his presentation, former central bank governor György Surányi emphasized that real wages drastically decreased ten percent in 1995 and 1996.  “The consequence of this despite the Bokros packages was that unemployment did not increase, and there was no recession.”  Surányi hadded that after 1995 unemployment decreased despite the absence of public work. There was an increase in exports and the flow of working capital, even as the state debt significantly decreased.

“We did not battle, but we implemented these measures effectively” said Surányi, implicitly criticizing the rhetoric of the current government.  “After 2001 fiscal and monetary policy were no longer in sync” said the former central bank governor, according to which “his resulted in an irresponsible budget that tried to serve as a counter-balance to monetary policy.  “On its own monetary policy can only produce miracles if it is in sync with fiscal policy” said Surányi.

The second panel featured two non-Hungarian experts familiar with the Bokros package. Leszek Balcerovicz, former Polish deputy prime minister and finance minister, talked about the close relationship of democracy, rule of law, and capitalism to one another.

Mark Allen, who served as the IMF’s representative to Budapest between 1996 and 1998  summarized relations between the IMF and Hungary between 1982, when Hungary joined the organization, and 1996.  He said that towards the end of 1994 a number of financial experts were seriously worried there would be a repeat of the financial crisis of Mexico in Hungary.

“The IMF expressly supported Lajos’ efforts, and in March 1996 the government approved the conditions” said the future IMF director, adding that he was “very sad that Lajos had already resigned his position by then.” The British financial expert said that, as a result of the Bokros package, the macroeconomic and balance of payments developed very nicely, adding that “The IMF underestimated the impact of the original package on future prosperity.”  Allen points out that this, in turn, enabled Hungary to avoid the “Czech crisis of May 1997.”

In closing Lajos Bokros said that, among other things, it was absolutely important that, on the one hand, the economic policy steps were sensible, credible, and predictable, and, on the other hand there was consistency between promises,  deeds, and results.  He said in 1995 the country had to choose between austerity or bankruptcy.

“The IMF is not an enemy, but an organization of which we are a member.  What we receive from them is very important to Hungary’s economic and financial stabilization.  The economy stayed on this path until 2001, when the first of several waves of (fiscally irresponsible) wage increases and stipulated economic growth began” said the former finance minister.