In the late 1980s, Hungary was widely considered to be the economic trendsetter in Eastern Europe. The “goulash Communism” of Janos Kadar, introduced at the end of the 1960s, had gradually morphed into a hybrid form of market socialism. I spent a month in Budapest in 1985 and was startled by the profusion of goods in the stores. It wasn’t exactly Vienna, but it was a far cry from Warsaw or Moscow.
Given its position at the head of the pack of countries in the region, Hungary was expected to be the first to make the successful transition to capitalism. And indeed, in the early years of the 1990s, foreign investment flowed into the country. But today, Hungary has fallen behind many of the other countries in the region in terms of growth, employment, debt, and other economic indicators. Many Hungarians are left scratching their heads and trying to figure out what went wrong.
When I first interviewed Laszlo Urban, he was a young economist affiliated with Fidesz, at that time a liberal political party. If Fidesz had formed a government in the early 1990s, Urban would have likely occupied a top position overseeing the economic transition. Instead, he went into the private sector, spending more than a dozen years in banking. Fidesz, meanwhile, shifted away from its early liberalism and took over power in 1998 as an avowedly conservative party.
We met again last May in Budapest, and I asked Urban what he thought went wrong with the economic transition. Among other things, he thought that the government mishandled the response to the collapse of the market that had existed in Eastern Europe during the Cold War.
“In order to make the Hungarian economy truly competitive, they had to privatize the majority of the economy,” he told me. “As a consequence, at least 30% of the labor force turned out to be unemployable at the inherited wage rate in the new system. What do you do in a situation when 30% of your labor force all of a sudden loses all their jobs or their ability to be employed productively? The way we handled that had a lasting negative impact on the transition. Roughly 30% is just too huge of a blow. In the way the government dealt with the issue, at least one-third of that number just left the labor force completely and was probably not employable productively anyway. But we’re talking about another two-thirds that we should have found some way to keep in the labor force. Instead, those people were let go into early retirement or given disability pensions, or in some other way they also left the labor force. This was just too large a percentage of tax-paying, employed workers who disappeared from the labor force.”
Practically speaking, the government should have approached privatization differently. “I would have separated the companies that needed to be privatized urgently from those that could have been privatized in a more gradual fashion,” he continued. “The more export-oriented enterprises, which needed to be competitive, had to be privatized. The state-owned sector was not competitive, that was clear. I still believe that state-owned companies cannot operate productively and competitively. They could not have survived competition. Nor did they have enough capital for their modernization. So in order to have a chance to stay competitive, those companies had to be privatized. But it is true that those companies that serve mostly the domestic market, particularly service sector firms, their privatization should have been done in such a way that a middle class would have emerged to run these businesses.”
The closure of huge numbers of factories and the creation of a large group of people dependent on government programs, Urban believes, are a legacy of the early 1990s that continues to shape Hungarian politics and economics today. This group “became the primary target constituency of any political force that wanted to win elections,” Urban concluded. “Budget deficits and increased public debt resulted from the measures to please that particular constituency. It is still a dominant part of politics in Hungary and is even driving what Viktor Orban is doing now. It’s not because of his personality, but because he understands the dynamic and has the numbers to prove it. If he maintains his popularity with this welfare recipient constituency, then he will be reelected in 2014.”
Do you remember where you were and what you were thinking when you heard about the fall of the Berlin Wall?
I was back from the United States, and the negotiations in the so-called opposition Round Table with the Communist Party were still ongoing. So I was involved in that in some capacity. I saw the fall of the Wall on the news. Previously the Hungarian government decided to let the East German tourists go to Austria. Then there were the demonstrations in Czechoslovakia. That fall, besides teaching, I was involved in negotiations on economic policy and preparation of the economic policy program for Fidesz.
It was kind of a relief. If things were collapsing even in East Germany, then a fundamental transformation must be taking place. In Hungary, though, that transformation was already a little bit more advanced. East Germany was the last bastion in some sense.
You were at Berkeley in what year?
I was at Berkeley during the previous academic year: 1988-89. I returned to Hungary in June 1989.
And you had studied economics here in Hungary first before going?
Yes, it was a kind of post-graduate scholarship for one year.
When you entered the field of economics as a student, what did you think was going to be your future in Hungary? Did you imagine that you would have a particular position? Or did you already think you might go abroad?
I started studying at the university back in 1978. There was obviously no sign back then that there would be a transformation of the system. And I didn’t think about going abroad at the time. I didn’t see myself just joining a state-owned enterprise and doing some lame work there. But the good thing about the field of economics was that it still kept open different career opportunities, from teaching and academic research to working in a government agency or going into actual – well, I wouldn’t call it business — but into the enterprise sector. Since I didn’t have a clear idea of what I wanted to do, it fit me perfectly that after graduation I continued to stay at the Rajk Collegium as a “senior fellow” for two more years. The Collegium was a special place where we learned a great deal about Hungarian history, about philosophy, and also about economics — a lot more actually than from the university. It broadened my perspective.
Once I graduated, I still didn’t know what I wanted to do, so I expanded my years of study by going to different universities to teach.. I was just hoping that something might change. And then I actually went beyond the area of economics. I was interested in the area of political economy and the logic of what kept this socialist system working. I was in a full-time job from 1985 until 1991 at the newly established political science department at ELTE (Eotvos Lorand University). Even when I joined that department, I didn’t foresee that the system would collapse in a few years.
I was there in 1987 when the Hungarian Democratic Forum (MDF) was founded. I was not interested in joining MDF, but we were invited along with some other colleagues as observers. From 1985 when there was the Communist Party Congress, things started moving, and 1987 was when things started to really change. Then I got the scholarship to the United States, and I had a choice, I had to decide whether or not to stay and try to participate. But I decided I’d rather go because it was a unique opportunity. It was the first opportunity for me to go on scholarship abroad. When I returned, my career probably would have taken a different direction if this transformation had not sped up, and I wouldn’t have gotten involved in that. But I did. So this way, for a few years, I became involved in policy and a little bit in politics, although I realized really early on that I’m not cut out to be a politician. But on the side, I flirted with the politicians and advised them on their work for a few years.
If it hadn’t been for the transformation at that time, you would have remained in academia?
I’m not sure. Already back in the mid-1980s, but definitely by around 1987, I felt that political science was too philosophical for me. I drifted back towards economics, and this is when I got the part-time job at the university of economics where I went to teach microeconomics and management. But when I was teaching, I felt that it was very difficult to teach the students in an interesting way if I myself had never actually worked in this field. At that time, I was already thinking that I should try myself out in business for a few years at least and then return to academia. Even without the systemic transformation, probably I would have gone into business. And it’s very likely that it would have been somewhere in the financial sector where I ended up eventually. It just would have happened probably a few years earlier.
I never felt that I’m the kind of academic who just reads about different things or maybe does some interviews and then puts stuff together. Teaching in the area of business, you need to have some personal experience. You cannot experience everything, and you still need to learn a lot from other people, from books, and other stuff. But still, one needs to get some first-hand experience.
What attracted you back in 1988-89 to Fidesz as opposed to working with the Democratic Forum or even the Free Democrats (SzDSz)? You did say in the 1990 interview that the economic programs of Fidesz and SzDSz were somewhat similar.
It was obvious to me that the fundamental principles were the same in any transformation to a market economy based on the dominance of private property. That was a common view of all progressive economists, irrespective of which political party they worked with. Beyond that, which opposition force you aligned yourself with depended more on personal connections. If there hadn’t been a separate party like Fidesz, I would have more likely ended up working with SzDSz rather than MDF, because MDF was more dominated by people who had a background in the humanities — more writers and historians. It was just a different worldview. At that time, they didn’t even have any economists around them, though some joined later. They also wanted to make a transformation to a market economy, but somehow their worldviews seemed less practical. It was not the ideology that they represented. It was rather that they were too esoteric for me, not pragmatic enough. And then the fact that Fidesz was founded by a group of young lawyers who I happened to know through the Collegium made it obvious that I would join forces with them — because I actually knew them.
In the interview in 1990, you laid out the Fidesz program in terms of economic transformation. When you look back at that first program for transformation, whether it was privatization or dealing with the currency, is there anything you would change in retrospect? The second question is: since Fidesz wasn’t in government, would you have changed anything in the economic program that was implemented in the early 1990s?
Yes, Fidesz was not in government during the first 10 years of the transformation, so it didn’t have any significant impact on the actual direction of things. Had it been in government, I probably would have played some role in it and then would have been confronted with the kinds of decisions that those in government faced. The most important decision they confronted in the early 1990s was how to deal with the collapse of the Cold War East European market. In order to make the Hungarian economy truly competitive, they had to privatize the majority of the economy. As a consequence, at least 30% of the labor force turned out to be unemployable at the inherited wage rate in the new system. What do you do in a situation when 30% of your labor force all of a sudden loses all their jobs or their ability to be employed productively? The way we handled that had a lasting negative impact on the transition. Roughly 30% is just too huge of a blow. In the way the government dealt with the issue, at least one-third of that number just left the labor force completely and was probably not employable productively anyway. But we’re talking about another two-thirds that we should have found some way to keep in the labor force. Instead, those people were let go into early retirement or given disability pensions, or in some other way they also left the labor force. This was just too large a percentage of tax-paying, employed workers who disappeared from the labor force.
On the other side, they all became dependent on welfare redistribution in one form or another. We have been struggling with a huge shift in which this almost unprecedented ratio of people who had been actually employed productively and paying taxes then became dependent on government redistribution. We didn’t deal with this problem at the time, neither those in government nor those of us who were in the opposition, until very late. For the first 10 years we thought it was just a side effect of this whole transformation. Of course a similar decline in the actively employed people happened elsewhere in the region as well, but not in such a huge ratio. If we had reduced that number in half, it would have been a more manageable situation. As it was, it contributed to the continuing budget problem and resulted in an increased constituency of those who have continuously been dependent on government handouts. They also became the primary target constituency of any political force that wanted to win elections. Budget deficits and increased public debt resulted from the measures to please that particular constituency.
It is still a dominant part of politics in Hungary and is even driving what Viktor Orban is doing now. It’s not because of his personality, but because he understands the dynamic and has the numbers to prove it. If he maintains his popularity with this welfare recipient constituency, then he will be reelected in 2014.
The way the transformation took place partly has to do with how the privatization was handled. I myself thought at the time, as did the government, that the best way to manage the situation was to sell the properties to those who had capital and could utilize the properties most productively. This meant mostly selling whatever we could to competitive foreign investors. But these investors only kept that part of their labor force who were productively employable. As they quickly continued to increase productivity, they shed labor. On the other hand, the government didn’t have the means or any kind of policy to retain some of those laid off in the labor force and not just simply let them go into some retirement scheme or whatever. It might have been a relatively less painful solution for a few years, but in the longer run, in 10-20 years’ horizon, it has come back to haunt us.
That begs the question of what could have been done. Would it have been better not to privatize everything and to keep in state hands certain enterprises that employ many people even if they had not have been the most efficiently run, like the state-owned enterprises in China?
Yes, something like that. I would have separated the companies that needed to be privatized urgently from those that could have been privatized in a more gradual fashion. The more export-oriented enterprises, which needed to be competitive, had to be privatized. The state-owned sector was not competitive, that was clear. I still believe that state-owned companies cannot operate productively and competitively. They could not have survived competition. Nor did they have enough capital for their modernization. So in order to have a chance to stay competitive, those companies had to be privatized. But it is true that those companies that serve mostly the domestic market, particularly service sector firms, their privatization should have been done in such a way that a middle class would have emerged to run these businesses. They would still have had to compete with each other but not necessarily with the very strong, capital-intensive competitors. Those firms didn’t have either the capital or the management skills or any of the many factors that could have enabled them to really survive the fierce competition. From time to time, different governments – the MDF government first and then even the Socialist-Liberal government — introduced programs that gave preference to local entrepreneurs. But it was more sporadic. The differences were less clear between areas that could attract foreign strategic investment and those where local entrepreneurs should take the lead. For me, the most important selection criteria would have been the extent to which a company was competing on the export market.
The second issue was the exchange rate. We should have managed the exchange more consciously. After the crisis in 1995, the pre-announced devaluation of the Hungarian forint for the five years period guaranteed some competitiveness for Hungarian exporters, which was helpful. But the problem was that nothing like that happened up until 1995, and that’s when the biggest shock happened. When the East European market collapsed, the blow should have been softened by a deliberate exchange rate devaluation policy. Of course, after a while the regular devaluation by itself fed into an inflationary cycle. So if we wanted to bring inflation back down below 10%, then some appreciation of the currency was needed. However, instead of using income policy to curb inflationary wage increases, the exchange rate became the only tool of curbing inflation. As a result, a huge appreciation of the currency took place, which then in the early 2000s basically undermined the competitiveness of many exporters and also of domestic producers facing competition from imports.
So the enterprises were squeezed. They couldn’t export and they couldn’t compete…
Exactly, they couldn’t even compete domestically. So I would say that these were two big mistakes. The first one is what we did with those who were unproductive and unemployable for a while. And then the second is the exchange rate, which was not properly managed in the early 1990s and then again in the early 2000s.
You said that after a couple of years of working at the policy level, you discovered that politics was not your cup of tea. What was it about politics, or even the policy world, that you found unappealing?
It’s more the politics than the policy world. I’ve always had an interest in policy, and I even recognize that if you want to make policy, then occasionally you need to compromise for political reasons, that’s fine. In terms of politics itself, what became very clear to me very early on was that I don’t have the needed skills and personality. First of all, if you want to be a good politician, a good joke can win over or defeat a lot of so-called policy wisdom. If you are smart and you have the skills to frame your messages clearly, if you can come up with a good joke, then these sound bites are a lot more important than the essential professional argument behind your reasoning. And I wasn’t good enough at that. Also you need to have the skills to simplify your messages, which hasn’t been my strong suit either. And the third, I would say, is that you need to have the stamina to keep repeating the same messages so many times that it would have bored me to death. If I’m teaching the same course twice, I’m already bored. So, I just couldn’t keep repeating these simplified messages for mass audiences over and over.
In terms of policy advisory work, up until 1994, Fidesz politicians were not behaving as professional politicians yet. They would listen to us advisors on the basis of the merit of our arguments. Up until 1994, we could work together whenever some policy was on the table and evaluate it on purely professional merits. Then we presented our proposal to the politicians. And they may not have accepted it all the time, but many times they did. But when they did, they always tried to come up with reasoning that made sense professionally, at least based on the values that we based our views on.
That changed in late 1994 or 1995.They turned into truly professional politicians. There’s nothing exceptional about that — it just took that many years for them. After that, they realized that they needed to attract certain constituencies, and so they needed to shape the party’s message so that it could attract more supporters. Then the policy advisor’s role was to try to come up with supportive arguments, to justify the politically motivated positions. The messages were clearly politically oriented. This was the criteria and not the policy merit. Those who were willing to work with Fidesz under these terms were welcome and those who didn’t had better find something else to do. I realized that this was coming, so I left before they asked me to leave. But it would have happened anyway.
That happened in 1995 when [Minister of Finance Lajos] Bokros was putting together a stabilization program that was needed to keep the economy from going bankrupt. Fidesz decided that it was an opportunity to attack the government for these unpopular policies. So that was a good point for me to depart.
One of the things I asked you in 1990 was about your expectations about Fidesz. It was a rather unusual collection of people with a radical, liberal, and alternative agenda. You imagined that it might hold together for about 10 years. But it began to split earlier than that.
It wasn’t really a split. Some people departed for SzDSz. Some of the alternative people who were never an influential part of the leadership also left. But the core of Fidesz stayed together. Actually I would not have thought that Viktor Orban could build such a strong party as he finally managed to do. Of the original group of 50 top people who closely worked together, probably more than 30 are still there. They are in different positions. Some of them are still at a high level, others are more marginal, but they are still Fidesz politicians. This was already the case in the early 1990s but increasingly Viktor didn’t care what the others in the party were thinking. He managed to achieve full control over the party and then later the government and then the whole country. That was quite an achievement. I wouldn’t have thought that it was possible. I thought that Fidesz needed to align itself with other political forces and form maybe a conglomerate leadership, more like what happened after the 1998 elections.
Orban’s economic program was different when he was in opposition than when he was in government, especially in his most recent incarnation. How you would evaluate his economic program today?
There was this episode in 1998 when Fidesz first got into government. I left in 1995, so we were not in contact during these next three years. And yet the economic program of the party was rigged up by Gyorgy Matolcsy already in 1996 and 1997. In the campaign he was the economic spokesperson. And yet when Viktor won the elections, he asked me first to be the finance minister. And I could have become finance minister. I’m not sure how long I would have stayed finance minister, because we probably would have disagreed on some policy issues pretty early on. But the interesting thing was that when he asked me, I said that I’d be happy to work with him, but we needed to agree to certain things and one of them was about reducing the budget deficit. That time it wasn’t even that high: about 4-4.5% of GDP. During the next three years, even without me, he followed that policy. He reduced the fiscal deficit every year, and even the debt started to decline. So his economic policy during the first term was pretty close to what I would have agreed to, but it doesn’t mean that we would have gotten along easily. The way he governed, even then, was that he could only work with people that didn’t set conditions, who didn’t even object, and who just executed whatever he said.
But his view about what needed to be done in the economy then was pretty close to mine, although the international environment was also more favorable. So he paid attention to macro balances. Then he tried to stimulate the economy through the housing sector, which was a little bit overdone, and it led him into some difficulty in the last year of his term. But I’m sure that he would have controlled that. Interestingly enough, even now that fiscal discipline still seems to be one of his priorities, partly because Brussels is pushing it. But that’s a continuity, in the sense that beyond the pressure from Brussels, Viktor understands that macro-fiscal discipline is important to maintain.
But the major disagreement between what he’s doing now and what I think should be done is that he does not seem to accept that the economy is a non-zero-sum game where the major incentive for a lot of people to participate is to gain more than they are putting in: this is what competition and the market economy are all about. For Viktor, the economy is predominantly, like politics, a zero-sum game where a person can win only if he takes away from others, and if others are winning then it is something that is taken away from him. It’s a power game for Viktor, and if someone looks at the economy that way, even only a certain segment, then it has much larger repercussions. He just doesn’t seem to have an understanding of what this lack of respect for this very delicate institutional and behavioral environment does to the incentives of people. If you want people to behave creatively in order to gain more and if they’re all doing the right things to contribute to an overall economic goal – he just doesn’t believe that this is what the market economy is about. For him the economy is just an extension of the political sphere where positions can be redistributed. This is what he is doing now, starting with the bigger public procurements all the way down to tobacco shops, which are now being redistributed. It’s a redistributive game for him. If someone looks at an economy as a redistributive game and has all the power that he has to rearrange the institutional structure along those lines, then he might get what he wishes for and end up with an economy where there is no growth.
That zero-sum attitude seems to apply to his approach to the EU and his talk of closer cooperation with Russia.
The bureaucracy in Brussels is basically trying to put a straitjacket on all the members. Sometimes this over-regulation is very irrational. But we have to implement the whole acquis communautaire. The fact that all members are contributing to the community project and then funds are redistributed and heavily administered makes everything very slow. Much of the money spent on investment in this economy is coming from Brussels and not much else. So paradoxically, whatever Brussels is doing very often helps his approach, which is that the government drives the economy. It’s not intentional. This is just the nature of how the EU is structured. It’s a bunch of common regulations and a bunch of money that is being redistributed, following rules and regulation, and with a lot of administration.
When Viktor is talking about the East, Russia and China and some other countries, there are two motivations behind it. One, he recognizes that some of these countries, for different reasons, have foreign reserves which they need to invest in foreign assets. Viktor thinks, “We are not a big country, so if they just put a little bit of their money into Hungarian government securities maybe it will help us to manage our public debt. Or if they don’t want to buy our government paper, then maybe they could help finance some infrastructure projects and invest their money in a way that would even open up some of their market.” So, in a sense, it is like a technocratic approach.
On top of that, Viktor has made it clear that anyone who wants to do business in Hungary must be humble with him because he can always use a wide array of available means to make their life miserable. It’s not necessarily an autocratic regime here, although we have a parliamentary regime where whatever happens basically depends on the leader’s own will and he can implement anything that he wants. In that sense, although the fundamental rules of the game are democratic here, the way he operates within that is closer to a Far Eastern non-democratic regime. He likes to be the alpha-male in every respect, not only in politics but also in business. Everyone recognizes that he is the ruler, at least in this small part of the world. These two motivations are skillfully mixed in his messages. It’s not so easy to pinpoint whether it’s just a pure problem of his personal style because he can wrap it up in rhetoric like “we want to be an export-driven market” and “we want to improve the macro finances.”
You said earlier that even before getting involved in the policy world you thought it would be a good idea to have some practical experience in the financial world. How did the opportunity arise, and did the experience meet your expectation?
I left politics and the parliament in late 1994, I didn’t know where to go. Shortly after, I became the advisor to the CEO of the Allianz insurance company for a few months. It seemed that I had an opportunity there to be a senior official in the foreseeable future. But that was kind of uncertain, and at the same time I applied for a temporary job at the World Bank in Washington. I got that and decided to go to Washington instead of staying at the company to wait and see whether this career path would materialize or not. I went to Washington for one year. When I got back, I had an opportunity to join one of the Hungarian state-owned banks, MHB, which within a few months was privatized, acquired by ABN-AMRO. After working there for two years, I moved to Postabank for another two years.
It was at this time — already during the first Orban government –that I found certain things to dislike about certain aspects of government economic policy. I was a manager of Postabank, which had been run into the ground by the previous management. We turned it around, and it was up for privatization. But the government decided not to sell it in a competitive process. That was not something I necessarily wanted to participate in. So it was good timing for me to get out of the country. In 2000, I went to Harvard Business School for a so-called executive management program, which was only three months. But there I got to know a senior manager from Citibank in New York, and he told me of a job opening there. Six months later, I got that job. I went to New York. When I came back in 2005, I first landed at the Central Bank, and then I got invited over by the CEO of OTP to be the CFO there, so I was there for three years. My banking career lasted about 14 years. I worked at five different banking institutions, and I enjoyed it. I learned a lot more than I would have learned, not only about banking, but also the practical business side. It was rewarding and met my expectations. It was not planned that way, so a certain element of luck was involved. I got opportunities where if I had applied to different open positions I might not have gotten them. Maybe it had also to do with the fact that in academia and in the policy advisory process, people got to know me in some capacity, so they trusted that I could do the job as I made the transition to the banking sector. If I had joined a bank and then had had to climb up the ladder, it might have taken at least that long or maybe longer than my previous career. So I didn’t feel that I lost anything by not starting off in banking, and I had the opportunity to have experiences both abroad and in Hungary in both Hungarian-owned and multinational banks.
You mentioned turning around Postabank, which had been run into the ground previously. So there was a managerial component. Did you concentrate on other aspects in banking, such as investment and so on?
I started out in planning and control areas, where you can get an overview of a bank’s financing. That was closest to my background and also gave me the opportunity to understand what drives the bank’s revenues and costs in every area. When I got promoted in Postabank I was first dealing with the inherited portfolio and then building a new one. There I was in new business development and corporate banking and in retail banking – more in corporate than in retail — with some oversight over pensions and fund management. I never went to actual investment banking per se. When I was later at the OTP as the CFO of the banking group I participated in certain acquisitions and in divestments. When we bought or sold some subsidiaries, it involved investment banking type activity in the sense of evaluating the value of businesses – but I was working more in a managerial role than a classic investment banker.
At Citibank in New York, there was a project management aspect to it. Citi is a matrix organization, so there are geographical units and then functional units. It was a functional unit and covered the whole globe, so in a sense, I had exposure to those particular business segments all over the world from Asia to Latin America to Eastern Europe and even Western Europe. But it was along a particular product line. The product line itself was not very sexy: the back-end of investment banking transactions. Whenever the traders made a transaction, whether shares or bonds or whatever kind of security,the back-end of this activity involved working with the particular exchanges and depositories. It’s not very sexy, but it gave us insight into the trade volume and the changes in trade volume of the different companies. When it’s done at the global level, it is interesting to see that whenever there was a financial crisis of any kind in a certain part of the world it immediately showed up in our numbers because Citi is a large enough global player that its clients’ business reflects the ongoing major international trends.. Working in the head office of a global matrix organization showed me how that works from the inside. You can read about it in books, but what makes it run? The Citibank experience was at least as instructive for me from a managerial point of view as from the actual product point of view.
So, all together, I still wouldn’t claim that I know every aspect of banking. That requires more than a lifetime of working in that sector. But I had the kind of experience that I can build on when I’m teaching. During the last seven years I have also taught a seminar for the IMM program of the CEU Business School. It’s an MBA program for students who gather from different parts of the world to take different courses in intensive one-week sessions during an 18-month period. It’s a full semester squeezed into one week. This is where I can build on all these different experiences that I have seen, and that is the reason why this course is a success. I can use cases and real-life business case examples, many of them from my personal experience, to illustrate the problems and principles they read about in the textbooks.
I want to ask you about your experience at the European Bank for Reconstruction and Development (EBRD). What’s your evaluation of the financial crisis from the viewpoint of your work at the EBRD? In the United States, the crisis was of course about new financial instruments related to mortgages. The discussion at a policy level in Washington was about new regulatory mechanisms to ensure that that would not happen again. Do you also see it as a function of these new instruments that should have been controlled or regulated previously? Do you think that the crisis has undermined public confidence in the financial sector in a significant way? What is the way forward to ensure that something similar does not happen again at a global level?
From a bird’s eye view, it looks like there were regulatory problems. The regulators were loosening their grip on market discipline and, given where it ended up, next time around they’ll need to keep a closer eye on things. I don’t share that view for several reasons. In the United States, it’s true that these very complex financial derivative products should have been more closely monitored and better regulated. But since even the regulators didn’t understand them, so I’m not sure whether if they decided that they wanted to regulate them better, they could have done it. But why were these products developed in the first place? Because the banks were under pressure to extend mortgages after a while to non-loanable clients, and they wanted to unload this risk from their balance sheet.
The pressure to go into those segments of the market partly came from competition but partly from politicians as well. Citi was sued for taking over a subprime financing company in Mississippi because they were discriminating against borrowers on the basis of whether they were loanable or not. The court ruled against Citi, so they paid a huge fine for that. Obviously they relaxed their standards, but they knew that these were risky products, so they tried to unload them from the balance sheet. It turned out that it was only temporary relief. Ultimately they had to take them back during the crisis. Yes, financial innovation went overboard. But I’m not sure whether regulators really could have prevented that. Perhaps if they had regulated more closely, they could have controlled that. But that assumes that financial regulators are so smart that they know what to prevent and what not to prevent from happening, and I’m not sure that regulators in any country are that smart.
But in the United States what also fueled the desire to find and buy new assets was ultimately the loose monetary policy of Alan Greenspan and his way of avoiding even small recessions (which ultimately come, as we all know). Even the U.S. case, then, is not that clear-cut.
In Europe, there are two kinds of problem countries. In the first category are the governments that were over-spending. Greece was one such case. Hungary is similar, although it didn’t go over the edge. The second kind are the countries where the banking system was too loose, as in Ireland and Spain, which had to do with the nature of the Eurozone itself. Low Eurozone interest rates fueled the mortgage-loan expansion in these countries, and country-level regulators had no influence on interest rate levels. It’s a recipe for disaster when very developed and competitive countries are in the same currency area as countries that are less competitive. The Eurozone, has members of very different levels of development, and it has no effective common rules to keep individual governments from fiscal overspending. I’m not sure whether any of the central problems could have been prevented even by smart regulators, which, as I’ve said, don’t exist. Even if they did, they couldn’t have prevented the crisis because they didn’t have the power to influence those factors.
Politicians are also promoting the conclusion that bankers are partly responsible for the crisis. I don’t disagree with that because, yes, bankers over-extended themselves: they lent even to clients who were otherwise not financeable. That happened in the United States, and it happened in Hungary as well, through these foreign currency loans. One could make the point that if the government would have lived up to its role — which is to manage public finances and to lead us to the promised Eurozone — then the foreign currency loans should not have been a problem in Hungary. They weren’t a problem in Bulgaria and the Baltics because their fixed exchange rate regime remained intact — so there was no difference between local currency and foreign currency denominated loans. But in Hungary the government didn’t manage public finances well. So again, we could shift the blame onto government. Beyond that it is also true that the banks relaxed their standards. As a consequence, they then suffered a great deal of credit losses, and they deserved this. But foreign owners and investors re-capitalized all these banks, so the government didn’t have to put in a dime to save them in Hungary. It’s fair that the banks’ shareholders are paying the price.
That’s the case here. That wasn’t the case in the United States.
In the United States, the government stepped in. But the latest that I learned was that the government, after selling all those shares that it took over, got back its rescue money with interest. So the banking sector investment of the government resulted in a positive balance. Even in the United States, then, it turned out to be more of a liquidity problem than a solvency problem.
But the banks themselves, with the exception of Lehman Brothers, didn’t really lose out.
The banks themselves, no. But the shareholders of Citibank suffered, when their share price went down from $30 to $2 during the crisis.
But here in Hungary, the government didn’t have to pay for any of these banks. And yet the government managed to pull off a public relations stunt and then blame it all on the banks. The government levied an extra tax on the banks, which basically just took out more capital from banks that themselves were suffering losses and needed to be recapitalized. Foreign investor owners have been willing to put that missing equity into the bank. So, again, there is not much reason to complain about foreign ownership of the banks. But on top of that, they are also still the enemy: according to the government’s rhetoric, they are responsible for the hardships of people because they want people to pay back the loans if they can.
The anti-bank rhetoric of the government is playing on the worst instincts of people. And, unfortunately, it is working. It causes a great deal of harm in terms of people’s attitudes toward financial discipline and the principle of “if I borrow it, I am supposed to pay it back.” The government is taking us back 40 or 50 years in terms of financial responsibility and people’s attitudes toward business and banking. That’s a side effect of what is going on. But as a banker, I also have to admit that, yes, the banks made a lot of mistakes. But I would say that they learned from their mistakes. Now the government is imposing on them some extra regulations that are absolutely not necessary. This more heavy-handed regulation just deepens the crisis itself. But again, Viktor Orban doesn’t seem to understand that either, or he just doesn’t care.
The banks’ shareholders, mostly the foreign institutions who are the shareholders, are paying the price for all the mistakes that they made before. In many cases the management has been fired, though not everywhere. Maybe more could have been done. But, overall, in the public relations area, the blame that is put on the bank is most of the time unfounded. In this way, the government encourages people to rid themselves of all their obligations to repay the loans, including foreign currency loans, even though they were normal business transactions. Whatever mistakes were made, they are still legally binding obligations. They signed a contract, they received the money, and they have a legal obligation to repay the loan. But now there are many lawyers trying to make some quick bucks by suing banks. None of them has been actually successful in gaining any meaningful advantage for their clients. But many people expect that something should happen and that they are not supposed to repay these loans. That’s potentially extremely dangerous and harmful for the future.
I looked at the European Bank for Reconstruction and Development (EBRD) between 1990-1992 and its role in economic transformation in this part of the world, but after that I didn’t really pay much attention to it. Tell me what you did while you were there.
I started in 2010, and I was there for one and a half years. And then I resigned. I have to tell you I resigned because I was bored by it. The EBRD is a public-owned institution. Compared to other publically owned institutions, it’s somewhat more flexible and market-oriented. But it is still a public-sector monopoly. It makes money based on the fact that it can issue bonds at a very low mark-up, which it then can re-lend to clients at a higher margin, justified by the higher risk taken. But the institution doesn’t want to take on any significant risk, so it wants either a sovereign or a multinational guarantee for its loans, and yet it charges regional-market margins. Second, although it doesn’t take on much risk, the bank wants to set a lot of related conditions for its clients. So, whoever has access to market funding doesn’t really want to do business with them.
The EBRD also managed to find some jewels, some local companies that it could extend loans to even without a multinational guarantee. So, there are a few successful cases. After all, they have about 500 bankers working for them now for 10 years. They’ve managed to build up a track record and some familiarity with the region. But the amount of capital and loans that they can provide is rather small. It might be significant for smaller countries but, again, the smaller countries are usually riskier and the bank is more cautious. It’s very narrow what they are willing and able to do. But they have made some contribution. The loans usually went to infrastructure development in certain areas with sovereign guarantee, but again, if the sovereign is not in trouble then they get repaid. But in the private sector it is more selective.
During the Arab Spring, the EBRD thought that it could transfer some of its experience to the Arab countries. But I don’t see many similarities actually to be transferred. Plus, there’s a big problem that they don’t have enough capital to service even Eastern Europe. Without significant additional capital they are spreading their operations to even more countries with no staff on the ground, no familiarity with these completely different cultures, in countries with completely different needs. I didn’t feel like this was something I could contribute to, so I resigned.
The future of the organization is not very bright in the sense that its contribution is rather limited. I’m not saying that they are causing harm. But the kind of good that they are doing is also very very limited, and the breadth of financial power is really insufficient to make meaningful contributions. At the same time they are really too political and very often willing to do only the things that at maybe a little higher price the private sector could do as well. They can provide some protection to some investors against certain regimes that have a tendency of harassing foreign investors, but only in smaller countries, like Ukraine. In Russia they don’t really have the leverage, so they are unable to provide this kind of protection either.
You resigned and then came back here to work with the airline here?
While I was at EBRD I was nominated to be the chairman of the board of Malev, the Hungarian airlines company. It was a sudden phone call. I said okay, but I wasn’t sure. And they said, “You’ll to be elected this afternoon.” So it happened. In the next two weeks I did some due diligence and realized that not only was the company unsalvageable but also the Belgian and Swiss model, which they wanted to follow in rescuing the company, wouldn’t work. They wanted to let the old company go bankrupt and then establish a new company with the same name that started flying the next day with the same planes. Such a transition was possible since the rights for the name of Malev were in a company owned by the government, so they could separate it from the airlines company. Also the fleet was leased, and the leasing contract was up. It required six months of preparatory work for the legal advisors to set up the succession. However, when I talked to the legal advisors they said that legally, within the EU, those who were associated with the top management of the bankrupt company could not work with the new one. They told me in advance that they wanted me to lead the transition to the new airline. When I realized that I could only be the scapegoat for the failure of the old company and I’d be automatically excluded from participating in the new one, I said, “No thank you, this is not the kind of assignment I agreed to. I don’t want to be remembered for bankrupting the national airline.”
When you look back to your philosophy in general, how you looked at the world in 1989-90, has it changed in any significant way?
If someone claims that they look at the world the same way as they did back then, it means to some extent that they aren’t able to learn. But I would say that probably my fundamental philosophical values and even my personal character haven’t changed. I have the same principles and values that I had. And whatever happened during the last 20-something years since then with me, or what didn’t happen, I have tried to follow those principles and didn’t give them up for a career or for other opportunities. There were a few times when I had to change jobs or I didn’t get the position I wanted because of that. Still, I don’t regret it because this is how I sleep well at night.
In terms of what we expected to happen 20-something years ago and what has happened, many of us are fundamentally disappointed that we have achieved a lot less than we hoped for or even what was achievable. It is not because our hopes were necessarily unrealistic. I didn’t expect that by now that we would live like the Austrians. But I was hoping that we wouldn’t have as many ups and downs, and that we wouldn’t finally end up with an outlook of economic stagnation. Even though the constitutional framework guarantees the basic rules of a democratic game in which potential governing elites compete, it’s far from a level playing field.
In terms of individual freedom, the situation is obviously significantly better than it was. People can travel, they can easily study abroad, and it’s not even necessarily much more expensive than back home. There are a lot more choices in many areas, so life is more livable at the individual level, and I’m enjoying that. You can start your own business. If it doesn’t have much to do with the government in terms of selling something that the government wants or if it’s not big enough that the government would be interested in it – and especially if it’s selling something that is competitive internationally — then it even has a chance of succeeding.
But in terms of the outlook for the country, we still lost a chance to…or maybe the chance wasn’t as good as we thought at the time. This is what I tend to think recently: we ended up on this path of stagnation for the foreseeable future because we came out of the Communist period as the relatively more liberal place where the Kadar regime tried to buy peoples’ tolerance, if not their support, of the regime with different kinds of public goods financed by Western loans. So, the starting situation tied the hands of the new political elite, which wanted to reduce those public goods. The people revolted, as it happened with the taxi drivers blockade early on. Politicians learned the lesson that in Hungary you can only make very gradual changes. But we already had these gradual changes in the 1980s, when there were no clear-cut rules and people found loopholes and other ways around the system to become better off than others. Your ability to get around regulations then became as important or sometimes more important than your actual professional competences. People became rent-seekers and loophole-searchers instead of rule-followers. It became the norm. If this is the case, then it’s not the politicians to be blamed. The roots are deeper, and go back to the Kadar regime.
Now we are back to the same atmosphere. Even though the constitutional rules are different, somehow at the everyday operational level, everyone feels that we are back to where we started 20-some years ago. It’s not the politicians to be blamed. It’s all of us. It’s how we behave and how the relative majority (of the welfare recipients and loophole-searchers) forces the politicians to bend the rules or shape the rules or open up loopholes. The most valuable competitive advantage goes to those who cheat. If the VAT is 27%, for instance, then you can reap a great benefit by cheating on it. But you need all these high taxes to reward all those people who otherwise feel that they are entitled to government support because they are older or because they can’t work ).
We never actually started a kind of capitalism based on the real principles of capitalism. It was just a privatized version of late Kadarism. Twenty years ago, I thought that the new rules of the game would liberate us, and then new norms would be established. But it turned out that the previous norms were stronger than the institutions that we have been able to create, and these norms have shaped institutions accordingly. Ultimately the political elite came to resemble what it used to be. Those who want to be different can get only marginal support. There is no chance for the foreseeable future to change that.
When you look back to 1989 and everything that has changed or not changed from then until now, how would you evaluate that on a scale of 1 to 10, with one being most dissatisfied and 10 being most satisfied?
In the country as a whole, everything that has changed compared to my expectations or compared to other countries?
Compared to your expectations, but your expectations might take into consideration what was happening in other countries.
Maybe it’s a five. The basic framework is still different. We are part of the EU, we are free to travel, we are free to do a lot of stuff, so in that sense this is a five. And the missing five is that compared to not just my expectations but even to our potential, we still underperformed. Despite of this web of micro-behaviors that I mentioned, the situation is not that much different from Poland and Slovakia, though the Czech Republic is somewhat different. But some other neighboring countries have made more progress with all their disadvantages. So I think we are underperforming.
Same period of time, same scale: your own personal life?
Nine. I’m very happy with what I’ve achieved professionally and individually.
Looking into the near future at the prospects for Hungary over the next two or three years, how would you rate those prospects on a scale from 1-10, with one being most pessimistic and 10 being most optimistic?
Three. In the coming few years, things are not going to get better. It’s going to be three, four, maybe even five years before any change can happen.
Budapest, May 7, 2013
The Interview (1990)
Could you describe how you got into the position of advising FIDESZ on its program?
I earned my degree in economics at the Budapest University of Economics in 1982. I did my doctoral work in 1985. I got a scholarship to Berkeley in 1988-89 so I left Hungary in September 1988 when the transformation was already on but at that time it wasn’t clear how far we would go. When I returned in May 1989, there had already been an agreement between the government and the opposition that there would be round table negotiations during the summer. The opposition parties agreed to negotiate on political and economic issues and FIDESZ needed some experts on economic policy issues. FIDESZ was basically organized by friends of mine. Some economists joined FIDESZ, but it was mostly lawyers who worked with them at the time. So when I returned to Hungary they asked me to represent them in the negotiations. This is how I got involved.
I wanted to join FIDESZ before I left for the U.S. but at that time it was still a little bit risky and I didn’t want to risk my scholarship because I thought that maybe because of my membership something would happen. But it was not a problem to join when I returned. From the circle of friends of mine, we put together a group of young economists. We represented FIDESZ during the summer in six different topics of economic policy. We discovered quite soon during the negotiations that it was neither important for the Communists to negotiate on economic issues nor for the opposition. Because the opposition realized that any kind of government would have to introduce some tough measures so its better not to give the support of the opposition to these unpopular measures. After the first month, we discovered that participating in the negotiations can provide some insights for us but professionally and politically it was not very helpful. But we found these new jobs for ourselves because it was clear that free elections were coming and FIDESZ needed some economic policy program. We decided we would use the process of negotiations to work out a program for FIDESZ.
Before us, in the summer of 1989 already, the economic program of the Free Democrats was announced. And we did not want to take a different position simply to make a difference between FIDESZ and the Alliance. At the same time, we wanted to differentiate somehow. Because the program of the Alliance at that time was focusing on the necessity of institutional changes, we thought that our program should focus on the economic policy issues: crisis management, anti-inflationary programs and land reform issues, privatization and the reform of the central budget and things like that. The philosophy behind our program is very similar to the Free Democrats. But we worked out a new program in the sense that no one had an economic policy program of that kind then.
The primary goal was to work out an economic policy that aimed at curbing inflation. Basically, in philosophy, it is not that different from even the program of the current government. Except that we did not make unfulfillable promises: that inflation could be pushed under ten percent in two years, the currency could be made convertible in one or two years, that privatization can take place in three years. Our program came out in October. It was well-received. But of course it was nothing really special. There was a consensus more-or-less among the opposition, even within the reform wing of the communist party, that this was the kind of economic policy reform framework within which the government can move reasonably. I thought that we cannot provide FIDESZ a program that gives FIDESZ a character. But we can provide a program that is defendable, professionally solid, and will not provide a chance to attack FIDESZ. It did not allow FIDESZ leaders to make unfulfillable promises in their campaign. But during the campaign and even since the campaign, this proved to be a rather helpful and productive strategy.
And the work that you do specifically?
Right now I have a joint assignment, here with the political sicence department in the law school at the Budapest University and at the Budapest University of business sciences where I am affiliated with the business economics department. And actually none of these are actually in the field of macroeconomic policy which is my job with the party. So three different fields. But the business economics and my interests here in the political science department are pretty close to each other in the sense that my primary focus is on an economic analysis of political, economic and legal institutions. Which includes fields like transaction cost economics which is applied to both economic and political institutions and problems of public choice. The applications that I think about are at both the macro and microeconomic level. I try to maintain as broad a focus as possible. So far there is no training in transaction cost analysis except for the courses I teach in the university: they are not mentioned in any other subject. I am also working on how to apply these hypotheses to transformation theory.
The criticism of the Alliance’s or FIDESZ’s economic policy is that it is too liberal and, if implemented, would plunge Hungary into a Polish-style crisis. How do you respond to these criticisms?
I think that one has to recognize that there is a basic difference between Hungary on the one hand and Poland and Yugoslavia on the other. The so-called shock therapy is not applicable to Hungary. This is the position of not only the Democratic Forum but of the Alliance and FIDESZ as well. Why? Because shock therapy means that you try to use the convertibility of your currency not as a result but as a basic means of managing the crisis. Which cannot be done in Hungary because people still keep a large portion of their savings in domestic currency which is not the case and has not been the case in Poland or Yugoslavia for at least ten years (and the remaining savings were devalued by the inflation during the last couple years). Hungarian inflation is not that high still; we have interest rates that are close to zero in real terms. People still have savings and they keep their money in savings. If you destroy the value of these savings, you would destroy the basis of any kind of crisis management because the middle class–the ones who can afford savings–are the potential social basis for crisis management. They can respond fastest. The real poor people–of course we must find some solution to keep them alive–but they are simply unable to respond to the incentives provided by the government.
No, we would not do what is done in Poland. On the other hand, much more could and should have been done in Hungary than what was done. It was a unique chance–a systemic transformation that the whole West was looking at–it could have been utilized in many different fields. And they simply lost the opportunity. In the beginning, if they had introduced an austerity package–not as critical as in Poland since we did not need something that critical–if they introduced the measures of the fiftieth day in their second day of office, it would have been much more acceptable. This was one mistake. The other–the debt issue. I am not in favor of stopping the payment of the debt right now. However, after the new government makes the necessary institutional changes to manage the crisis, after all this is done, the Western debtors have to work out some kind of debt relief because this country is just unable while we are managing the crisis with structural adjustment to pay 1.5 or 2 billion dollars just in interest payments. We cannot do that. I do agree with the Western banks that if they provided this relief the Hungarian government would not introduce the necessary drastic measures. Any kind of government needs that kind of outside pressure or else it is exposed to the internal complaint of people. They would just postpone the tough measures. But at the beginning they should have begun some kind of negotiations about the preconditions of some kind of later debt relief effort. Since they missed that opportunity, either the country will go bankrupt which will result in a huge disaster or we will become the only country in Eastern Europe which is still able to fulfill our obligations with that enormous amount of debt. The Polish and the Yugoslavs are no longer paying back; only we are paying back. I have no problem with that: we should what we can because this is the only way that the government can be forced to introduce these measures.
With respect to the internal transition: they have been thinking about this so-called pre-privatization, selling out these small shops. This was prepared by the old government: again something that they should have introduced in their second day of office. All of these things should have been done much faster. All the organizations, the trade unions and everything, are just waiting for an excuse to organize strikes and make scandals. They should have from the very beginning introduced some tough measures because at that time people accepted them. These wouldn’t have resulted in a Polish crisis. Quite the opposite. These slow measures could result in strong social resistance: people will say that they are suffering for no reason, without any perspective.
At this point, what can be done from your perspective now that the initial opportunity doesn’t exist?
This government is neither willing nor able to make fast steps. Maybe they will be able to come up with something but I’m afraid that they will simply increase the problems with this new land reform issue. They should have realized that the Smallholders are the most dangerous coalition partner for anyone. I direct this criticism not only at the Democratic Forum but to the Alliance as well. The Alliance should have realized that together with the Forum, they could have formed a government that could manage the crisis in the short term. This doesn’t mean that they should have formed a coalition in the long term; but in the first two or three years, though they attack each other so strongly, only these two parties until they agree on an issue, nothing really important can done. They should have realized that: they together could have renegotiated some of the missed opportunities with respect to the debtors. They should realized that instead of going ahead with the Landholders land reform program, they should have formed a Grand Coalition government.
In this society, the relative performance of this economy depends on the willingness of people to make sacrifices on the one hand and on the other to find individual solutions to their problems. This is what has been going on for 20 years or so. And I do hope that Hungarian people will continue to do so instead of waiting for the government or the trade union to help them. I do not expect much help from the government which likes to present itself as the savior of the nation.
I tend to explain the first four or five months of economic performance–a foreign trade surplus of higher than we expected–with the simple fact that there basically was no government in office. So the economy was left alone. Of course, one could use other explanations. I couldn’t defend this position against very professional arguments: but I would still maintain philosophically that this is the best approach. The best thing that the Democratic Forum can do is to realize that they lack the competence to work out a workable program: the most they can do is to get rid of as many obligations as they can: privatize the economy and let the people figure out ways to improve the situation.
I have been thinking of coming out with a radical program on the FIDESZ side in early September if this uncharacteristic government behavior continues. In the sphere of privatization, the whole process should be speeded up. It could be done if they simply distribute a portion of the property rights to the citizens. At the same time, I am not against this type of spontaneous privatization. Democratic Forum is accusing the old incumbents–professionals and bureaucrats–that they are using their opportunities. Yes, they are. But if they hadn’t had these opportunities, they would have figured out different ways to stop the whole transformation. The major reason why the Hungarian transition is so peaceful–more peaceful than any other country like Czechoslovakia or East Germany since we didn’t even need a mass demonstration or a mass strike–was that the beneficiaries of the old regime found some way to survive and build up a new basis for themselves within the structure of the new regime. What’s wrong with that? I think that we need to create a regime in which no one has a guaranteed monopolistic position and then through competition will put everyone in the place they deserve. Instead of trying to figure out different political or ideological criteria.
Economically that might be more efficient. But politically, there would be a big outcry.
I’m very happy that these people so far have not been able to control the process. At this point, we are through the phase in which the whole transformation could have been blocked or reversed.
The government has suggested a tripartite arrangement in which trade unions, business and the government come together to talk about structural policy. What do you think about this plan? Is this worthwhile to pursue?
Yes, it is worthwhile pursuing. These corporatist structures can be helpful. And there are examples when they were helpful. Not many examples of helpfulness in economic crisis or in crisis management. Rather, they were helpful when the whole economy was booming and the question was how to divide the increasing pie. But when it comes to economic crisis and how to divide a decreasing pie, even the smoothest running corporatist regime tended to break down: the British, even the West German case in which the operation was less smooth than in the 1970s. There is nothing wrong if the government is trying to build up negotiations and conclude an agreement which could guarantee strike restraints from trade unions and some guaranteed wage increase. But the problem is that they always demand guaranteed wage increases and that eliminates the chances of the government to succeed in crisis management. An automatism built into the regime will make the curbing of inflation much more difficult: because there will be an anticipated inflation rate. So I’m rather skeptical. I believe that if the trade unions are making an agreement that will be harmful to the employees, the employees will simply reject it or not appreciate it. Why shouldn’t they? The trade union will gain popularity only if they make a so-called good deal, but this good deal will be harmful for the economy as a whole because it will result in increased inflation. So, I think that the best would be if they could make a good agreement. But even if they could make an agreement, I’m not sure that the trade union could discipline its member. Or they would make an agreement that would have bad macroeconomic consequences.
Are people talking about ESOP?
Yes. When we were talking during the campaign, there was widespread agreement that some kind of ESOP should be or has to be introduced but it shouldn’t be more than 10 or 15% of the value of the shares–there could be exceptions (in a company that goes bankrupt as in America or Britain, the employees have a chance to maintain their jobs by buying out their companies with loans that they repay later). As a general rule, it would be beneficial if ESOP did not exceed 15% because there would be problems of enforcing ownership rights and controlling management
FIDESZ has said Hungary should leave COMECON as soon as possible. Some Polish and Czechoslovak economists say that Hungary is naive in turning almost exclusively to the West: one key to economic prosperity is trade among neighbors and even to the East, with the Soviet Union.
I do not agree with this position. Because even though we are a member of COMECON, the Soviet Union decreased the amount of oil that they will provide us. And not only Hungary (because you could say, “Ok, they simply want to punish us”) but they are doing the same to countries who want to remain in COMECON and maintain good relations with the Soviet Union. Our energy dependence is much more important than our military dependence was. The withdrawal of Soviet troops is symbolically important and it has to be done. But economically, we will still depend on the energy resources that they are providing or not providing us. Our government has realized that we should find ways to rebalance it. It will take a long time to decrease their share: something like 20-30 per cent of our energy needs and push it below 10 per cent. We will be heavily exposed to the risk of what the Soviets decide in terms of energy exports to Hungary. But I don’t think it has anything to do with COMECON. COMECON cannot be reformed. The trade relation between Soviet Union and Hungary or any other country and Hungary can be easily maintained without COMECON. Nothing beneficial comes from COMECON.
Do you think that Hungarian products are now competitive in Western markets?
Yes. Of course, the quality is poorer so the price is lower. We need to improve the quality and decrease the energy contained in the products. But I think we can find those goods and services which give us comparative advantage–especially if the capital inflow increases.
I was surprised by my experience in Spain. Spain is an economy with 20 per cent unemployment–which is enormous. Not very much inflation, something around 8 per cent. And the level of prices is enormous and still foreign investment is coming in. And the level of real wages is still very high. The foreign investment can still be absorbed. Of course Spain is a member of the EEC so many companies investing in Spain want to find a cheap country to invest in within the EEC that is more stable than, say, Greece. This is an advantage which we don’t have: and therefore I don’t expect that enormous an amount of foreign investment. On the other hand, I think that in many respects, especially in the field of work ethic or discipline, we have advantages over certain portions of Spain (not Catalonia, but the southern part). Although it has been mentioned many times that there is cheap labor here–which is not true as a whole–there is room to increase the wages of people and it still will be less than the wages of some Western countries. And for that much money, people here are willing to provide that much more effort. We need as free a capital market as possible. I agree that this is not the best solution for all countries: I would not suggest this for African countries for instance–or for southern Italy or the southern part of Yugoslavia. Even within Hungary, there will be differences even though we are a relatively homogeneous country. We must rely on the middle class who are willing to make sacrifices and are flexible to make the adjustment. They have to be given more and more opportunity.
There is a problem with foreign investment: Hungary wants it but it also doesn’t want to sell firms too cheaply. Do you propose any regulations on foreign investment?
The largest amount of property possible should be partly sold, partly distributed among Hungarians–they can then make the decision whether they want to sell out to foreigners or not. Then you can only blame yourself if you sell out too cheaply. This is especially true in the field of housing and real estate. Because it is true once the foreign investors start to come, Hungarians cannot compete with them in buying property in the most frequented areas. The state-owned apartments should be sold to the people who are living in them. I have worked out a relatively simply framework for how this could be done. 50 per cent of the market value of the apartment should be simply given to the people who are living in them. And the other 50 per cent should be paid back to the state. From that point on, the owner has a 50 per cent value of the apartment and they can work out different arrangement with an agent, an insurance agent, the government, whomever. If someone cannot afford to pay the debt, they still have the 50 per cent asset: they can buy a smaller apartment or work a contractual relationship with someone else.
After the value has been sold or distributed to Hungarian citizens, from that point on, all restrictions or most restrictions on foreign investment should be lifted. Then people should decide whether it is an invasion of foreigners that is harmful for the Hungarian soil or a good deal for themselves.
The land reform question is quite confusing. The Smallholders want land ownership to revert back to 1947 owners. What other possibilities exist for land reform?
You should give back to the private owner in those cases who still are members of collective farms. It could be given back and actually this would be going on if the Parliament hadn’t made a decision two months to stop any kind of reselling of land. A certain portion of the land could be given back to the individuals who formally are owners. What would happen to the rest? Either you could give the ownership rights to the local governments: and they would decide to sell or lease the land to companies, individuals. Or these collective farms which have so-called employee councils could decide what to do: formally they are the owners so they have the right to decide. The problem is that they are not recognized as legitimate; so perhaps it would be better to give it to the local government and the government would lease it back to the collective farm. They could also distribute shares among owners: they wouldn’t distribute the land itself, just the ownership rights. This would be the best thing to do in the production of grains because it requires large pieces of land to work efficiently. These are the strategies and they probably have to be used in a mixed form.
Hungary seems to be in a better position than Poland with respect to the percentage of the workforce employed in agriculture.
Yes, but don’t forget that the result of the Smallholders platform would be a larger number of people in agriculture. But this could happen only if they decreased the efficiency of the agriculture. It would not be beneficial at all. If they would distribute land into very small portions it would require people to go back and work themselves or lease the land to other people: this would increase prices and decrease production. There are examples where productivity could increase; but when they say that employment would rise they may not be using the same examples. But by and large, I don’t think that this is a sphere that can help with unemployment.
I want to go back to a question asked earlier concerning restrictions on foreign investment. Do you think there should be environmental or labor restrictions on foreign investment–or in terms of agriculture, in the amount of land that can be owned?
I think that major restrictions are not needed. I would even allow foreign investors to exclude trade unions from their plants because the regular practice is that trade unions increase the wage levels so these levels are higher than in companies owned by Hungarians. You don’t need that type of trade union demand. As long as they can have employees who are willing to do the work and not be members of a trade union: and this is usually the case, people are much more concerned with wages than trade union membership. I have no problem with that. But we are a democratic country and it would be difficult to push through Parliament such legislation.
Environmental standards can be and should be set. However, I would be much more in favor of guaranteeing this right for local governments than setting these standards nationally. For instance, if we are talking about a region in which people do not have jobs because it is a poor region–they are certainly willing to make certain sacrifices in their environment in order to get some kind of plant which would not be welcomed in a well-to-do neighborhood or region. One could ask, what happens to the national treasures in these regions? Ok, if it’s a national treasure, then the national government, from the central budget, should provide the resources necessary to maintain the national treasures. If there are not national treasures, then nuclear plants and other dangerous companies are able to build plants in only those regions where the general development of the region is low. And this is really an improvement for the people living there. [Another example Urban gave was the providing of additional money to that local government willing to store nuclear waste: the additional funds could then go to improving the local infrastructure].
What kind of policy do you think the government should adopt to protect the most vulnerable parts of the population during economic reform?
Of course, the government is doing something and will continue to do something. This is after all a European country. People complain: the government should increase the value of pensions, should increase other welfare benefits. Of course it should! But these can only be increased if we increase the tax burden on the most productive part of the population. I’m not talking about eliminating these welfare benefits. When the economy is still in crisis and we cannot afford to pay higher wages to the productive portions of society, why should we increase or maintain the real value of the welfare benefits? It sounds cruel but the situation is cruel. How can you justify to someone working all day long who is making less than a pensioner who had a lifetime to accumulate? There will still be room for finetuning. There will be chances for charity groups and local governments. It cannot be handled from above through minimum wages and minimum pension increases.
FIDESZ is very unusual in combining radical alternative with liberal. Do you think this combination can be maintained?
I think it depends on the internal Hungarian scene. If the Democratic Forum absorbed the Christian Democrats and the Smallholders disappeared from the scene, then the political scene could become a two-pole scene. But still there would be room in the middle and FIDESZ occupies that middle. I could imagine a situation in which we come so close to the Alliance that we become part of them but that would be ten years in the future. The other case scenario would be that we maintain our distinct centrist position.