After goulash communism came goulash capitalism

September 18, 2016

Illustration by The Budapest Sentinel
Illustration by The Budapest Sentinel

“Reasons given by those who suggest that sustainable competitive market economy can be done on the Eastern European model are weak. The market economy and capitalism are based on the strong ethics of people who follow the rules and keep their word, be that a verbal contract or on paper.”

The following interview with former National Bank of Hungary governor Péter Ákos Bód appeared in the September 15, 2016, edition of Hungarian weekly Figyelő (pg. 18-21) under the title “After goulash communism came goulash capitalism “:

Péter Ákos Bód, an economist and university professor, was born in 1951. He served as a member of the National Assembly and as Minister of Industry and Trade from 1990-1991. From there, he was appointed chairman of the National Bank of Hungary, where he served from 1991-1994. Bód also served as chief economic advisor until the first Orbán government, and later went on to become an economic advisor for the Hungarian Democratic Forum (MDF).

You just arrived back from Poland. Is the illiberal democracy building there, too, or are the old powers still able to hang on?

A large economic conference has been hosted in Krynica for years. Of course, several politicians also take part in it, this year even Viktor Orbán attended. There was a strong presence of Hungary’s economic diplomats, but I missed seeing representatives of the business community there. Other than those from the oil industry, there were not that many present. Based on my earlier experiences, I can say that the Polish business class is much more confident and prepared than its Hungarian counterpart. Managers are younger, and they are not made of the types of people who suddenly became rich thanks to state support. They become rich, not overly wealthy. The development of the Polish economy is much more consistent and organic than the Hungarian economy. To find reason for this, we should look back to the pre-transition period. After the 1980 crisis, hundreds catapulted out of the country. Readers may remember the Polish markets that popped in Hungary. For some reason, Hungarians always snubbed their noses at the Polish people.

Tool sets, drills…

Yes, that is precisely what I am talking about. But that class separated from the state, and it learned how to stand on its two feet. The reason for Polish success is the much more organic development of their agriculture sector. Furthermore, the support of the American-Polish diaspora also played an important role. Hundreds of thousands of Poles work abroad, and those who come home are able to put their new experiences, skills, and network to use in Poland.

But are they really going home? One of the greatest fears concerning those who work abroad is that they will use the skills they acquired at home to work abroad.

They will return home if they can return to a dynamically developing country because it is worth it. The dynamism of the Polish private sector is much stronger than Hungary’s. And here I am also referring to small, medium, and big businesses.

This is a matter of regulation or economic policy?

The state can do a lot of harm, but can only help minimally. But I do not believe that Polish economic policy is better than anywhere else in the region. However, the Polish society’s dynamism is stronger, as is its commercial sector. Sometimes a national tragedy can provoke certain changes which put an end to trends that have developed for decades. Homogenous development oftentimes comes with the side-effect of a narrow societal horizon. The entrepreneurial class that did not develop during a crisis, but instead started off in the 1980s, was poorly conditioned. They are now 60-70 years old. There will be a changing of generations and the big question here is whether this will be successful. Will Hungary get a new, young, market-based entrepreneurial class that is not dependent on the state?

Well, currently, the situation does not look like the state will leave the market process on its own.

Yes, centralization has once again moved to the forefront, and this will not help businesses move out from underneath the protective wings of the mother-hen state. The Hungarian mentality is already very much biased towards centralization, and I mean this with respect to both the people on the street and the business world. It can’t really be anything else because the state’s redistribution of wealth in Hungary is the highest in the region, it is 50 percent of GDP.

Around the time of the transition, we, too, had a crisis similar to that experienced by the Poles. We need only remember the crowds of forced entrepreneurs they tried to save from being unemployed.

The old commercial and political structures fell apart in all transition countries [-ed. former Soviet bloc countries], but the critical question here is how these commercial and political structures would be restored.  The problem is not that the various import-export companies, trusts, and “industrial works” collapsed, but rather arises from the fact that a new structure was not created capable of creating dynamic economic growth. 25 years have passed and the Hungarian economy produces 30-35 percent more GDP than in the last year before the crisis.
This is very modest growth compared to the 140 percent growth experienced in Poland. Of course, we could argue that the base was smaller there because Hungary was much better off, but they are already ahead of us in terms of GDP per capita.

We are already in last place in the region when considering GDP per capita.

Yes, and the Romanians have already caught up to us. But here I would emphasize that you can’t quite see the GDP per capita in terms of infrastructure, capital reserves, and the condition of buildings in eastern Slovakia. Therefore, the Hungarian public really can’t face up to the fact that the Slovakians beat us in terms of higher incomes about 8 years ago. The appearance will soon change because if a country is capable of significantly increasing income, it will be conspicuously visible.

Since the time of the Austro-Hungarian monarchy, Hungary was on a higher level than other countries in the region and socialism was an alien system to us, but the market-oriented, middle class perspective has a strong tradition in Hungary.

Do you really think so? There is a lot of research which shows that Hungary’s middle class and the tradition of the middle class perspective and solicitude are not strong enough in Hungary.

We still have this advantage, which started to develop after the 1860s, to which we were able to retain during the planned economy of socialism, and which really helped us during the fall of communism. Further to the east and south of us there was much less human and institutional capital gathered up earlier. But that is all in the past. Currently, it is difficult to have optimism for Hungary concerning in that regard. Optimism was certainly warranted in the 1990s. I’ll give you an example: back then party platforms and programs had substance. Every single one. A significant portion of the people read and considered these. But these have emptied out in recent years, and no one cares to read them.

This has something to do with the notion that value-based politicizing has disappeared, that maximizing votes is more important, and that parties are eager to thematize public discourse and public sentiment.

Yes, but the reason behind this is that the public accepts it. It is difficult for an economist to understand, but a large portion of Hungarian society does not consistently inquire or analyze enough. Of course, I see another country, too, where the media is dominated by one-liners and politics manipulates.

Hungary is often criticized for the lack of social consultation. What do you think that means?

For example, that someone who promises to spend a lot should not be elected. Because these are the times that we need ask how they want to pay for these things. The average person should be aware that every state expense is paid for by taxes. Corruption is not only an ethical issue because “it is wrong”, it is also an economic issue: the expense is mine, I have to pay for it. From this point of view, Hungary is really lacking the middle class mentality. The Polish, example, shows us that we can come out of very difficult situations. If someone says that transition was a failure, that it “didn’t work”, then we must be careful because there are examples that prove the opposite. In fact, it worked for virtually everyone in the region better than it did for us. Only the Croatians and Hungarians can say that the past 25 years did not do much for them in financial terms.

In the past 8-10 years, it seems that the euphoria of the transition has turned into some kind of throwback to the Kádár regime, doesn’t it? We often talk about dismantled structures in the economy, but it seems that society is clinging much more to what it became accustomed to under socialism.

This is the case in every transition country, but it is true that the class of people with strong ties to the state is more massive and persistent in Hungary. There are many reasons for this. One reason is that the Kádár system was considered to be among the most successful in the region. And this is where we come back to what I said about Poland earlier: a great tragedy can help shake society loose of its bad qualities.

So József Antall was right when he said he would have liked a revolution?

Yes, one part of Hungarian society, which expected more from the state than it was capable of providing, wanted to transition from goulash communism to goulash capitalism. The state is still willing to serve society, and the politician is ready to satisfy their needs. In the case of countries where the state collapsed during the transition, for example in Poland or Romania, society was forced to stand on its own two feet.

If you have already mentioned Romania, the Romanian anti-corruption agency is locking up practicing politicians almost every day. One would assume that in a country where corruption is a tradition going back hundreds of year, where corruption is tied into the society and economy, that serious problems would arise if it were to disappear.

This has only been going on now for three years, so let’s wait and how it ends. So far, we have seen the Romanian economy grow by twice as much as Hungary’s. But let’s also look at Italy, where the tradition of corruption is even more of a tradition than the European average and is more widespread than in Hungary. They had a good run for some time, but their economy has not grown over the past decade. I am not saying this is because of corruption, but there is no growth. I will, however, say that reasons given by those who suggest that sustainable competitive market economy can be done on the Eastern European model are weak. The market economy and capitalism are based on the strong ethics of people who follow the rules and keep their word, be that a verbal contract or on paper.