SOCIAL COSTS OF TRANSFORMATION TO A MARKET ECONOMY IN POST-SOCIALIST COUNTRIES

Also by Jan Adam

ECONOMIC REFORMS AND THE WELFARE SYSTEM IN THE USSR, POLAND AND HUNGARY (editor)

ECONOMIC REFORMS IN THE SOVIET UNION AND EASTERN EUROPE SINCE THE 1960s

EMPLOYMENT POLICIES IN THE SOVIET UNION AND EASTERN EUROPE (editor)

EMPLOYMENT AND WAGE POLICIES IN POLAND, CZECHOSLOVAKIA AND HUNGARY SINCE 1950

PLANNING AND MARKET IN SOVIET AND EAST EUROPEAN THOUGHT

WAGE CONTROL AND INFLATION IN THE SOVIET BLOC COUNTRIES

WAGE, PRICE AND TAXATION POLICY IN CZECHOSLOVAKIA, 1948-70

WHY DID THE SOCIAL SYSTEM COLLAPSE IN CENTRAL AND EAST EUROPEAN COUNTRIES?

Social Costs of Transformation to a Market Economy in Post-Socialist Countries The Cases of Poland, the Czech Republic and Hungary

Jan Adam Professor Emeritus of Economics University of Calgary Alberta

* ©jan Adam 1999

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To the memory of Zuzana's and my parents

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Contents

List of Tables

Acknowledgements

Preface

List of Abbreviations

PART I INTRODUCTION

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1 The Strategy of Transformation to a Market Economy 3

PARTII THEPERFORMANCEOFTHE TRANSFORMING ECONOMIES

2 Common and Contrasting Features of the Transition 13

3 Transition to a Market Economy in Poland 22

4 Czech Transition to a Market Economy 37

5 Transition to a Market Economy in Hungary 52

6 Privatization 68

PART III THE SOCIAL COSTS OF TRANSFORMATION

7 Unemployment 87

8 The Standard of Living 104

9 Social Policy 126

10 Poverty 155

Conclusions 171

Notes 182

Bibliography 194

Index 206

vii

List of Tables

If not otherwise indicated, the tables refer to Poland, the Czech Republic (CR) and Hungary.

2.1 Important indicators of performance 15 2.2 Important indicators of foreign trade 19 6.1 Methods of privatization of medium and large

state-owned enterprises 74 7.1 Some indicators of employment in the civilian

economy 93 7.2 Number of unemployed and benefits 96 8.1 Real wages, real incomes and consumption 106 8.2 Changes in the structure of net household

expenditures per capita 109 8.3 Consumption of selected food items per capita 111 8.4 Housing construction 113 8.5 Development of monthly gross average wages and

salaries of those employed in main sectors of the economy 119

8.6(a) Distribution of per capita income by socioeconomic groups in Poland 121

8.6(b) Household incomes by occupation in the CR 121 8.6(c) Distribution of per capita income by socioeconomic

groups in Hungary 122 8.7 Distribution of household incomes on the basis of

the Gini coefficient 123 8.8 Distribution of net household income per capita 124 9.1 Social transfers as a % of GDP 128 9.2 Social assistance to families and family allowances 130 9.3 Pensioners, their benefits and outlays on pensions 132 10.1 Poverty in Poland, the CR and Hungary 165 10.2 Distribution of poverty 166

viii

Acknowledgements

I would first like to thank the Social Sciences and Humanities Research Council of Canada, Ottawa and Research Services of the University of Calgary, for the extended research grants which enabled me to work on this study.

I am obliged to those who read parts of the original drafts and whose comments enabled me to improve the final version of this book. I have greatly benefited from consultations with scholars in my field. I am especially obliged to M. Augusztinovics, L. Antal, L. Beskid, T. Bauer, A. Chlon, L. Csaba, E. Ehrlich, Zs. Ferge, I. Gabor, W. Herer, L. Herzog, J. Hetenyi, M. Kabaj, J. Klacek, V. Kluson, G. Kolodko, S. Kopatsy, K. Kouba, Gy. Kovari, K. Kovari-Csoor, A~ Koves, T. Kowalik, K. Lorant, J. Mujzel, E. Orosz, M. Pick, G. Revesz, L. Rusmich, E. Rychlewski, Z. Sadowski, V. Safarikova, K. A. So6s, Z. Sulc, L. Szamuely, J. Timar, 0. Turek, K. Tymowska, F. Vencovsky, R. Vintrova and L. Zienkowski. Of course, the sole responsibility for the views expressed in this book, or any remaining errors, is mine.

Special thanks go to those reasearchers who have provided valuable material for my book: I. Bastyr, L. Beskid, J. Bondyova, J. Broun, A. Cervenkova, E. Ehrlich; Zs. Ferge, M. Kabaj, T. Kowalik, Gy. Kovari, K. Kovari-Csoor, J. Lakatos, Gy. Lengyel, B. Milanovic, G. Revesz, J. Timar and K. Tymowska.

I wish also to record my appreciation for the help contributed by my research assistant, Mrs K. Lukasiewicz, in collecting, processing and evaluating materials. Special thanks to my daughter, Julie Adam, for the care and patience with which she improved the English of my typescript. To my wife Zuzana, who encouraged me in my work and helped me to collect and process materials, I am very much indebted.

A small part of the material in the book was published in earlier studies: 'Transition to a Market in the Former Czechoslovakia', Europe-Asia Studies, 1993, no. 3; 'The Transition to a Market Economy in Hungary', Europe-Asia Studies, 1995, no. 6; and 'The Transition to a Market Economy in Poland', Cambridge Journal of Economics, 1994, vol. 18, no. 6.

JAN ADAM

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Preface

In my last three books I discussed the socialist economic system: in the first book the economic reforms, in the second the market and plan­ning in Soviet and East European thought, and in the last one the reasons for the collapse of the socialist system.

The stagnation of the East European economies, shortages and the increasing gap in technological progress between the socialist and Western countries, the inability of the communist leaders to reform the system, to make the market at least as strong a co-ordinating mechanism as planning, all these shortcomings, combined with lack of democratic freedoms, turned the population of these countries against the communist rulers. Since they could no longer rely on the 'help' of the Soviet rulers, they agreed to transfer power to the opposition, which committed itself to overhaul the socialist system for the purpose of creating a democratic political system instead of the authoritarian one, and a capitalist market economy instead of a planned economy (which in Poland and Hungary had already started to change into a market economy under the old system).

The transformation to a capitalist market economy has already lasted 10 years, which is a long enough time to pass judgements about its successes and failures. The forces which took over the countries promised prosperity and increases in the standard of living after a short period of pain. Since I followed with great interest the develop­ment of the socialist economy, especially the attempts to introduce market socialism and I liked some of its features, mainly many aspects of its social policy, it is of great interest to know how the new system is performing.

In this book I am only dealing with three countries, which have always been my primary interest: Poland, the Czech Republic and Hungary. The focus of my study is mainly on the social costs of trans­formation, a topic which has not yet received the attention it deserves. Cost of transformation is a very broad concept, which includes losses in production. It could also include losses which cannot be quantified: psychological and sociological. My interest in this book is limited to quantifiable aspects which directly affect the well-being of the popula­tion. This book also deals with the effect of the transformation on the performance of the economy in the subject countries. For reasons of

XI

xii Preface

limited space neither of the two topics could be treated at the length and depth I would wish.

I have tried to back up my statements with statistics and to analyse these figures. I have had some difficulty finding proper figures for all the detailed topics I have discussed. One would expect that in the new era statistical offices would not try to conceal information even if it is unpleasant to the establishment. Yet, it seems that they have not yet fully given up old practices.

The book, divided into three parts, has 10 chapters and a Conclusion. Part I consists of one chapter, which analyses the trans­formation strategy applied in the countries under review. The Chinese strategy of marketization of the economy as an alternative solution is briefly discussed.

Part II has five chapters. The first, Chapter 2, discusses the common and different features of the development of the economy since the beginning of the transformation. The next three chapters are country studies. Chapter 6 then deals with privatization in the subject coun­tries. I have given some thought to the question of the placing of the privatization chapter. Logically, it should follow the first chapter, since it is an integral part of the transformation strategy. On the other hand, in the short run privatization has contributed to the increase of social costs and therefore I have placed it where it is.

Part III, which discusses the social cost of transformation, as defined above, consists of four chapters. Chapter 7 deals with unem­ployment, a new phenomenon in the subject countries, engendered by the transformation. Chapter 8 then analyses the effect of transforma­tion on what I call standard of living; more precisely, the effect of transformation on incomes, consumption, housing and widening of income differentials. Chapter 9 examines what the transformation has meant for social policy, primarily for the reform of the pension system and the health care system. The last chapter discusses poverty.

I hope that this book, together with those previously published, will give the reader a comprehensive picture of the gradual evolution of the transformation of the planned economy into a market economy.

JAN ADAM

List of Abbreviations

Journals and Papers

Czech (Czechoslovak)

E Ekonom HN Hospodtirske noviny NH Ntirodni liospodtirstvi PE Politickti ekonomte

Hungary

F Figyelo KSz Kozgazaastigi Szemle KG Kiilgazdastig N Nepszabadstig

Polish

Ek Ekonomista (Polish) GP Gospodarka Narodowa ZG Zycie Gospodarcze

National Statistical Yearbooks

MSZs Magyar Statisztikai Zsebkonyv (Hungarian Statistical Pocketbook)

MRS

RS SE SRCR SRCSR

Maly Rocznik Statystyczny (Polish Small Statistical Yearbook) Rocznik Statystyczny (Polish) Statisztikai Evkonyv (Hungarian) Statistickti rocenka Ceske republiky (Czech) Statistickti rocenka C~skoslovenske republiky

Miscellaneous Terms

CMEA CR CSR

Council of Mutual Economic Assistance Czech Republic Czechoslovak Republic

xiii

xiv

EU FDI IPF NIP OECD TVE VAT

List of Abbreviations

European Union Foreign direct investment Investment Privatization Fund National Investment Fund Organization for Economic Co-operation and Development Township and village enterprise Value added tax

Part I

Introduction

1 The Strategy of Transformation to a Market Economy

INTRODUCTION

After the collapse of the socialist system, Poland and Hungary accel­erated their march to a market economy. The Czech Republic (CR) (up to January 1993 the Czech Republic was an integral part of Czechoslovakia [CSR ]), where market institutions barely existed, made fast changes in order not to remain behind its neighbours. The transformation was preceded, but mainly accompanied, by a large volume of literature. Most of the literature favoured a radical strategy which is nowadays known under the name neo-liberalism. 1 Considering the objective internal and external conditions which existed at that time, this was practically the only possible strategy. Of course, there were available alternative strategies to the neo-liberal, but they did not have a chance in Europe, because they did not have the support of the powerful international financial institutions. In addition, the polit­ical classes which came to power as a result of the collapse of the socialist system came under the influence of neo-liberal ideology. And finally, some of the alternative programmes did not have an opera­tional plan. The neo-liberal ideology was not endogenous; it was brought into the subject countries, mainly by East and Central European scholars visiting and studying at Western universities, pri­marily American, where the teachings of M. Friedman and F. Hayek have a large following among professors of economics. It had already spread quickly before the socialist system collapsed.

A very important role in designing the strategy was played by econ­omists of international financial institutions (mainly the IMF and the World Bank) and Western academics, though its implementation was naturally carried out by the domestic authorities. It was assumed that foreign economists, who know the capitalist market economy not only theoretically but also from their own experience, know best how to overhaul the socialist system. The IMF was entrusted by the Western countries, which play a decisive role in this institution, with guiding

3

4 Introduction

post-socialist countries to a capitalist market economy.2 It was soon made clear to the post-socialist countries that only by following the advice of the IMF could they hope to receive aid from the IMF, other international financial institutions and Western countries. In addition, it soon became obvious that joining the European Community was conditional on the transformation of the economy to a market economy. This explains to a great degree why Poland, which in the first half of 1989 during the Round Table negotiations between the representatives of the Communist Party and Solidarity adopted a radical programme of transition to a market economy, but still in the pre-transformation tradition of Solidarity, half a year later, under the new Solidarity government, adopted a transformation package which was contrary to the programme. Kowalik (1994a) believes that the turnaround was due to the promise of generous help from the West, the 'illusion of a new Marshall Plan' and 'a leap to Europe'.

Amsden, Kochanowicz and Taylor (1994) believe that this radical strategy was the work of the IMF and the World Bank, which followed the ideology of the US Republican administration in the 1980s. They believe that what Washington offered in terms of ideology was 'a mythologised version of eighteenth-century laissez-faire' (p. viii).

Rayment (1995) takes a similar position when he argues that the conservative revolution in the USA and the UK influenced the strat­egy of transformation. This was also the reason why the post-war experience of West European countries was dismissed (p. 47).

Gowan (1995) maintains that there were disagreements between France, on the one hand, and the USA and Britain, on the other hand, about transformation. The French government of that day suggested keeping the CMEA alive, refraining from pressuring countries to accept a particular system and creating a pan-European confedera­tion which would embrace all European countries. The French plan was rejected and the American plan was adopted at a G-7 meeting, which meant the break-up of the CMEA, and the imposition of a par­ticular capitalist system across Eastern Europe. To the author the encouragement of the break-up of CMEA was the most damaging decision and 'the most fundamental feature of ST [shock therapy]' (p. 54).

Poland, which was the first country to launch the transformation officially, invited Western advisers, headed by J. Sachs, who was the adviser of several South American countries when they were involved in reforms. It is also of importance to remember that Sachs used plen­tifully his experience in South America for advising Eastern Europe,

The Strategy of Transformation 5

though the situation in the latter was in many respects, historical, cul­tural and systemic, different from the former. 3 Evaluating Lipton's and Sachs's (1990) strategy of reforms, Murrell (1993) notes that to them ' History, society, and the economics of present institutions are all minor issues in choosing a reform program.'

Western economists could also play such an important role because domestic economists were not well prepared for the transition to a market economy. The rapid collapse of the socialist system was a sur­prise not only to Western countries, but even to the public of the socialist countries. Nevertheless, in Poland and the CSR the formula­tion of the reforms was entrusted to a small group of academics.4 This happened because, as Gomulka (1994b) maintains, 'the new, post­communist political elites had typically only a vague idea of what economic reforms to introduce and in what sequence to introduce them'. The reformers had an unusual amount of power. The fact that academic economists and not politicians played the leading role in designing the strategy of transformation explains why so little atten­tion was given to the need to create a consensus for the far-reaching changes. Most economists have a tendency to disregard factors other than the economic (political, social or psychological factors) when they consider economic policies and therefore do not attach proper importance to social welfare. Most of the economists who had a say in the detailed design of the transformation were adherents of neo­liberalism. They also wanted a radical reform because this would create conditions for making a return to the old system impossible.

It would be wrong to assume that East European countries were entirely helpless and were fully dependent on Western advisers. In all the countries there were economists who gave some thought to trans­formation, and once it became a real possibility, many proposals appeared. Maybe the best-known proposal was Kornai's, which was already published in 1989 in Hungarian and a year later in English. Perhaps his work had the greatest influence, probably more abroad than in Hungary, where his proposal for a radical reform was much criticized. Kornai has been regarded as one of the best experts on socialist economies and he enjoyed the confidence of most Western economists because his thinking was (nowadays it is probably less so) similar to theirs.

Ladanyi and Szelenyi (1995) maintain that there are three possible models of the transformation. They have in mind the neo-liberal, the Chinese5 and the social-democratic model. Here only the two models, which have been put into practice, will be discussed.

6 Introduction

TRANSFORMATION STRATEGY IN POLAND, THE CR AND HUNGARY

The neo-liberal strategy is based on the idea that a transformation of the planned socialist economies into market economies requires a radical economic reform which must include a radical stabilization and liberalization, carried out simultaneously, followed by privatiza­tion. Stabilization and liberalization are closely intertwined: stabiliza­tion measures contribute to liberalization and vice versa.

The stabilization package had to bring about a renewal of internal and external market equilibrium and also cope with inflation, which surged as a result of the package. To this end a strict monetary and fiscal policy and an austerity incomes policy were introduced. Furthermore, with few exceptions, prices were freed. Freeing of prices at a time when the economy was still severely monopolized, combined with considerable cuts in subsidies and an excessive devaluation of the domestic currency, made inflation shoot up dramatically. Wage growth remained much behind the inflation surge.

The instruments of monetary policy in the first phase were: restric­tion of money supply, increases in interest rates and imposition of credit ceilings. All these measures, which had to renew market equi­librium, had the effect of restricting economic activities. Fiscal policy, which aimed at balancing the state budget by substantially restricting the previous system of tax breaks and subsidies, had a similar effect.

The austerity incomes policy, combined with a loss of purchasing power of savings because of increased prices, reduced substantially the real purchasing power of the population and dramatically diminished demand. In this way demand was brought into equilibrium with supply.

The liberalization included provisions for opening the economy to the world market. Foreign trade was liberalized, the national currency was substantially devalued, and internal convertibility was introduced. Liberalization of imports made it possible for foreign products to compete in domestic markets of the subject countries and thus to exert pressure on enterprises to be in step with technological develop­ment abroad and thus promote economic efficiency. Liberalization of foreign trade was also intended to help create a rational price system, as a precondition for effective competition.

The substantial devaluation of the domestic currencies primarily followed the goal of creating preconditions for increasing exports and curbing imports. Higher increases in exports than in imports have

The Strategy of Transformation 7

been important for producing means for servicing the foreign debt. A surplus in foreign trade is also important as an instrument for enhanc­ing employment.

The introduction of internal convertibility was mainly aimed at making exporters and importers independent of state bureaucracy so that they could make economic decisions according to their considera­tions. Furthermore, it was also aimed at pushing out the dollar -where it played an important role, as in Poland -from the functions it performed, to a great degree, as a medium of exchange and the store of value, and returning these functions to the domestic currency.

The package by itself was not regarded as sufficient to bring about a market economy. It has been gradually complemented by privatization and other institutions and the introduction of a legal infrastructure. Since the reform package was radical and was carried out simultane­ously, it is often labelled in the literature as 'shock treatment'.

The social costs of the transformation in Poland as well as in the CR and Hungary were quite high and were not distributed equally. The burden of the social costs is borne by the masses.

As will be shown in the country chapters below, the neo-liberal strategy was carried out in its pure form in Poland and in a moderate form in the CSR. It was also applied in Hungary, but to great extent gradually.

CHINA'S PATH TO A MARKET ECONOMY6

At a time when former European socialist countries have been engaged in a transformation of their economies into market economies, China has done the same, with the difference that China has never claimed to aspire to capitalism. On the contrary, although its economy has made considerable progress in adapting to market conditions, China continues to insist that what it is engaged in is the building of market socialism. Its model of transformation is quite dif­ferent from the neo-liberal model. The stabilization was carried out to a great degree by administrative measures. The process of consider­able liberalization of prices and foreign trade has been carried through gradually. The government sees to it that the process of trans­formation stimulates economic growth and increases the standard of living. The restructuring of the economy is not left to market forces alone; the government investment plans are supposed to direct the economy to changes the authorities believe are necessary. The state

8 Introduction

sector is supposed to be the dominant sector - at least this is what the official line is and what was stated in Jiang's report at the recent Congress of the Communist Party (1997).

China had for a long time the same traditional economic system as the East European countries before the latter embarked on reforms. In 1979 China started a process of decollectivization of agriculture which was completed in 1981-2. The new 'household responsibility system', as the new system is called, allowed peasants to lease land for 15 years. After paying taxes, the peasants might keep all the net receipts realized from selling products. However, the new system still contained some elements of the old system. Prices for certain products continued to be controlled by the authorities and peasants were encouraged to enter into delivery contracts with government agencies for grain and some other key agricultural products. In the course of years market prices were gradually expanded. In 1993 only prices for a few products, such as cotton and tobacco, were controlled (Perkins, 1994; LiuJiang, 1994).

The reform in agriculture released a very large number of workers. A great proportion of these found work in the township and village enterprises (TVEs) established for this purpose. TVEs are collectively owned by townships and villages where the enterprises are located. Managers, who have partial control rights over the activities of enter­prises, are appointed jointly by the local government and employees (Weitzman and Xu, 1994).

In 1984 the Chinese carried out a major reform of state enterprises. Enterprises were allowed, after they had fulfilled the state targets, to use the remaining capacity for production of goods of their liking. Whereas inputs for the implementation of state targets were provided to enterprises at controlled prices, inputs for the rest of the produc­tion had to be acquired in the market at market prices. As a result of the reform, market forces started to play an increasing role, though the dual price system opened the door to various kinds of speculation and corruption. The amount of products sold at market prices was increasing and, of course, the share of material inputs acquired at market prices was increasing too (Jefferson and Rawski, 1994). Apparently enterprises have been allowed increasingly to use their capacity for production for the market. With it the dual price system has been slowly disappearing.

As to ownership relations, 80 per cent of small-scale businesses in retail trade, catering and services gradually landed in the hands of individual and private firms (Beijing Review, 20-6 June 1994, p. 18).

The Strategy of Transformation 9

There is also private ownership in medium-sized enterprises. Large enterprises, primarily in energy, transportation, telecommunications, raw and semi-finished materials industries, and technical equipment are owned by the state.

In 1993, the Chinese government decided to embark on a new reform. It is aimed at giving enterprises greater autonomy and strengthening the authority of managers. To this end enterprises (after carrying out experiments) are to be turned into joint-stock com­panies and to introduce cross-ownership by enterprises, meaning that individual state enterprises will own shares of other state enterprises. In this way there will be a separation between the state and the enter­prises. Shareholders and representatives of the staff will make up the supervision bodies. In order to enable enterprises to develop their capacities fully, social functions such as health care and pensions, which enterprises now fulfil, will be taken over by institutions estab­lished for this purpose (Beijing Review, 17-23 October 1994; Rongxia, 1996; cf. Perkins, 1994; Qian, 1996). Judging on the basis of Fulin's paper (1998), the reform has not progressed very much.

China has also carried out a reform of the banking system, foreign trade, exchange rate system and the tax system.

As is generally known, China's economy grew very fast. In the 1990s economic growth has slowed down, but it is still high by European standards. In 1997, it grew by 8.8 per cent. China's fast economic growth was due to the fast growth of productivity. Huge inflow of foreign direct investment (FDI) played an important role. In 1997, there was an inflow of $45 billion. Inflation, which was high in the 1980s, was brought down to 0.9 per cent between January and November 1997. It is important to mention that inflation was not brought down by a restrictive monetary policy (Hu and Khan, 1997; 'Will China ... ', 1998).

China has avoided the economic crisis which has befallen several East Asian countries. Many economists argue that the crisis has arisen because East Asian countries have not fully opened their economies to market forces. It seems rather that the severity of the crisis in East Asia was caused to a great extent by over-investment, mainly in real estate and by the convertibility of domestic currencies which enabled an inflow and a sudden outflow of speculative foreign currencies, thus destabilizing the economy. That China is quite well protected against the crisis has to do with effective government control and regulation of the economy and with the fact that its currency is not fully convertible.

10 Introduction

This short description of reforms, which cannot capture all the details and niceties, can be summed up as follows. The Chinese economy has made great progress towards a fully-fledged market economy. It seems that large state-owned enterprises in some form will continue to exist. It is difficult to predict whether China will remain a socialist market economy or whether it will later turn into a capitalist economy. What is clear is that it has put its economy gradu­ally on a path to a market economy without bringing about a decline in output and the standard of living. On the contrary, the transforma­tion is proceeding with a simultaneous remarkable growth of the economy and improvement in the standard of living. All this has been possible because China has chosen a different path to the market economy from the former European socialist countries, which clearly shows that there is an alternative to the neo-liberal strategy. Chinese leaders have rejected out of hand a possible use of neo-liberal strat­egy, not only for ideological reasons but also because such a strategy, accompanied by a recession and decline in standard of living, as hap­pened in Central and Eastern Europe, would have seriously threat­ened political stability and the unity of the country. Finally, its size enabled China to stand up to any pressure from international financial institutions and to go about managing the economy according to its own interests. 7

Part II

The Performance of the Transforming Economies

2 Common and Contrasting Features of the Transition

INTRODUCTION

In this chapter I shall discuss briefly common and contrasting features of the economic performance of the subject countries. I shall then discuss the economic performance of each of the three countries in separate chapters.

In Poland and Hungary the collapse of socialism was gradual and was caused primarily by internal factors. Of course, without changes in the Soviet Union, particularly the abandonment of Brezhnev's doc­trine, neither the Polish nor the Hungarian opposition could have brought down the system. In the former Czechoslovakia (CSR; hence­forth Czechoslovakia always means former), the collapse of the social­ist system was the result of a 'domino effect'; there the internal opposition alone did not have the strength needed to bring down the regime.

In all three countries, regardless of the way the old system col­lapsed, the new, non-communist governments committed themselves to transforming their economies into market economies based on private ownership and to introducing a democratic system. As men­tioned in Part I, neo-liberal transformation strategy was adopted in two ways. Of the three countries under review, first Poland (in 1990) and later the CSR (in 1991) adopted shock treatment as a transforma­tion strategy. Hungary opted for a gradual transformation, but it was not implemented consistently.

THE PERFORMANCE OF THE ECONOMY IN THE FIRST YEARS OF TRANSFORMATION

The first years of transformation produced a mixed bag. On the one hand, they produced positive results. In Poland, where a major market disequilibrium existed, shortages were eliminated. In all three coun­tries consumers have been given a greater choice of products; a more rational price system has come into being; the private sector has

13

14 The Performance of the Economies

begun to expand rapidly: the foundations for a market economy have been laid down.

On the other hand, Poland and the CSR were plunged into a deep recession combined with a considerable decline in the standard of living. Hungary, despite the choice of a gradual transformation, did not manage to avoid a deep recession either.

In the first two years of transformation output declined drastically (see Table 2.1). There is disagreement among economists about the reasons for the output decline. I agree with those who argue that the decline of output was primarily caused by the transformation strategy (for example, see Laski, 1992; Laski Bhaduri and Levcik, 1994; Amsden et al., 1994; Gowan, 1995; and Kornai, 1994a, to some extent). There were of course also factors on the supply side which contributed to the recession.

The restrictive monetary policy, combined with high inflation rates, brought about high interest rates and a falling of credit behind inflation, which turned out to be an obstacle to economic activity. The freeing of prices and the elimination of most of the subsidies as a result of a restrictive fiscal policy necessarily brought about price increases which were much higher than expected, the main reason being the monopolization of the economy. The excessive devaluation of the domestic currency added to the inflation. The price increases were not matched by wage increases. The incomes policy restricted wage increases to a fraction of the price increases and, as a result, there was a considerable decline in real wages, mainly in Poland and Czechoslovakia. In Hungary, where prices were already largely freed, inflation was much smaller than in Poland and the CSR and there was not a major devaluation of the currency; wage growth was not exposed to such restrictions as in the other two countries and as a result real wages fell much less than in the neighbouring countries.

Needless to say, the decline in real wages, which was combined with a decline in non-real wage incomes, necessarily had a negative effect on demand and on consumption, all the more because the large increases in prices reduced the purchasing power of savings, primarily in Poland and Czechoslovakia. The decline in demand brought about drop in output and a rise of umemployment. It also contributed to a fast liquidation of shortages.

Of course, there were also other contributing factors to the decline in output. No doubt the collapse of CMEA was one such factor, but I do not think that it was the dominant factor, as for example Brada (1993) believes. He forgets that the collapse was offset to a great degree by the increase in trade with OECD countries.

Table 2.1 Important indicators of performance

Poland Czech Republica

1990 1991 1992 1993 1990 1991 1992

GDPb 92-93 93.0 102.6 103.8 98.8 85.8 93.6 Industrial outputb 75.8 92.0 102.8 106.4 96.5 78.4 92.1 Gross agricultural outputb 97.8 98.4 87.3 106.8 97.3 91.1 87.9 Investmentb· c 89.9 95.9 100.4 102.3 108.3 67.5 116.6 Productivityb· d n.a. 97.0 114.3 112.6 n.a. 85.6 97.7 State budgete 0.4 -3.8 -6.0 -2.8 0.0 -1.7 -1.6 Rate of inflation 585.8 70.3 43.0 35.3 9.7 56.6 11.1 Unemployment rate1 6.5 12.3 14.3 16.4 0.8 2.6 3.1 Real wage (growth in %) -24.4 -0.3 -2.7 -2.9 -5.5 -26.3 10.3 Private sectore 30.9 42.1 45.4 47.5 12.3 17.3 27.7

1993 1990

99.1 96.5 94.7 90.7 97.8 90.7

108.0 90.4 98.8 n.a. 0.0 -0.1

20.8 28.9 3.0 1.9 3.7 -3.7

45.1 n.a.

Hungary

1991 1992

88.1 96.9 81.7 90.2 93.8 80.0 87.7 98.5 93.8 103.8 -4.9 -7.0 35.0 23.0

7.5 12.7 -7 -1.4

n.a. 46.7

1993

99.4 103.9 90.3

102.5 113.4 -5.7 22.5 12.6 -3.9 54.8

....... Vl

Table 2.1 Continued

Poland Czech Republic" Hungary

1994 1995 1996 1997g 1994 1995 1996 1997 1994 1995 1996 1997

GDPb 105.2 107.0 106.1 105.6 102.7 106.4 103.9 101.0 102.9 101.5 101.3 104.4 Industrial outputb 112.1 109.7 108.5 108.0 102.3 109.2 106.4 104.5 109.6 104.8 103.4 111.1 Gross agricultural outputb 90.7 110.7 100.3 100.3 94.0 105.0 98.6 94.1 103.2 102.6 104.9 99.4 Investmentc, b 108.2 117.1 122.1 116.0 116.3 130.3 111.0 96.3 112.3 94.7 105.2 108.0 Productivityb, d 115.5 109.6 109.7 105.1 120.5 110.3 110.0 111.2 108.0 State budget< -2.7 -2.6 -2.5 2.8 0.0 0.0 0.0 0.0 -7.5 -5.4 -2.3 4.4 Rate of inflation 32.2 27.8 20.0 15.1 10 9.1 8.8 8.5 18.8 28.2 23.6 18.3 Unemployment rate1 16.0 14.9 13.0 12.9 3.3 3.0 3.1 4.4 10.9 10.9 10.7 10.4 Real wage (growth in %) 0.5 4.8 6.2 6.0 7.7 8.6 8.8 3.1 7.2 -12.2 -5.4 4.7 Private sectore 53.0 62.0 70.0 56.3 66.5 74.7 60.4 63.3 70.0

Notes: a czech figures for 1994-7 are revised figures by the Statistical Office bPrevious year = 100% c In Poland and Hungary total investment and in the CR material investment dJndustrial 0 Expressed in percentage of GDP. Private sector in the CR apparently includes cooperatives 1 At the end of the year; in Hungary in the beginning of the year

Sources: Statistical yearbooks of the three countries. In addition, Chro§cicki (1996), Kolodko and Nuti (1997); Main Economic ... (1998); Economic Trends ... (1997, no. 3), Ludanyi (1997); Tomsik (1998) and E, 1998, no. 16.

...... 0'\

Common and Contrasting Features 17

According to Czech authors (Komarek, 1993, p. 72; and Vintrova, 1992) the decline in exports in 1991 was 5 per cent (Angelis, 1992, indicates 6.3 per cent). Of course, the decline in exports to the former CMEA countries was much higher. Even if we take into account Angelis's figure as to the loss in exports, and assume that in 1991 exports amounted to 31.8 per cent of GDP computed in CSR crowns, and consider the multiplier, this does not have a great effect on GDP, compared to the actual decline in GDP.

Privatization also contributed to the recession. As Kornai (1994a), the great supporter of privatization, has pointed out, privatization in the short run 'raises unemployment, reduces demand, and so con­tributes to the recession' (see also Gomulka, 1994a).

The neglect of state enterprises and the creation of uncertainties within enterprises also worked in this direction (Kolodko, 1992). The authorities did not behave like owners of assets and relied on the invis­ible hand to do the job for them, even in cases where the market did not work well. This is not to say that the authorities should interfere in the daily operations of enterprises, but, in the transitional period when many enterprises were grappling with financial difficulties and various uncertainties, the authorities should have been involved in order to further the development of the economy (cf. Mladek, 1992).

The excessive liberalization of trade (mainly in Poland), which brought in a flood of cheap Western goods that could have been pro­duced at home, also contributed to the drop in output.

However, the decline in output was not the only problem which occupied the governments of the subject countries. The achievement of a balanced budget was not a great problem in the first year of transformation. Enterprises were able to take advantage of the liber­alization of prices; many of them still had inputs, including energy and raw materials, which were acquired at low prices. Finally, there was a large devaluation of the domestic currency in Poland and Czechoslovakia, which helped promote exports. All three factors combined ensured many enterprises made huge profits, part of which was transferred into the state coffers. Later, however, the balancing of the budget turned into a chronic problem in Hungary, and also in Poland. The CSR was in a better position because it was relatively little indebted.

All three countries were plagued with foreign trade problems, but to different degrees. In the first year of the transformation the situ­ation was not bad; Poland even had a huge trade surplus. Later the situation in Poland and Hungary started to worsen; both countries

18 The Performance of the Economies

suffered from excessive imports at a time when they very much needed a trade surplus.

Inflation, which was characterized by the architects of the transform­ation as corrective, in other words only a transitory phenomenon, turned out to be a chronic problem in Poland. Hungary, which unlike Poland avoided large increases in the general level of prices in the first years of transformation, is still plagued by inflation. The CSR, which in the first year of transformation experienced a major increase in prices, managed to bring down inflation the most.

THE PERIOD OF ECONOMIC GROWTH

The transformation strategy did not contain any special measures which would put the economy on the path of growth. The architects of the strategy, faithful to their neo-liberal ideology, relied heavily on market forces, believing that they would sooner or later bring about economic growth. Poland was the first country which could boast a reversal in economic growth. In Poland in 1992, both GDP and industrial output increased. In the Czech Republic (CR) and Hungary this happened two years later. While Poland has already achieved the 1989 level of GDP, the CR and especially Hungary are far from such an accomplishment. In 1995-6 the growth rates in Hungary were in the area of possible sta­tistical error. The performance in 1997 was quite good.

In this growing stage, until1997 the Czech economy performed the best and the Hungarian the worst. The CR has not achieved such robust rates of economic growth as Poland, but it managed to sustain a very small rate of unemployment, perhaps the smallest in Europe, and to balance the budget. In 1994-5 the Hungarian economy plunged into a crisis; it was plagued by a large state budget deficit combined with balance of payments problems. In 1997 the Czech economy found itself in a crunch also caused primarily by balance of payments problems.

The record in balancing the state budget is not the same. Hungary has had to grapple with large budget deficits, one reason being its exces­sive indebtedness. In 1994 this amounted to 7.5 per cent of GDP. On the other hand, the CR managed in the second stage of transformation to maintain a more or less balanced budget. Poland's record is also quite good; it managed to keep the budget deficit below 3 per cent.

Inflation is still high in Poland and Hungary. In Poland there is a clear declining trend in inflation; it is declining from year to year. In

Table 2.2 Important indicators of foreign trade, direct investment and debts

Poland Czech Republic

1990 1991 1992 1993 1990 1991 1992 1993 1990

Exports" 14.3 14.9 13.1 14.1 163 234 248 385 9.5 Importsa 9.5 15.5 15.9 18.8 176 209 293 375 8.6 Trade balancesa 4.8 -0.6 -2.8 -4.7 -13 25 -45 10 0.9 Current accountb 0.7 -1.4 -0.3 -2.3 -0.3 0.1 0.3 0.1 0.1 Current accountc 1.1 -2.9 -0.3 -2.7 -2.9 1.2 0.8 2.2 0.4 FDib n.a. 0.25 0.9 1.5 0.11 0.49 1 0.65 0.9 Foreign debts b. d 48.9 48.3 48.2 48.7 n.a. n.a. 7.5 8.5 n.a. Foreign debtse n.a. n.a. n.a. 276.1 n.a. n.a. n.a. 54.2 n.a.

Hungary

1991 1992

10.1 10.7 11.3 11.1 -1.2 -0.4

0.3 0.3 0.8 0.9 1.6 1.6

n.a. 13.3 n.a. n.a.

1993

8.9 12.5 -3.6 -3.5 -9.6

2.5 14.9

267.2

,..... 'C>

Table 2.2 Continued

Poland Czech Republic

1994 1995 1996 1994 1995 1996 1994

Exports a 17.4 23.1 65.8 410 575 594 10.7 Imports a 21.5 29.1 100.2 431 670 754 14.5 Trade balances" -4.1 -6.0 -34.4 -21 -95 -160 -3.8 Current accountb -0.9 -2.1 -8.5 -0.1 -1.4 -4.5 -3.9 Current accountc -1.1 0.7 -2.5 -0.2 -2.7 -7.6 -9.8 FDib 1.3 2.5 4.5 0.9 2.5 1.5 1.3 Foreign debtsd 40.9 39.4 10.7 16.3 20.8 18.3 Foreign debtse 183.8 122.7 111.5 64.6 61 60.3 319.8

Notes: a In Hungary and Poland in US$ billion. Polish figures for 1996 in billions of zlotys. In the CR in billions of crowns. Data for 1995 and 1996 are calculated according to new methodology. Figures according to the old methodology were in 1995: 482 for exports and 554 for imports.

bin US$ billion. cAs a percentage of GDP. dFigures for Hungary refer to net debts. 0As a percentage of exports.

Hungary

1995 1996

12.9 13.1 15.4 16.2 -2.6 -3.1 -2.5 -1.7 -5.5 -3.8

4.6 2.0 15.9 12.9

206.1 201.4

Sources: Poland: Chroscicki (1996) and Kolodko and Nuti (1997); figures on current account are from Lubinski (1996). His figures on Polish trade in 1994-5 are much lower than Chroscicki's. CR: Main economic ... (1998) and statistical yearbooks. Hungary: Statistical yearbooks and Lud{myi (1997). Figures for foreign direct investment and current account as a percentage of GDP come also from Ludanyi (1997). Figures for foreign debts as a percentage of exports come from the IMF Survey, 8 June 1998 and figures for current account as a percentage of GDP are from OECD Economic Outlook (1998), no. 63.

N 0

Common and Contrasting Features 21

Hungary there was a similar trend, but it was reversed with the start of the economic crisis in 1994. The CR has already managed to attain single-digit inflation (see Table 2.1).

In all subject countries foreign trade was the weakest area (see Table 2.2). Imports have grown faster than exports. Even when exports have started to grow faster than imports, the latter have had such a head start that in absolute terms they have still been larger. This weakness has to do, among other things, with the weakness of the microsphere due to the failure to restructure adequately to suit the needs of exports and domestic demand.

The failure to restructure the microsphere has also had an effect on the structure of exports. In the old regime machines and equipment played a significant role in exports. With the collapse of CMEA and with it the former Soviet market, exports of machines suffered tremendously.

The transformation brought about a dramatic change in the owner­ship structure. The private sector grew very rapidly in all the subject countries, primarily in the CR. In Poland and Hungary, there had already been a not negligible private sector under the old regime. In Poland, most agricultural farms were in private hands. In 1996, the Polish and Hungarian private sector made up 70 per cent of GDP. In the CR in 1985 only 0.3 per cent of the economically active population was engaged in the private sector and at the end of 1996 the private sector made up 74.7 per cent (see Table 2.1).

3 Transition to a Market Economy in Poland

INTRODUCTION

The Polish economy suffered from as many ills as those of the other two countries. In addition, Poland suffered from galloping inflation; huge shortages - larger than in the CSR and Hungary; considerable erosion of the role of the domestic currency as a medium of exchange and store of value; and large foreign debts, to mention the most important problems. The so-called Balcerowicz programme intro­duced in January 1990 with the aim of stabilizing the economy and putting it on a transformation path, had to cope with all the problems mentioned above and was supposed to be completed with privatiz­ation of most state enterprises and the introduction of a legal infra­structure, thus leading to the establishment of a fully-fledged market economy. The programme can be characterized as shock treatment, since stabilization and liberalization measures were carried out simul­taneously, with one stroke (see Kowalik, 1995, pp. 133-5).

No doubt the Balcerowicz programme soon produced positive results. It restored market equilibrium; shortages were eliminated and consumers got a greater choice in goods. The trust in the zloty as a medium of exchange and store of value was renewed, and the exchange rate remained stable longer than was expected. The private sector expanded dramatically. The fight against inflation was less suc­cessful: the inflation rate, after increasing in 1990 to 586 per cent (measured as annual average), more than double that of 1989 (259 per cent), was substantially reduced in 1991 (70 per cent). However, the programme brought about only a short-lived balanced budget.

The successes mentioned were accomplished at the cost of a severe recession and a decline in the standard of living. In the first two years of transformation, GDP declined by 14-15 per cent, sold industrial production declined even more, by 32.2 per cent, unemployment increased to 12.3 per cent, and real wages declined by 24.2 per cent in 1990 (see Table 2.1). The results, with the exception of the balance of payments, were much worse than the architects of shock treatment had expected.

22

Poland 23

The architects of the transformation had assumed that once the transformation package was implemented, spontaneous market forces would put the economy on the path of economic growth. The trend in economic growth was reversed only in the third year of transforma­tion. As to real wages, their level in 1997 was 12.8 per cent lower than in 1989, and unemployment in 1997 was 13 per cent.

In this chapter I shall discuss in greater detail first the methods used to achieve the objectives of the transformation and then their results.

THE FIRST YEARS OF TRANSFORMATION

Monetary and Fiscal Policy

Monetary policy had a central place in the transformation strategy. Its main instrument was the regulation of money supply and interest rates; only later did the authorities impose credit limits on the banks. In the first months of 1990, the money supply declined even in nominal terms, and in most of the months of 1990 and at the begin­ning of 1991 it also declined in real terms (Dgbrowski, 1992).

The interest rate, which was set monthly at the start of the transformation, was supposed to be positive, if not immediately, at least as soon as inflation eased. The Central Bank's refinancing interest rate (discount rate) was set at 36 per cent in January 1990 and at 20 per cent in February and reduced every month; in June it was 4 per cent. Starting with July 1990, the interest rate again started to increase; in July and in the next two months it was 34 per cent and in November and December 55 per cent due to rising inflation. 1 Of course, the market interest rate was much higher in the first half year than the Central Bank's discount rate.

Although most of the time the interest rate was below the inflation rate, it was excessively restrictive, mainly in the first months of the transformation. Most enterprises ceased to seek credit and in addi­tion less credit was available. According to Calvo and Coricelli (1992a), the stock of capital credit, deflated by producer prices, declined by 51 per cent in January 1990. What is also important is that the Central Bank ceased to be the lender of last resort.

The restrictive monetary policy, however, did not have the impact such a policy has in market economies. Although in Poland it plunged the economy into a deeper recession than expected, one of the reasons being that it was combined with a very strict fiscal policy, it did

24 The Performance of the Economies

not bring down inflation to the expected level. The high interest rate, but even more so the high taxes, soon changed inflation from demand­pull to cost-push inflation. Excess demand, which existed before 1990, was replaced by insufficient demand after the application of shock treatment, and inflation was fed by higher production costs.

One of the objectives of the shock therapy was to bring about a bal­anced budget. To this end taxation was increased, with the exception of the old 40 per cent tax on gross profit. The turnover tax on products was increased (from 15 to 20 per cent) and the same happened with the tax on wage growth beyond the set limits and the tax on assets (known in professional parlance as the dividend). The latter tax, which was the successor to the known charge on assets and paid from net profit, was increased on the average several times. In addition, enter­prises paid a 20 per cent tax on paid-out wages (not to be confused with the tax on wage growth, the so-called 'popiwek' in Polish) and a social security contribution at 43 per cent of paid-out wages (in 1989 it was 38 per cent) (Maj, 1991).

As a result of all these tax provisions, the tax contribution of state enterprises to the budget was 71 per cent in 1990 and was planned at 79 per cent in 1991 (see Kolodko and Gotz-Kozierkiewicz, 1991; Kowalska, 1991; and Misiak, 1992).

The tax on fixed assets, as well as the tax on wage growth, was not paid by the private sector. There may be economic justification for the discrimination against the state sector with regard to the tax on assets, but there was no good economic reason for doing the same with the tax on wage growth.

In 1990 there was even a small state budget surplus. In the second half of 1990 the budget situation started to worsen and in 1991 there was already a budget deficit amounting to 3.8 per cent of GDP and in 1992 the deficit peaked at 6 per cent. The budget deficit was to a great degree of the government's own making. The imposed high taxes on enterprises brought about a worsening of their financial situation. Growing unemployment caused increasing budgetary outlays on unemployment benefits. The rapidly growing number of pensioners, a result of the recession,2 had the same effect. Needless to say, lack of financial discipline in enterprises and considerable tax evasion by the private sector also had an effect on the budget deficit (see Uplawa, 1994).

The inability of the government to maintain the deficit within the range agreed upon with the IMF led to disagreements with that insti­tution.3 On the other hand, the government's attempt to reduce the

Poland 25

deficit even at the cost of violating the law, which linked wages of gov­ernment employees and pensioners to the growth of wages in state enterprises, brought it into a collision course with its own employees and pensioners.4

Wage Policy

It is understandable and logical that if the architects of the stabiliza­tion programme wanted to achieve their objective, wage control was of great importance. The question was how much wage growth should lag behind the inflation rate. The IMF was in favour of a total wage freeze (Baczynski, 1992, p. 44). The Polish authorities did not agree, and finally a compromise came about. But even in the compromise the wage adjustment coefficient was very restrictive. In January 1990 it was 0.3 (meaning that the wage fund could increase to 30 per cent of the cost of living increase), in the next three months 0.2 and in May and June 0.6. In July it was 1.0 and in the remaining months of the year 0.6. The restrictiveness of the adjustment coefficient was com­pounded by the rule that the basis for the calculation of the coefficient should be the wage bill of September 1989, and not December 1989, when the average wage was much higher (Krencik, 1991; and Kolodko et al. 1992, p. 100). (For more on this see Adam, 1994a).

To make wage control effective, the authorities introduced a second line of defence in the form of tax penalties for violating the set wage growth limits, an instrument which was used in Poland in the 1980s and in Hungary in the 1970s. The tax on wage growth beyond set limits was a tax on the growth of the wage bill. For 1990, enterprises which exceeded the allowed wage fund (including adjustments allowed for inflation) by up to 3 per cent paid 200 per cent in taxes on the additional wages paid out, and for each additional 1 per cent the tax was 500 per cent (Maj, 1991).5 In 1991, the tax was eased slightly and it was no longer levied on the wage bill, but on average wages (see Fiszer, 1991, p. 132).

The tax had a negative effect on production and productivity and contributed to the widening of wage differentiation. Enterprises that wanted to expand production and to this end had to increase the workforce were necessarily at a disadvantage; they had to pay the tax. The construction of the tax also had a negative effect on productivity. Enterprises could not reward workers who worked hard and more productively without paying the tax, if they could not reduce the work­force at the same time.

26 The Pe1jormance of the Economies

Not all enterprises could afford or find ways to pay wages higher than the set limits, (some were not even able to pay the admissible wages) and among those that paid, the extent of payments varied; in some enterprises wages increased twice as fast as in others. Figures on average wages by industrial branches for 1990 show that the old interbranch differentials (relatively high average wages in heavy indus­try and low in light industry) were strengthened (Chmiel, 1991).

The tax on wage growth provoked a great debate and played an important role in the 1990 presidential elections. The economic com­munity was split: some defended it, others called for its removal. The critics of the tax primarily stressed two things: the tax made the reces­sion worse;· and its removal would not feed inflation to any great extent because, according to them, the existing inflation was of a struc­tural nature and not a demand-pull inflation (ZG, 1991, no. 14, p. 6). Most of the criticism was levelled at the discriminatory nature of the tax- the fact that the private sector was not subject to it, meant that the conditions for improving efficiency were not the same in the two sectors.

Foreign Trade

The Polish government went too far in its liberalization of foreign trade. In 1989 and 1990 it reduced the customs tariffs to 8 per cent on average. (For comparative purposes it should be mentioned that EC countries applied at that time a 6.1 per cent tariff on average in their trade with non-members.) On textiles the tariff was set at 3.5 per cent and on garments at 13.1 per cent (Dziewulski, 1992a). The adverse effects of this policy were not instantly felt. The decline in domestic demand and the undervalued zloty encouraged enterprises to export. Low prices of raw materials in the domestic market, due to cheap imports from the CMEA countries, also contributed to good results in exports, mainly in 1990. Without the good exports performance, the Polish economy would have been in a much deeper recession. In 1990 exports exceeded imports by US$4.8 billion and a current account surplus was registered. In 1991 a reversal occurred; imports grew fast, much faster than exports, and also continued to grow fast in 1992. In 1991 there was already a US$0.6 billion foreign trade deficit, which continued to grow in the following years (see Table 2.2). This, of course, adversely affected the current account and threatened to destabilize the exchange rate. It should not be forgotten that Poland still had a huge international debt.

Poland 27

After some time the stocks of cheap raw materials, imported from the former CMEA countries, were exhausted. This necessarily had a negative effect on domestic prices of raw materials and thus on trade with the EC countries, which became the most important trading part­ners of Poland and the most important outlets for Polish materials and semi-finished products. Polish exports to the EC countries were also affected by various restrictions imposed on different products in different periods by the EC due to the recession there. Of course, this development had a negative impact not only on the current account, but also on economic growth (Chroscicki, 1993; Mozejko, 1993).

The imports of industrial goods grew so fast that Lech Walt;sa pub­licly accused foreigners of ruining Polish industry. Needless to say, excessive imports6 were the result of excessive liberalization of foreign trade, low customs tariffs and lack of incentives for the private sector to invest more in production. After some hesitation, in August 1991 the authorities increased tariffs by more than 100 per cent (on average to 18.1 per cent). The tariffs on textiles were increased almost five times, to 16.6 per cent, and those on garments to 27.9 per cent (Dziewulski, 1992b ).

In setting of the new exchange rate, the authorities followed several aims. They wanted to make the new exchange rate a powerful incen­tive for the promotion of exports, and thus for an increase in employ­ment and debt repayment to foreign countries, and for curbing imports. In addition, they wanted to restore the zloty to its function as a medium of exchange in the internal economy. Finally, in the deliber­ation on setting the rate, an important consideration was to make it stable at least for a quarter of a year. The new exchange rate was at a level which was close to black market rates and thus much below the purchasing-power parity (see Gomulka, 1992).

Many of the economists who criticized the stabilization policy believed that the devaluation was too excessive and too inflationary. This is true, but it may be difficult to prove that once convertibility was introduced and foreign trade liberalized, a lower devaluation would have brought about the expected external equilibrium, even in the short run. Nor would it necessarily have restored the zloty to its function as an exchange medium in the internal economy and encour­aged Poles to convert their dollars, which they had in relatively large amounts, into domestic currency. This could not have been achieved just by giving higher interest rates on deposits in zlotys than on those in dollars. 7 Holders of dollars had to be assured that, whenever they wished, they could convert their zlotys back into dollars. It is true

28 The Peiformance of the Economies

that this could have been achieved without resorting to internal convertibility.

REVERSAL IN THE GROWTH OF THE ECONOMY

Introduction

The year 1993 was an important milestone in the transformation process. There was a reversal in economic growth which had already started in the second half of 1992. The growth of GDP by 3.8 per cent and of sold industrial production by a robust 6.4 per cent in 1993 confirmed that the bottoming out and growing of the economy in 1992 was not an accidental phenomenon (see Table 2.1). GDP reached the pre-transformation (1989) level in 1995 and sold industrial production in 1996.

The recovery of the economy was enabled by investment growth, expansion of exports and a rapid expansion of the private sector, which was quite extensive even before 1990. The considerable fall of investment outlays in the first two years of the transformation came to a halt in 1992, and in 1993 they grew by 2.3 per cent to accelerate in the following years (see Table 2.1). This brought about an increase in labour productivity which in turn contributed to economic growth and later to a decline in the unemployment rate.

Despite the good results in economic growth in 1993-7 and also in stabilizing the state budget deficit at an acceptable level, Poland still has many problems. Inflation remains high, despite its decline over the years. In 1997 it was 15 per cent. Exports, though growing fast, are outstripped by imports, which means a foreign trade deficit and under Polish conditions a current account deficit. (The standard of living will be discussed in Chapter 8.)

The year 1993 was also politically significant. Two non-Solidarity political parties, the Democratic Left Alliance and the Peasant Party, took over power.8 The former was the successor of the Communist Party, whereas the latter had been a coalition partner of the Communist Party during the old regime. Although the two political parties were frequently bickering- after all, they represent different constituencies; the Alliance, primarily the urban population, and the Peasant Party, primarily peasants - they managed to give Poland a more stable government and reduce social tensions.9 This is not to say that the country has been free of destabilizing phenomena. Their main

Poland 29

source were the clashes with President Waf~sa, who tried to grab more and more power for himself. He aimed at establishing a presi­dential system for himself, apparently believing that only he could give Poland the governance it deserves. With his defeat in the 1996 presi­dential elections, the political tensions have abated, but not entirely. Golebiowski (1995), a good observer of the Polish political scene, maintains that the political life in Poland is

affected by two overlapping cleavages. The first is historic: a divi­sion into parties with Solidarity and anti-communist backgrounds and ones with origins in the old structures. The second cleavage is based on political, economic and social options. It is a division into supporters of parliamentary democracy and advocates of semi­authoritarian solutions, into pro-market and populist stances, into commitment to a secular or a denominational state, and so on ... Lech Wai~sa is seeking to strengthen the latter and on this hinges his plans for reelection or institution of an unconstitutional form of 'presidential' government. (p. 15)

The programme of the new coalition found its way into the Strategy for Poland (Polish Government, 1994), which was later elaborated in the Pakiet [packagej2000 (see Kolodko, 1997). The Strategy for Poland was a medium-term programme for the years 1994-7. Its forecasts for economic growth, reduction of budget deficit and growth of real wages were exceeded in 1995 and the same happened in 1996. On the other hand, the forecast for the rate of inflation was not achieved. 10

The Strategy for Poland reflected the centre-left government differ­ent approach to certain important problems from that of the old Solidarity governments. The very production of such a document was a novelty. The government promised to reduce the social costs of trans­formation and ensure their more just distribution, and also to improve the standard of living. It committed itself to 'the deliberate construc­tion of a market system in place of the passive expectation that it will establish itself once the government has destroyed the old system' (Kolodko, 1996a, p. 12). In this spirit the government adopted an industrial policy, aimed at promotion of foreign trade, innovation and thus economic growth, and put the private and state sectors on the same footing with regard to taxation. It also promised to re-introduce tripartite bargaining about wages (see also Blazyca and Rapacki, 1996).

The September 1997 elections brought into being a new coalition: Solidarity Electoral Action (a grouping of many small parties

30 The PeJformance of the Economies

dominated by Solidarity) and the Freedom Union. The future will show whether they will be able to co-operate smoothly. The former is a conservative populist party which stresses patriotism and Christian values, and the latter is a neo-liberal party headed by Balcerowicz, the architect of the Polish shock treatment of transformation and the new finance minister. The new coalition inherited an economy in relatively good shape; but it will have to prepare the country for joining the EU, an action which will be accompanied by many difficulties (The Economist, 20 and 27 September 1997).

In the following text I shall analyse some of the macroeconomic policies applied in the growing phase of the Polish economy.

Monetary Policy

The monetary policy, which was so restrictive with the start of the transformation process, has been eased. In 1994 and 1995 money supply growth was higher than the rate of inflation and this was higher than the projected rate. In money supply foreign currency, a great deal speculative, played an important role. In 1993 it was increasing, in the following two years it was declining, but it was still high. In 1994, it was 28.6 per cent and in 1995 20.5 per cent of all the bank deposits (Hubner, 1996, p. 14; Sobota, 1996, p. 158).

Speculative foreign currency, if it amounts to a large percentage of money supply, is worrisome to the authorities. 11 It complicates the management of monetary policy by increasing money supply unneces­sarily and may be inflationary. Its sudden withdrawal may destabilize the exchange rate. On the other hand, it may help bring down interest rates. There are no good non-administrative methods of sterilizing speculative foreign currency. As long as there are significant differ­ences between the interest rate which foreign speculators can achieve at home and that in East European countries, favourable portfolio investments and a feeling that the invested funds are safe, large capital inflows continue. And these preconditions have existed in the subject countries (Nuti, 1996a; Rosati, 1997, pp. 495-7).

In the regulation of money supply the authorities relied more and more on non-administrative methods. Already in 1992, they had imposed on the banking system the obligation to hold reserves against deposits. In 1993 they introduced open market operations (J6zefiak, 1997, pp. 189-90). The reserve ratio was quite high 12 and was extended to hard-currency deposits, apparently in the desire to steril­ize the inflow of foreign speculative currency. At the end of 1995

Poland 31

Poland took a more resolute decision to discourage the inflow of foreign speculative currency- the National Bank revalued the zloty. This means that it considered the inflow of speculative foreign cur­rency to be a greater danger than the impact of a revaluation of the zloty on exports (Sobota, 1996, p.170).

In credit policy the authorities tried to reconcile two contrary goals. On the one hand, they tried to make access to credit easier compared to the early years of transformation. On the other hand, they wanted a quite high interest rate in order to fight inflation. On balance, they managed to improve the credit situation. Access to credit was helped by the greater inflow of money into the banking system, among other things, because of the inflow of foreign currency (Sobota, 1996).

Inflation

The rate of inflation has been declining, in the first years even rapidly, but it is still high. There have been several reasons for the slower than forecasted decline of inflation. The adjustment of domestic prices to world prices is continuing. This is mainly true for such important prices as those of electricity and gas. In 1995, especially in the first half-year, food prices increased considerably. This was the result, on the one hand, of a poor harvest, and on the other of protection of agriculture. Some believe that agricultural protection was excessive; they allude to the high customs tariffs on some foodstuffs. 13 Needless to say, the high tariffs were politically motivated to some extent: it was the concession the Peasant Party exacted for its being a coalition partner.

The price increases of food were also caused by a high increase in the cost of trade operation. The number of small businesses increased from 150 000 in 1989 to 400 000 in 1994. As a result, buying conditions improved considerably, but at the same time the costs of trade opera­tion increased too (Kapuscinski, 1996).

Increases in foodstuff prices led to great pressure for wage increases, all the more because the real wage level was still lagging greatly behind the 1989 level. Under such conditions, especially when productivity grows fast, as was the case in Poland, it sounds strange if someone blames real wage increases for the still high inflation rate.

Many economists blame the slower than expected decline in inflation on the huge inflow of short-term foreign currency, mostly speculative, weakening the restrictive monetary policy (see for example Kozak-Lisiecka (1996, p. 138). Some blame the slow decline of inflation on the alleged slow-down of the reform, a belief which is

32 The Performance of the Economies

debatable. Balcerowicz (ZG ,1996, no, 22), for example, believes that the slow-down of privatization is the main reason for the development in inflation.

Finally, the great stress of the centre-left government on economic growth was, no doubt , one of the factors which hampered a faster decline in inflation. For a government that is committed to reducing the cost of transformation, and in this way to ease the burden of trans­formation for ordinary people, this is the proper way to proceed. The rapid economic growth in 1995-7 enabled robust increases in real wages in 1995-7 and helped ease unemployment and thus claims on the budget.

The State Budget

In 1993-7 the state budget deficit amounted on average to 2.6 per cent, 14 which is undoubtedly a success, considering that it was 6 per cent in 1992. The favourable result was achieved despite the fact that no reforms of the pension system and the health care system were carried out. Perhaps the most important reason for this was that the economy started to grow again and at a considerable rate - and as a result enterprise profits and household incomes increased. The improvement in the collection of taxes also played a role.

The budget deficit was covered primarily from domestic sources and as a result domestic indebtedness was growing fast. In 1990 it amounted to 11.6 per cent of GDP and in 1994 to 23.7 per cent. In 1995, it declined to 21.8 per cent. At the same time foreign indebted­ness declined dramatically from 78 per cent of GDP in 1990 to 37.3 per cent in 1995 because Poland managed to obtain a reduction of its debts. 15 The servicing of the public debt, primarily of domestic debt, grew quite fast, from 4.1 per cent of GDP in 1990 to 15.6 per cent in 1995 (Up!awa, 1994; Wernik, 1996 and 1997) .

The budget revenues increasingly come from indirect taxes (turnover tax, replaced by VAT in 1994, excise taxes and import taxes); in 1990 they made up 19.1 per cent of the total revenues and in 1995 43.3 per cent. Taxes paid by enterprises have declined immensely since the tax on wages was eliminated and the tax on wage growth was substantially reduced (1994) and in 1995 eliminated. The gap was filled by the introduction of income tax, starting in 1993 (Owsiak, 1994; Krajewska, 1994).

State enterprises are paying higher taxes than the private sector. According to Krajewska's computations (1994), in 1993 state

Poland 33

enterprises had to bear a burden in taxes three times heavier per worker than the private sector. In 1994 and 1995 there was certainly a decline in the differentiation because of the reduction and later elimi­nation of the tax on wage growth. Yet a portion of the private sector, mainly small businesses, does not pay taxes at all, or only part of their obligations. According to Wernik (see Upfawa 1994), there would have been no budget deficit in 1992 if every businessperson had paid taxes.

Despite considerable improvement in the state budget situation, Poland's budget worries are not over. It still suffers from a deficit which cumulates and is reflected in a growing cost of servicing the public debt. Yet, foreign borrowing is limited and domestic borrowing may have a negative impact on the economy, if banks as a result must limit lending to the private sector. In addition, households do not show great interest in buying government treasury bills (Chojna-Duch, 1995). The import tax, which, when introduced in 1992, was 6 per cent of the price of imported goods including the customs tariff, is declin­ing; in 1996 it was only 3 per cent. Customs tariffs also have a declin­ing tendency (Chroscicki, 1996). Finally, there are no guarantees that the economy will grow at the same high rate as in 1995-7.

Foreign Trade

Foreign trade is marked by many weaknesses which threaten the sta­bility of the economy. Exports in terms of volume declined in the first four years; in 1993 they were only 92 per cent of the volume of 1990 (Plowiec, 1993). A reversal occurred in 1994, but even more in 1995, when the value of exports in terms of US dollars was 34.5 per cent higher than in 1994. If the changes in exchange rates are disregarded, then the growth was only 17 per cent, which is also a respectable achievement, due mainly to abatement of the recession in the West. The success in exports was achieved despite the appreciation of the zloty.

However, the dynamics of imports were even stronger; in 1995, they were 38.9 and 20 per cent respectively higher than in 1994. In 1996 the foreign trade situation became worse; imports grew by about 26 per cent, whereas exports only grew by 8 per cent. Needless to say, the growing trade deficit has had a negative effect on the current account balance. In 1995 the deficit on the current account was US$2.1 billion, despite a trade surplus in services, whereas in 1994 it amounted only to US$940 million (Lubinski, 1996, pp. 76-8). In 1996-7 the deficit

34 The Peiformance of the Economies

was even larger. (In 1996 it was 8.5 US billion dollars.) The fast growth of imports is due to the growth of the economy, excessive lib­eralization of trade and appreciation of the zloty.

The unfavourable structure of foreign trade has been another weak­ness. Up to 1995, products which require less processing, such as raw materials and semi-products, played a leading role in exports to the European Union. Therefore Perczynski (1995) could maintain that exports to the EU did not play a creative part in the restructuring of the economy in 1990-3. In 1995, there was already a noticeable small improvement in the structure of exports. Whether this is a sign of better days to come is impossible to say.

The structure of imports is not free of negative effects either. Imports from the European Union turned out to be an impediment to the domestic production of certain machines and electronic consumer goods. On the other hand, one could mention as a positive feature that imports of investment commodities are growing. However, even in this case, one can challenge the assertion, because the item 'electro­machines' contains a large quantity of cars and office furniture (Perczynski, 1995) which in the view of many economists are not the best investment goods.

The Solidarity governments, primarily the Mazowiecki government, in which Balcerowicz was the minister of finance, were reluctant for ideological reasons to promote exports and to impose restrictions on imports. The centre-left government introduced several provisions aimed at promoting exports, provisions which are also applied in the West. It granted subsidies towards interest rates on exports credit, tax reliefs for investment, intended for modernization and promotion of an increase in exports, and guarantees for exporters against potential losses and so on (Plowiec, 1993; Lubinski, 1996; Jakobik, 1996).

To boost exports, which may be threatened by the appreciation of the zloty, the Polish authorities decided to reduce the value of the zloty monthly by 1.4 per cent and in 1995 they changed it to 1.2 per cent. In addition, in 1995 they allowed the exchange rate to fluctuate within the limits of ±7 per cent. Later the limit was reduced to ±5 per cent (Lubinski, 1996). This policy was not followed consistently; as already mentioned (seep. 31) at the end of 1995 there was a revalua­tion of the zloty.

To balance foreign trade, let alone to achieve a trade surplus, will be more difficult, since the provisions for protection of domestic markets (customs tariffs and import tax) are weakening (Plowiec, 1997, vol. 2, p. 235).

Poland 35

Poland's main trading partner is the European Union, specifically Germany with approximately 55 per cent of Poland's trade with the European Union, to which two-thirds of Polish exports go. It is interesting that Germany, which has a leading position in trade, is much less involved in the rapidly growing direct investments in Poland.

CONCLUDING REMARKS

In the first years of the new regime, Poland went through a deep recession, caused primarily by the transformation strategy applied. Output declined dramatically, unemployment soared, inflation shot up and and the budget deficit was high. In recent years Poland has been quite successful, mainly if we disregard the situation in foreign trade. It managed to put its economy on the path of fast economic growth. Interestingly enough the economy started to grow when inflation was quite high and thus contradicted de Melo's and Gelb's thesis that 'transition countries do not resume growth until inflation has been brought down to moderate levels' (1997, p. 76). In 1992, when both the GDP and industrial output started to grow, the inflation rate was still 44 per cent, which is by no means a moderate level.

It can be regarded as a success that every year Poland managed to reduce the inflation rate, though it did not decline at the rate fore­cast; in 1990 it was 586 per cent and in 1997 it was 15 per cent. Poland also achieved success in managing the state budget: since 1993 the deficit has been below 3 per cent, which is below the level required for joining the European Union.

Poland has no good reason to be complacent. The developments in foreign trade are not good; imports continue to grow faster than exports in 1998. The strengthening of the zloty is one of the factors in this development. In addition, Poland has the highest rate of poverty among the subject countries (see Chapter 10).

One could argue about who should be credited for this success, whether the centre-left government or the preceding governments. In my opinion, the centre-left government deserves credit for bringing political stability and for governing with more consensus than the pre­ceding governments. 'In general the left-wing government is favoring a development of a policy consensus between government, labor, and business, over the more technocratic and authoritarian approach of the early transition governments', write Ernst, Alexeev and Marer

36 The Performance of the Economies

(1996, p. 92). The centre-left government distanced itself from the philosophy of laissez-faire, which was followed mainly by the first democratic government, in which Balcerowicz more or less deter­mined the economic policy, and played a more active role in the economy. It did not leave the growth of the economy fully to market forces. It applied a moderate industrial policy, promoted foreign trade and helped agriculture.

Further development of the economy will very much depend on the extent to which the partners in the new government coalition will be able to work in harmony. There are quite significant ideological differ­ences between the coalition partners and in addition within Solidarity Electoral Action itself. The future agenda of the Polish government is full of issues (pension system reform, reorganization of the local authorities, reform of the tax system, subsidies to agriculture and so on), in whose solution ideology may play an important role and there­fore there are many potential disagreements.

4 Czech Transition to a Market Economy

INTRODUCTION

Under external and internal pressure the Czechoslovak Communist Party agreed to a dialogue with the opposition, the result of which was the relinquishing of power by the communists. And so the 'velvet revo­lution' came about in November 1989. The new government, which resulted from parliamentary elections on June 8-9, 1990 and which brought to power the opposition, organized in the Civic Forum in the Czech lands and its partner in Slovakia, the Public against Violence, as well as their coalition partners, committed itself to a radical econ­omic reform (HN, 4 July 1990, p. 3). The neo-liberals, who held the important economic portfolios, had managed to a great extent to impose their philosophy on the economic reform proposal, which was submitted to the parliament on 1 September 1990. As in Poland, the neo-liberals could gain such influence only with the help of interna­tional financial institutions (the IMF and the World Bank).

In this chapter I shall discuss first the stabilization and liberalization measures Czechoslovakia undertook in the first years of transforma­tion and identify the factors which contributed to the recession. Then I shall discuss the development of the economy in the period of its recovery.

THE FIRST YEARS OF TRANSFORMATION

On 1 January 1991 Czechoslovakia (CSR) introduced a package of far-reaching transformation provisions, which, compared to the Polish ones of 1990, could be characterized as a slightly moderate form of shock treatment. The package included all the elements of the Polish therapy, but some of the components were less radical; indexation of wages was less restrictive, trade was less liberalized and internal con­vertibility was more restrictive.

The CSR was in a different economic situation from Poland- it did not suffer from galloping inflation; even if we take into consideration

37

38 The Peiformance of the Economies

its hidden inflation, inflation was lower than in the West, and short­ages were smaller by far than in Poland, where citizens were forced to queue for everyday food items. Its foreign indebtedness was small in comparison to the other two countries under review. There was no good reason for the CSR to imitate Poland, all the more because, when the CSR embarked on its shock treatment course, the negative results of the Polish venture were already known. In the CSR the transformation package 'was launched in a context of relative macro­economic equilibrium ... that is in a situation that apparently did not call for major stabilization surgery' (Koves, 1992, p. 32).

In the preamble to the scenario of the economic reform -which was prepared by a group of economists headed by V. Klaus, the finance minister of the day, and approved by the government- a substantiation was given for the radical reform. One of the arguments for a radical solution reads: 'Indecisiveness is demonstrated to the advanced world even a desire to create an environment for the so-called third way of economic development' (HN, 4 September 1990) In other words, inde­cisiveness can be interpreted by the West as a desire to set up a system which is somewhere between socialism and capitalism.

On the other hand, compared to that of the other two countries, the Czechoslovak economy was the least prepared for a market economy. The planning system, although in many respects substan­tially modified from that of the 1950s, had been applied until the system collapsed.

Monetary and Fiscal Policy

Like Poland, the CSR assigned a central role to monetary and fiscal policies in the pursuit of macrostabilization and in attempt to cope with inflation. The main instruments of monetary policy were sup­posed to be positive interest rates and credit limits for individual banks. Yet the inflation rate was much higher than expected, one reason being that in January 1991 prices were set free (with some exceptions) and subsidies were restricted to a great extent 1 and the interest rate - even at its highest, which was slightly reduced in the second half of 1991 -was negative. However, credit conditions were substantially influenced by the credit limits, set for individual banks. Already for 1990, the target set for the credit volume was more or less at the level of 1989. For 1991 a higher limit was set, but it was much below the inflation rate. In addition, money supply in real terms (taking into account inflation) declined (Hrncir, 1991). In light of

The Czech Transition 39

these facts, it is clear that the monetary policy was over-restrictive2

and contributed to the recession. In the following years, the monetary policy was eased.

Fiscal policy was supposed to help the fight against inflation by sub­stantially restricting government subsidies to enterprises and invest­ment projects financed from state revenues. The authorities set themselves an ambitious goal - to achieve a state budget surplus in 1991. To this end they did not need to increase taxes in 1991; the tax burden, which was already high, was increased for 1990. The tax on profit was increased from 50 per cent to 55 per cent (Sourek, 1988; Supplement to HN, 1990, no. 3). The tax on the wage bilCremained at the same level, 50 per cent; however, the tax on wage increases beyond the limit set (henceforth tax on wage growth) increased. The restrictive fiscal policy was one of the factors which brought about a deep recession. It was also one of the reasons that insolvency of many enterprises increased, starting from the second half of 1990.

In the first five months of 1991, the state budget surplus grew fast because many enterprises had high profits, but later the opposite occurred, and, in addition, the government decided to use some funds for the revival of the economy and to increase the funding of social programmes (see Brejnik, 1992). As a result, the government ended up with a small budget deficit.

In 1992, the budgetary situation did not improve. The amount of collected revenues remained much behind the budgeted amounts, and this was mainly due to a smaller collection of the turnover tax (79 per cent) than was expected (Bulletin of the Czech Statistical Office, 1992, no. 12, p. A25). The reasons for this phenomenon should be looked for, on the one hand, in the recession, in a shift to the consumption of foodstuffs with a zero rate of turnover tax, and in a growth of savings (Kamenickova, Horcicova and Vaskova, 1993) motivated in many cases by fevar of the fiifure; and, on thve other hand, in the fact that the trade in cigarettes, alcohol and beer, items with very high tax rates, was partly in the hands of criminal elements, which managed to make big profits by tax evasion. Government intervention came late and has been far from effective.

Revenues from profits paid by state enterprises were also below the expected amount, one of the reasons being that many enter­prises were insolvent. For all these reasons there was again a budget deficit in 1992, though a bit smaller than in 1991. In 1993 the budget situation improved considerably; there was even a tiny surplus (see Table 2.1).

40 The Performance of the Economies

Wage Policy

The restrictive wage regulation was made up of two components: the allowable growth of the wage bill and heavy taxes for exceeding it. The wage bill could grow by a percentage (the so-called guide for wage growth), which was set for the first quarter of 1991 at 5 per cent and which at end of the year had reached the level of 32 per cent. In addi­tion, enterprises were allowed to increase wages up to 3 per cent beyond the limit without paying taxes, a provision which was supposed to give them some manoeuvring space in case they wanted to expand production. Increases in wages beyond the 3 per cent mentioned were taxed heavily, regardless of the form of ownership (Prace a mzda, 1991, no. 4-5).

In June 1992 the government linked wage increases to an average annual rate of profit. Increases in wages beyond the prescribed limits were penalized, as in 1991. The new regulation system had an addi­tional component which had not existed in the previous one: it was discriminatory, referring only to state enterprises (Cervenkova, 1992). Wage regulation ended in 1994. From the foregoing it is clear that wage control was restrictive and was of course co-responsible for the decline in demand and output.

Foreign Trade

Despite opposition and criticism,3 the government opted for an exchange rate which was not very far from the black market rate in the hope that this would ensure a stable exchange rate, contribute to the promotion of exports and curb imports. However, setting the value of the crown low in relation to foreign currencies contributed greatly to inflation.

Liberalization of trade, among other things, was also supposed to promote exports. The authorities apparently believed that if they widely liberalized foreign trade, Western countries would reciprocate in kind.4

Therefore the protection of domestic markets in the CSR was reduced to below the level of OECD countries (Angelis, 1992).5 Some barriers to trade were removed in the OECD, but some still remained.

The Performance of the Economy in the First Years

The provisions made on 1 January 1991 laid down preconditions for a market economy. Like the two other countries, the CSR achieved

The Czech Transition 41

positive results: a more rational price system came into being; the exchange rate was more or less stable; shortages, which existed previ­ously, were gradually eliminated; consumers got a greater choice of products; the private sector was expanding.

However, the successes were achieved at a very high social cost. The country plunged into a deep recession for reasons already mentioned in Chapter 2.6 In the first three years of transformation (1991-3) the GDP in the Czech Republic (CR) declined by 21.8 per cent; industrial output dropped even more, by 34.8 per cent. Unlike in the other two subject countries and Slovakia, unemployment in the CR increased only modestly. Inflation in 1991 increased by 56.6 per cent, to decline in 1992 to 11.1 per cent and to increase again in 1993 to 20.8 per cent. Real wages in the CR declined in 1991 by 26.3 per cent; if the decline in real wages in 1990 (5.5 per cent) is added, the total decrease amounted to 31.8 per cent. Unlike other indicators mentioned here, real wages started to increase in 1992 by a robust rate of 10.3 per cent (see Table 2.1). The figures mentioned were mostly worse than the architects of the transformation had assumed.

Exports in 1991 declined in real terms to 94 per cent of the 1990 figure. Although exports to market economies increased by 14 per cent, this increase could not fully offset the decline in exports to the former USSR and the Third World. Luckily, imports declined even more (to 78 per cent). As a result, the foreign trade balance in 1991 ended with a surplus of US$900 million and with a tiny surplus on the current account (Angelis, 1992; Weigl, 1992). In 1992 a deficit in balance of trade was recorded, although there was a surplus in trade with industrially developed countries.

No doubt, the rapid reorientation of foreign trade was a success. However, the structure of trade was of concern; there was a shift in exports to products with less added labour; 'international division of labour pushes us rather into steel and cement than into electronics, par­tially because the state has in substance given up on active structural policy' (Mladek, 1992). The scenario for the economic reform (HN, 4 September 1990) envisioned an active restructuring policy, mainly in the period of transition to a market economy. Government support was to be orientated toward state programmes and included financial support, loan guarantees and so on. In addition, small and medium private businesses were to be aided. However, the government soon dropped the idea of an active restructuring policy and accepted the phi­losophy of the international financial institutions that structural changes were to be left to the market mechanism (see Klacek et al., 1991).

42 The Performance of the Economies

The decline in industrial output has not affected all industries equally. Light industry, primarily textiles (garment as well as footwear) was affected the most in 1991. It was hit by the collapse of the Soviet market and by the contraction of the domestic market. Its reorientation to other markets was difficult; Czech products had difficulty competing in quality on Western markets and were expen­sive for the Third World market. Fuels and energy fared the best. Even metallurgy performed relatively well; high devaluation of the Czech crown has enabled it to make high profits on foreign markets (Czesany, 1992; Vintrova, 1992).

In the first months of 1991 enterprises made huge profits: the freeing of prices and the large devaluation of the crown allowed them to sell at high prices goods produced from materials bought at low prices. For most enterprises the good times lasted only a short while. The factors which influence profit changed. The interest rate increased considerably at the start of 1991, productivity declined, demand plummeted and profitability from export sales worsened. The increases in the price of oil (36 per cent) also had an effect, mainly in energy-intensive enterprises (Weigl, 1992). Of course, there were dif­ferences in the profitability achieved. However, they did not always reflect the performance of enterprises. The worsening of enterprise finances plunged many enterprises into a state of temporary or perma­nent insolvency.7 (For more on this see Adam, 1993a.)

The poor financial situation of enterprises was one of the reasons that investment activity decreased more than output. What was of great concern was that modernization investments remained at the relatively old, low level. The distribution of investment among branches of industry was contrary to the needs of the restructuring of the economy. Investment in heavy industry increased, whereas that in light industry declined (Nesvera, 1992).

THE PERIOD OF ECONOMIC GROWTH

When discussing economic growth, it should not be forgotten that the CR had some advantages compared to the other economies under review. It managed to keep unemployment low, it was much less indebted to foreign lenders than Poland and Hungary, and it devalued its currency much more than its neighbours.

In 1994 a reversal in economic growth took place; GDP, industrial production, as well as productivity, all started to increase.8 In 1995 and

The Czech Transition 43

1996 GDP and industrial production achieved robust rates. However, in 1997 GDP grew at a very modest rate (1 per cent). The CR, admired by many observers because of its good performance, disre­garded for a long times weaknesses in the economy, which turned into an open economic and political crisis in 1997. The reasons for this development will be discussed later.

In 1994-6 private consumption and investment were the main driving forces of economic growth. The growth of private consump­tion, primarily of services, was brought about by increases in real wages, which started to grow earlier than GDP.9

An important role was played by the investment boom which started in 1993 in connection with the start of the restructuring of the economy. The rate of fixed investment in 1994 was 30 per cent, increasing in 1995 to 32.2 per cent. The high level of investment was enabled by a high rate of savings: in 1994 it was 20.3 per cent and in 1995 23.6 per cent of gross disposable national income. Since the state budget in these years was marked by a small surplus, the savings could flow to investment. (Czech Statistical Office, 1996, p. 1; Reti, 1996; Vintrova, 1996). Inflow of foreign capital also contributed to the high level of investment. In 1995 foreign direct investment achieved its peak; it was US$2500 million, almost three times higher than in the previous year. In 1996, it declined to $1500 million (Czech National..., 1997, p. 33). Needless to say, this capital inflow activated the construc­tion industry.

In 1995, the growth of GDP was also driven by fast-growing manu­facturing, and there was a favourable change in the growth of agricul­ture. The growth rate of service industry slowed down (Sujan, 1996).

The first years of transformation brought down labourvproductivity, mainly for the reason that employment fell much more slowly than output. In 1994, national labour productivity started to increase again. The same trend occurred in industry. However, small private enter­prises managed to increase productivity earlier (Hajek, 1995). The role of labour productivity in the growth of GDP was growing; in 1995 it was responsible for 60 per cent and in 1996 73 per cent. Still, national labour productivity was growing at a slower pace than real wages (Vintrova, 1996; Czech National..., 1997).

Monetary Policy

The monetary policy was focused primarily on reducing the rate of inflation and also on curbing the inflow of short-term speculative

44 The Performance of the Economies

foreign capital. In 1995, the inflation rate was already one digit and as such was much lower than in the other two countries. In 1996 and 1997, it continued to decline. It was the ambition of Czech politicians to bring it down to the level of the European Union.

In 1995 and 1996 money supply measured by M2 grew faster than the set target because of higher growth of credit than expected, a high inflow of foreign speculative capital, as well as the acceleration of economic growth. In both years the government applied monetary instruments aimed at curbing credit and foreign speculative capital. In June 1995, the reserve ratio was set at 8.5 per cent against the previous 3 per cent for term deposits and 12 per cent for demand deposits. In addition, the discount rate was increased by 1 per cent. As the Czech National Bank itself admitted, the measures did not stop the growth of money supply in the second half of 1995. Restrictive monetary policy usually pushes up the interest rateHl and encourages the inflow of foreign capital. After all, the higher the interest rate in the country where the capital flows by comparison to the home rate, the more foreign capital is attracted. Therefore the National Bank resorted to an administrative measure, which turned out to be quite effective. It imposed a limit on the holding of short-term foreign capital by commercial banks. In addition attempts were made to steril­ize foreign capital by open market operations.

Because the money supply was still high in 1996 despite a decline in foreign speculative capital, the National Bank repeated the 'cure' of 1995 and again increased the discount rate by 1 per cent, and minimum reserve requirements by 3 per cent. Needless to say, this restrictive monetary policy had a negative impact on economic growth.

The restrictive monetary policy also had an effect on credit; its volume in crowns increased in 1995 only by 6.4 per cent (the inflation rate in 1995 was 9.1 per cent) whereas in 1994 it increased by 15.3 per cent. The greatest portion of credit went to manufacturing (around 31 per cent) and to trade, catering and accommodation (around 26 per cent). In 1996, the credit situation did not change much (Czech National. .. , 1996, pp. 36-7; Czech National..., 1997, pp. 40 and 44).

Inflation

In 1994 the inflation rate was 10 per cent, declining in 1995 to 9.1 and in 1996 to 8.8 per cent. In 1997 there was a further moderate decline.

The Czech Transition 45

The most important factor in the decline in 1995 was a drop in food price increases from 12 per cent in December 1994 to 5.4 per cent in December 1995. This trend continued in 1996. Tradables were marked by smaller price increases than non-tradables (in 1995 6 per cent against 11.9). In other words, world competition has had an effect on prices.

There are, however, factors at work which hamper a faster decline in inflation. One of the inflationary factors before 1996, and one which will continue to exist in the following years, has been the gradual freeing of still controlled prices such as those of energy, transportation and postal services. In addition, rents, which are still below market prices, will continue to increase. Since the price adjustment is to a great extent planned, its effect is predictable.

The adjustment of prices to international relative prices is another factor. Czech prices in 1995 were 3.2 times lower than German prices and 2.2 times lower than American prices, calculated on the basis of the official exchange rate. 11 The difference is biggest in non-tradable goods, primarily in services (mainly in rents) (Vintrova, 1996, no. 31, p. 18). It is worth while mentioning that the difference in wages is much bigger, to the sorrow of the Czech population.

On the other hand the CR, at least up to now, has been protected against some of the inflationary pressures the other two countries have been suffering, such as a large budget deficit (mainly Hungary) and strong support of agricultural prices (mainly Poland). Unlike in Poland, where the Peasant Party was until the September 1997 elec­tions a part of the ruling coalition, and where therefore the interests of agriculture have been taken care of, in the CR the agricultural lobby has not been strong enough to defend its interests. Agricultural prices grew more slowly, also because they were exposed to intensive foreign and domestic competition. As a result, a price disparity between agricultural prices and prices of industrial commodities developed, which plunged agriculture into an economic crisis (Novotny, 1994).

As far as I know, none of the Czech authors dealing with inflation mentions the low unemployment rate as a factor of inflation, refer­ring to the theory of the natural rate of unemployment. Rather, they discuss the fact that nominal average wages growing faster than productivity are an inflationary factor. The gap between the growth of nominal average wages and productivity was quite large, although it improved in 1995 to worsen in 1996. However, if labour produc­tivity is compared with real wages, which should be done if the two

46 The Performance of the Economies

variables are compared on the level of the whole economy, the result is different. If !about productivity is measured in terms of GDP per worker, its growth was only 5 per cent behind the growth of real wages in 1997. However, if measured in terms of GDP per hour, then there was no difference in the growth of the two vari­ables (see Main economic ... , 1998). Despite this unfavourable rela­tionship between nominal wages and productivity, it does not seem to be an important factor in inflation because labour costs are only a small percentage of the total production costs because of the low level of wages.

On the other hand, it should be remembered that increases in real wages contributed to economic growth and a considerable proportion of increased incomes was used for savings which enabled a high invest­ment ratio.

The State Budget

Unlike the other two countries, the CR has had a good record in bal­ancing the state budget; in 1994 and 1995 it had a small surplus and in 1996 a tiny deficit. Even in 1997, when the CR experienced a crisis, there was no great deficit. One of the reasons for a balanced budget is that the government takes in more for social security and active employment policy than it spends. 12 Contributions to social security made up a respectable percentage of government revenue: in 1993, 30.4 per cent, in 1995, 35.1 per cent and in 1996, 36.1 per cent, whereas revenue from other taxes relatively declined: in 1993 they made up 63.4 per cent of all revenue, to decline to 57.4 in 1995 and 58.6 in 1996 (Kamenfckova, 1996; SRCR for 1997, p. 156).

The tiny budget deficit in 1996 was the result of some lowering of taxes and, in addition, of collecting less revenue than was assumed due to loopholes in the tax system (Klak, 1996; Machacek, 1996).

Foreign Trade

The situation in foreign trade is of great concern to the authorities. In this respect the CR does not differ much from the other two coun­tries. The main problem is that since 1994 the Czech economy has been experiencing an increasing gap between imports and exports -the former have grown faster than the latter. In 1994 exports increased by 6.5 per cent and in 1995 by 10.3 per cent, whereas imports grew in these two years at a rate of 14.9 per cent and 28.6 per

The Czech Transition 47

cent respectively, which is quite an acceleration. Even in 1996, when the growth of exports and imports decelerated, the relative gap between the two increased; exports grew by 3.5 per cent while imports grew by 12.7 per cent. 13 Thanks to a surplus in trade with services (such as tourism and transportation) the deficit on the current account in 1994 was small. Because of a rapidly increasing balance of trade deficit, the current account deficit shot up from 2.7 per cent of GDP in 1995 to 7.6 per cent in 1996 (Table 2.2 above; Monthly Bulletin of the National Bank, 1997, no. 7; The Economist, 31 May 1997, p. 65).

There are several reasons for the faster growth of imports than exports. The start of recovery in 1994 and the acceleration of econ­omic growth in 1995 increased the demand for investment goods. This factor was strengthened by the start of several major investment actions. Another reason was that inflation in the CR grew faster than in OECD countries, with which the CR has intensive trade relations and, as a result, exports were hampered, while imports of foreign goods became more attractive. Increase in incomes generated not only an increase in demand for domestic products, but also for foreign products. In the minds of most Czech citizens the view still prevails that foreign goods are superior to domestic products. Indeed, there are many products, primarily electronic goods and luxury cars, which are available in better quality abroad. The Czech market is also flooded with cheap second-hand, low-quality textiles and cars from abroad. Clever advertisement of foreign firms strengthens the view about the superiority of foreign goods. In addition, foreign firms in the CR often give preference to foreign products over Czech. The increase in imports has also to do with the reduction of customs tariffs (Dlouhy, 1995; Stouracova and Titerova, 1996).

The huge balance ovf trade deficit is also due to weaknesses in exports. The slow restructuring of enterprises to the needs of exports is one of them. Lack of sufficient support for exports for ideological reasons is another. Some blame the increasing labour costs for the loss of competitiveness of Czech products on foreign markets (see Pick and Fassman, 1996). The increase in demand, due to increases in incomes, caused the diversion of some resources that could have been used for exports into production for the domestic market.

Viewing the structure of exports, it is clear that the foreign trade deficit was caused in 1995, as in previous years, primarily by a great deficit in trade in machinery and means of transportation, primarily with developed countries. In 1995, imports of machinery and trans­portation means were 65 per cent higher than those of exports. While

48 The Performance of the Economies

the proportion of these products in total imports did not change much (in 1989 it was 36.9 per cent and in 1995 it was 35.6 per cent), there was a dramatic decline in their exports (from 44.4 per cent in 1989 to 26.3 in 1995).14 Needless to say, the Czech ambition to make exports of machinery the main focus, as they were in the old system, has not yet made great progress (Czech Statistical Office, 1996; Stouracova and Titerova (1996). vv v

Economic Crunch

In the first quarter of 1997 the situation in foreign trade became worse; exports increased by 0.5 per cent, whereas imports went up by 12.7 per cent and the current account deficit became larger. Furthermore, industrial output declined and state revenue remained far behind expectations. The only positive development compared to the forecast was inflation. This unfavourable situation was made worse by the extensive flooding in the summer of 1997. Before the flooding the government had already decided to act, after the National Bank reversed its monetary decisions of 1995,15 which increased substan­tially the reserve ratio and thus brought about a slow-down in indus­trial economic growth. The government package of provisions adopted in April 199716 included the introduction of a 20 per cent deposit on imports of consumer goods for half a year in order to curb imports, and a cut in government expenditure,I? which aimed at curbing the planned wage increases of state employees in the hope that the private sector would follow suit. The government also promised to accelerate the completion of privatization. In order to cope with increasing criminality, the government, which had not paid proper attention to it, perhaps in the belief that the market and com­petition would curb criminal acts, decided to adopt provisions for fighting crime, and to create a security commission with the purpose of overseeing the stock market (for more see Chapter 6 below; E, 1997, no. 17).

The Czech government, especially its prime minister, V. Klaus, who often used to brag about his skilful management of the transformation process in the CR, had to experience an unexpected humiliation. In May 1997 speculators brought down the value of the quite stable Czech crown by 10 per cent against the US dollar despite the great effort of the National Bank to hold the crown within its trading band (7.5 per cent up and down) (The Economist, 31 May 1997; Horalek, 1996, p. 12).

The Czech Transition 49

The government package was received with criticism and doubts. The economic community agreed more or less that the main reasons for the crisis were that

1. the government was slow in reacting to the cumulating problems in the economy;

2. it did little to restructure the economy and as a result Czech exports have become less competitive on foreign markets;

3. it allowed the appreciation of the crown; 4. many privatized enterprises do not have final owners; 5. it failed to establish institutions which would protect the system.

There are, of course, also disagreements about the reasons for the crisis and about the most adequate cures. Many economists argue that the monetary policy was too restrictive (Pick and Passman, 1997b; Vintrova, 1997), others that the restrictive monetary policy should have been combined with restrictive fiscal policy (Kouba, 1997). Many believe, and these are mostly neo-liberals, that an important reason for the crisis is the failure to complete privatization and to remove what they call 'bank socialism', a situation in which banks, as a result of voucher privatization, have control packages of many large enter­prises and at the same time are their creditors; 18 therefore they call for a fast completion of privatization, especially banks. On the other hand, left-leaning economists are against privatization of large banks, arguing that fast action which primarily aims at gaining receipts would bring down the bankers' selling price.

In their resolution about the government package, the trades unions argue that problems in the economy, such as the irrational behaviour of enterprises, do not result from the failure to complete privatization, but from failed privatization (Pick and Passman, 1997a; Trade Unions' resolution, 1997).

Neo-liberals criticize the imposition of the 20 per cent deposit, arguing that it would not help the economy much and that it would only affect small importers. On the other hand, left-leaning econo­mists favour even more provisions for curbing imports and reorienta­tion of demand to domestic products. They also stress the need for an industrial policy, which would guide the process of restructuring.

The worsening of the economic situation, combined with the sudden decline of the currency value, provoked a political crisis. The popularity of Klaus and his political party declined and calls for his resignation were voiced, even from his own party. Once reports

50 The Performance of the Economies

appeared that his party received money from beneficiaries of privat­ization, a storm of protests broke out and instant government resigna­tion was demanded. When President Havel joined the demands for resignation, Klaus finally capitulated and a provisional government, headed by the Governor of the National Bank, was installed.

The performance of the economy slowed down in 1997. The growth rates of GDP, industrial production, agricultural output and investment declined as well. Real wages declined too and as a result private consumption declined as well (see Table 2.1). The small rate of unemployment, which was the pride of Czech politicians, is slowly increasing. In the first month of the second half of 1998, it already reached more than 6 per cent. The bright spot in the economic per­formance was an improvement in the current account deficit. In the first half of 1998 there was an absolute decline in GDP.

CONCLUDING REMARKS

Until the 1997 economic crisis, domestic and foreign economists more or less agreed that the Czech economy had fared the best; it had suc­ceeded in overcoming transformation problems to the extent that Czech leaders had a penchant for talking about the completion of the transformation process. To be more specific: it had managed to avoid large unemployment, had succeeded in balancing the state budget in most of the transformation years and had also accomplished a quick reduction of inflation, which is now relatively low. In all these three variables it had achieved better results than its neighbours. However, the 1997 economic crisis showed that the Czech economy, despite its successes, is quite vulnerable. Foreign trade is its Achilles' heel. The failure to make much progress in restructuring the economy is another of its shortcomings. (see also Chapter 6).

When the transformation began and its negative aspects (dramatic decline of production and the standard of living and a shooting up of inflation) started to show up, Klaus (1991) blamed external factors and the old regime for all the economic troubles. 19 He wrote: it is 'an inevitable tax for the 40 years of squandering ... overemployment ... plundering the economy ... living at the expense of the past and future, etc.' He was not willing to admit that the transformation strat­egy, which was to a great extent his doing, was primarily responsible for what happened in the economy. But then, when the economic

The Czech Transition 51

slump came about and he could no longer blame the communists, Klaus admitted that some mistakes had been made.

Klaus and his supporters have pushed policies which can be charac­terized as laissez-faire, though not consistently. He has been against an active restructuring policy, although in practice it has been applied to some extent, and for a long time he has opposed provisions sup­porting foreign trade. He believes that market forces and competition will take care of all the problems.20 His unlimited trust in competition hampered the build-up of the institutions needed for the proper working of a capitalist system and for preventing the spread of crimi­nality. Klaus' lax attitude to criminality is best characterized by his declaration that he does not recognize and does not want to recognize dirty money (Mladek and Jantsa, 1997).21 His boundless belief in the market created a favourable environment for the rise of some 50 banks in the CR (a great number of which collapsed or were liquid­ated in recent years), some 250 investment funds (which made the voucher privatization uncontrollable and a hotbed of corruption, to put it with some exaggeration), some 45 pension funds and 25 health insurance companies (which made the working of the voluntary pension system and the health care system inefficient). Perhaps the best proof of Klaus's and his supporters' misunderstanding of the workings of the market has been their allowing taxi drivers in Prague to charge rates according to their own consideration, an action which hurt tourism.

5 Transition to a Market Economy in Hungary

INTRODUCTION

Hungary was quite well prepared for a market economy. State enter­prises were more autonomous and the price system was more liberal and rationql, especially more so than in the CSR. On the other hand, Hungary was relatively the most indebted among the subject countries.

The Hungarian transformation programme of 1991 followed more or less the same objectives as the Polish and the Czechoslovak pro­grammes, with the difference that it was applied gradually. When it was approved in 1991 (see Hungarian Ministry ... , 1991), it promised a turnaround in the declining economy in 1993, a reduction of inflation to a single digit in 1994 and the completion of trade liberalization in 1992. The completion of the convertibility of the forint, which was to conclude the transformation process, was promised for 1994. No mention was made about prices, since they were mostly freed in the meantime. 1 Finally, the programme promised privatization and to complete the legal infrastructure in the near future.

The transformation package produced positive results, but did not achieve by a long way several of the set goals, and what it achieved was at a very high social cost. In the ten years since the collapse of the socialist system, Hungary turned its economy more or less into a market economy based on private ownership. Despite its choice of a gradual transformation, it did not manage to avoid a deep recession, but with less drastic consequences for the standard of living than in Poland or Czechoslovakia in the first years of transformation (see Table 2.1 ). In addition, when Poland and the Czech Republic were already on the recovery path, Hungary was plunged into a new recession.

In this chapter I shall first discuss the macroeconomic measures Hungary undertook in the first years of transformation and then iden­tify the factors which contributed to the recession. Finally, I shall discuss the reasons for the Hungarian economic crisis in 1994-6 and the economic strategy of the new socialist-liberal government.

52

Hungary 53

TRANSFORMATION PROVISIONS

Monetary and Fiscal Policy

In Hungary, as in Poland and the CSR, monetary and fiscal policies were at the centre of the transformation provisions. However, the gov­ernment did not impose as restrictive a monetary policy as Poland and Czechoslovakia had, and therefore inflation in Hungary was much milder than in the other two countries.The money supply grew faster than the nominal GDP; in other words, in contrast to the situation in Poland and the CSR, the real stock of money in Hungary increased in 1990 and 1991.2 As a result, access to credit was easier than in the other two countries. In 1989, borrowing grew faster than the nominal GDP and in 1990 and 1991 proportionally (Valentinyi, 1992).

In 1989 interest rates were below the level of inflation. In 1990 they started to grow and reached their peak at the beginning of 1992. Before this date the real interest rate had already become positive, and it remained so. In 1993-4 the interest rate was quite high and borrowing of capital became too expensive (F, 1992, no. 26, p. 17 and 1994, no. 45).

In Hungary under the old regime taxes on enterprises were quite high. In connection with the introduction of a value-added tax and income tax, the government shifted the burden of taxation to the population not only in relative but also in absolute terms. Taxes on the population which made up 26.6 per cent of state revenue in 1987, increased to 39.3 per cent in 1992 (MSZs, 1989, p. 206 and 1993, p. 178; and Murakozy, 1992). In the first years of transformation (1990-2) it was not so much the monetary policy, but rather the fiscal policy and other factors which caused the recession in Hungary. Later the monetary policy became a factor of great significance in the rise of the recession.

Despite the reduction of subsidies and government investments, and increases in taxes, Hungary increasingly suffered from a budget deficit, even more than Poland, let alone the CR, which more or less managed to balance its state budget. Declining demand and produc­tion had substantially reduced the profits of enterprises and, as a result, government revenue from enterprises declined in real terms. In 1990 the government collected 573.3 billion forints from enter­prises; two years, later despite inflation, the revenue from enterprises declined to 498.7 billion. If one considers that in 1990 social security contributions made up 200.7 billion of the sum mentioned and in

54 The Peiformance of the Economies

1992, 223.9 billion, the picture is even more depressing (MSZs, 1993, p. 178).3 This development was also due to the fact that the private sector contributed little to the state budget, definitely less than its fair share.

Increasing unemployment, which entails growing amounts paid out for unemployment benefits, was and is a significant drain on state expenditures, and the growing number of pensioners has a similar effect. Finally, the servicing of foreign and domestic debt was the most important factor in the budget deficit (for more on this, see below).

Wage Policy

The Hungarian transformation was also characterized by limits on wage growth and the payment of punitive taxes when the limits were exceeded. However, the limits were less restrictive and the penalties were much more moderate than in Poland and the CR. For 1989, the limit was set in terms of value added; only enterprises which increased wages by a higher percentage than the percentage increase in value added had to pay a wage growth tax (Herczog, 1989). Later the limit was linked to the wage bill, since the previous system had led to great inter-enterprise differentiation in wage growth, and in 1992 to average wages (Popper, 1991; Munkaugyi Szemle, 1992, no. 2, pp. 1-2). Commencing in 1993, there was no more wage control by tax penal­ties. Hungary felt that it could afford such a provision, since the trade unions were split and not very strong, and unemployment was quite high. During the 1994-6 economic crisis the government again started to control wage growth indirectly.

Foreign Trade

Hungary started to liberalize its imports earlier than the other two countries, as early as January 1989 (with engineering products), a process which was to be finished in 1992, by which time tariffs were to be cut (Gacs, 1991; Koves, 1992, p. 51).

Because of its decision to achieve currency convertibility gradually, Hungary could afford to adjust the exchange rate slowly and moder­ately to the needs of the economy. The gradual adjustment of the exchange rate prevented inflation from being fuelled from this source and perhaps made the flight of capital more difficult (than from the other two countries, mainly Poland) at a time when the domestic

Hungary 55

economy needed it urgently. As will be shown later, the Hungarians were not able to use this advantage properly.

SPECIAL REASONS FOR THE RECESSION AT THE BEGINNING OF THE TRANSFORMATION

The reasons for the recession in Hungary were on the one hand the same as in other countries, and on the other hand there were some unique reasons whose impact is still being felt. Since the general reasons have already been explained in Chapter 2, I shall concentrate on those which were unique: first the economic and then the political reasons. There have been primarily five economic policy measures which have negatively affected the performance of the Hungarian economy compared to the other two countries and thus weakened the effect of the gradualist strategy. I have in mind the approach to foreign debt, the treatment of agriculture, the introduction of a strict bankruptcy law, the slow adjustment of the exchange rate to the needs of exports and the treatment of privatization.4

Unlike Poland, which asked for debt relief and got it, Hungary, although its foreign debt has been relatively the largest,5 did not ask for and was not offered it." There were several reasons why Hungary did not ask for debt relief. It was afraid that it would lose the confidence of international financiers and that this would make access to the international bond market more difficult and also affect foreign direct investment. That is, Hungary wanted to replace (and replaced to a great extent) bank loans needed for servicing the debt by issuing bonds on foreign markets for which it had to pay a much lower inter­est rate than the rate foreign banks asked for. The Hungarian attitude to foreign debt was perhaps also motivated by the consideration that servicing of the debt would not be such a big problem because of a trade surplus, inflow of direct investments and increasing household savings. For some time Hungary managed to attract more foreign investment than the other two countries together (Bartlett, 1996; Ernst et al. 1996, p. 163; Oblath, 1993).

Hungarian agriculture was a success story. In 1989 agricultural output was almost twice as high as in 1938. Hungary made more progress in equipping agriculture with modern technology than other socialist countries. A considerable portion of output was exported, and the domestic market was well supplied. Average incomes of farmers were not much behind those of industrial workers.

56 The Performance of the Economies

The transformation provisions plunged agriculture into a deep crisis, from which it is slowly recovering. Gross agricultural output in 1993 was almost 42 per cent lower than in 1989, a greater decrease than in the other countries. Badly thought-out economic policy was one reason; drought, a decline in domestic consumption and exports difficulty were also important. Although many people left agriculture, unemployment in agriculture is high. Incomes of the agricultural sector were the most affected (Meszaros, 1993).

By badly thought-out policy I mean primarily the compensation policy for the land peasants took to collective farms when they joined them, privatization and other agricultural policies. Unlike in other sectors of the economy, where compensation for property lost during the communist regime was given in the form of vouchers, in agricul­ture, due to the pressure of one of the coalition partners, the Peasant Party, compensation was in fact given in kind. The Peasant Party hoped that with this provision it would be possible to destroy the col­lective farms and create family farms on their ruins (see Koves, 1994; Petschnig, 1994, p. 91 ). As a result of this policy, a great portion of the land has gone into private hands, but only a small percentage of the new owners are interested in cultivating the land by themselves.

These policies brought about a huge fragmentization of the land, created impediments to large-scale production and introduced into the reorganized collective farms a feeling of uncertainty which mani­fested itself in a large decline in arable land, a dramatic decline in the animal population (cattle population decreased by almost 50 per cent) and lower economic efficiency. On top of this, the government dra­matically reduced subsidies at a time when agricultural prices were depressed (Keserii, 1993; Meszaros, 1993; Ehrlich, Revesz and Tamasi, 1994, pp. 62-4; Varga, 1994).

Poland had a minuscule co-operative sector in agriculture, and therefore privatization was not a problem there. In the final analysis, the CSR took a similar route to Hungary's with regard to privatiza­tion. However, it seems that it was more generous with subsidies for agriculture (Divila and Sokol, 1993; Silar, 1993).Yet, what makes the decisive difference in the situation in agriculture between the two countries is that agriculture and exports of agricultural products play a much greater role in the Hungarian economy than in theCR.

In 1992 a new, very strict bankruptcy law came into effect in Hungary. Foreign experts invited to a conference in Budapest in October 1992 in order to pass judgement on the law also believed that it was too strict. The experts suggested several changes; some of them

Hungary 57

were carried out (Zsubori, 1993). As result of this law 44.8 per cent of organizations with limited liability and 12.8 per cent of state enter­prises filed for bankruptcy procedures in 1992 (Kalal, 1993; see also Gray, 1993). According to Mizsei (1993), the consequences of the bankruptcy law might have been 'the most important single reason for the fall in GDP by 3-5 per cent in 1992'. Needless to say, employment was also negatively affected. 7

It could be argued that in the long run the implementation of the bankruptcy law might have a positive effect. But in the short run, it has exacerbated the existing recession. It is also important to stress that the application of bankruptcy legislation was contrary to the adopted principle of gradualism.

Neither Poland nor the CSR followed the Hungarian example. Both have had bankruptcy laws, but the enforcement was delayed and lax. The Czechoslovak parliament passed such a law in 1991, but the gov­ernment has several times postponed putting it into effect. When the Czech prime minister was asked about it, he maintained that there are better ways to restructure the economy than by bankruptcies (E, 1994, no. 1, p. 14).

Unlike Poland and the CSR, Hungary did not carry out a major devaluation at the start of the transformation. Despite this and the collapse of trade with the former CMEA countries, it managed to avoid a decline in exports. In the years 1991-2 there was even a reval­uation of the forint in order to fight inflation. Only in 1994 was there a 20 per cent devaluation of the forint.

The revaluation of the forint was one of the most important reasons that exports, which stagnated in 1992, declined in 1993, and that the balance of trade started to worsen in the second half of 1992 and con­tinued doing so in 1993, negatively affecting GDP and employment. Of course, there were also other reasons for the deficit in the balance of trade: a decline in agricultural exports due to drought, import barri­ers in the West, the embargo on Yugoslavia, the consequences of the bankruptcy law, and so on. (Csermely and Oblath, 1993; Lanyi, 1993; Vertes, 1994).

Fast-growing imports also affected the balance of trade negatively. In 1993 when exports, calculated in terms of volume, declined by 13 per cent, imports increased by 12 per cent. In 1994 there was an important improvement in the relationship between exports and imports. Still, imports were too high and negatively affected some tra­ditional industrial branches. In 1993, 27 per cent of imports were made up of industrial consumer goods and food (A vilaggazdasag ... ,

58 The Peiformance of the Economies

1994). There were some good reasons for growing imports. Although the public was quite well supplied with consumer goods in socialist Hungary, still the selection and variety of goods lagged greatly behind the West, mainly with regard to luxury and electronic products. The Hungarian government's liberalization of imports went beyond what was needed in order to satisfy the increased demand and to create an environment for competition.

Furthermore, during the so-called spontaneous privatization, some important retail networks (mainly shoes and apparel) were sold to for­eigners, apparently without making provisions in the sales contract for the new owners to offer a certain amount (or percentage) of Hungarian products in their outlets. 8 As a result, the Hungarian market was flooded with foreign goods.Y

In the first years of transformation in Hungary, more than in the other subject countries, privatization turned out to be a negative factor. Spontaneous privatization was enabled by the 1988 corporate law and the 1989 transformation law which allowed managers in co­operation with self-management bodies to make enterprises fully autonomous and under certain conditions to privatize them. In many cases managers used the so-called spontaneous privatization for per­sonal enrichment. This kind of privatization was forbidden by the last government of the old regime, but abuses did not cease. The new post-communist government created new opportunities for abuse and corruption by its privatization policy. The difference between the former and new abuses was that before the beneficiaries were man­agers of the old regime whereas later they were political loyalists of the new post-communist government of J. Antall. According to Horn, the socialist prime minister, Hungary lost assets worth hundreds of billions of forints due to the privatization policy of Antall's govern­ment (N, 28 September 1994).

Political factors can also be blamed for the poor performance of the economy. In the political parties, headed by the Hungarian Democratic Forum, which came to power in 1990, there were few highly experienced politicians, economists and administrators. As a result, the government was composed, to put it with some exaggera­tion, of second-class experts. This no doubt had a negative impact on the management of the economy. Many government members were learning on the job, and therefore it was no wonder that they had difficulty estimating correctly the state of the economy and what to do about it. The situation was compounded by the government's desire to have its adherents in positions of responsibility, often regardless of

Hungary 59

their qualifications. Furthermore, political power was concentrated in the hands of the prime minister and his staff. Neither the prime minis­ter, Antal!, nor his staff had the experience needed to cope with the complex and sensitive problems that the transformation had gener­ated.10 In addition in the third year of his tenure the prime minister was stricken with a terminal disease.

The government's reputation was also damaged by its desire to con­tinue where the Horthy regime had left off before the war, mainly in giving a very important role to the rural gentry in society (Cf. L. Antal, 1994). It did not want to realize that 40 years of the communist regime had changed the country and that only a small segment of the popula­tion was still filled with nostalgia for the spirit of Horthy's regime.

THE NEW ECONOMIC CRISIS AND THE NEW GOVERNMENT'S STRATEGY

In the June 1994 parliamentary elections, Hungarian voters expressed their frustration with the reform by crashing the leading party of the coalition and bringing to political power the successor of the former Communist Party. The Socialist Party got 53 per cent of the parlia­mentary seats and so it could govern the country without any coalition partner. Nevertheless, it wanted and got a coalition government. It was motivated to such a step by the desire to disperse any suspicion in the West that it intended to abandon reforms. The leader of the Socialist Party, Horn, a former communist who in 1956 sided with Kadar and was a member of the Communist Party's militia, did not enjoy great confidence in the West. 11 The Alliance of Free Democrats, another opposition party, which is known for its reform-mindedness, and which was ideologically the closest, was picked as a coalition partner. To strengthen his credentials in the West, Horn picked Bekesi, a known reformer from his own party, for the post of finance minister.

The new coalition inherited an ailing economy. The recession still continued and in some respects was worse than in preceding years. Although industrial production started to grow in 1993, growing in that year by 3.9 per cent and in 1994 by a robust 9.6 per cent, declining to 4.8 per cent in 1995, GDP started to grow only in 1994; it increased by 2.9 per cent, to decline in 1995 to 1.5 per cent, which was to a great extent already the result of the austerity programme. The situation in agriculture has already been mentioned. Investment was still low. The

60 The Peiformance of the Economies

most disturbing phenomenon was the growing external disequilibrium and state budget deficit. In 1993 imports grew much faster than exports, and as a result the deficit in the current account was US$3.5 billion and increased to US$3.9 billion in 1994, despite an improve­ment in the relation of exports to imports. Foreign indebtedness was growing (Vertes, 1994). The budget deficit in 1993 calculated in terms of a percentage of GDP was 5.7 per cent and in 1994 7.5 per cent. Inflation was still high; in 1994 it amounted to 18.8 per cent, which meant a decline compared to 1993, but in 1995 it shot up to 28.2 per cent. In this gloomy picture the only bright spot was the declining unemployment rate (from 12.6 per cent in 1993 to 10.9 per cent in 1994). There was for the first time in the new era an increase in real wages in 1994 by 7.2 per cent (See Tables 2.1 and 2.2), but this was regarded as a negative phenomenon.

Some of the reasons for the unfavourable development of the foreign trade balance have already been mentioned. Here it is import­ant to mention the recession in the Western countries that were the most important trade partners and the resulting increased protection­ism. The slow recovery of inter-regional trade was also a factor (Ernst et al., 1996, p. 198).

In order to overcome external disequilibrium and the huge budget deficit, Bekesi came up with an austerity programme which in its con­sequences was in conflict with what the Socialist Party thought to do and what it had promised in the election campaign. Yet the election programme was quite modest in its promises (Valasztasi Program, 1994).

The austerity programme put the idea of economic growth on the back burner and stabilization of the economy became the primary objective. Bekesi believed that making economic growth a priority would result in disequilibria because it would increase foreign debt and the budget deficit (Interview with Bekesi, N, 19 August and N, 22 September 1994). The prime minister, as well as many other members of the Socialist Party leadership, disagreed with this strategy for political reasons, but because the coalition partner and the IMF -for which the stabilization strategy is one of the articles of belief -supported the finance minister, the latter prevailed and the strategy became official government policy.

It is interesting that this government policy was criticized by many economists. Kornai (1994b) argued that stabilization and growth should proceed simultaneously. To insist on the principle that stabilization must be achieved before it is possible to put the economy

Hungary 61

on a growth path means postponing growth for many years, since in practice it very often happens that after the elimination of one instabil­ity a new one appears. Similar positions were taken by Koves (1995a), Balassa (1994), Tfmar (1996) and Csaba (1997). It is also necessary to agree with Kornai that budget cutting should not be at the expense of output.

Still, the approved Bekesi plan was not to the liking of the IMF. According to the plan, the budget deficit should not have exceeded 5.5 per cent of GDP, whereas the IMF pushed for a 3 per cent deficit and made it clear that further aid would depend on compliance with its demand. (See interview with the representative of the IMF in Hungary (inN, 17 September 1994.) It is interesting that Sachs (1994) subjected this IMF policy to criticism, arguing- among other things­that a low budget deficit does not guarantee low rates of inflation.

Bokros's Programme

Bekesi's tenure in the government was short; he resigned due to criti­cism of his programme. Bokros, the new finance minister, came up with a new package of stabilization provisions which in some respects were more restrictive than the previous programme. Some economists labelled it as shock therapy. The programme, which was approved by the government in March 1995, was aimed, as before, at cutting the budget deficit and reducing the current account deficit. To this end the programme envisaged a restriction of consumption by reducing real wages, limiting family allowances to the needy (the exception is families with three or more children), introducing payments for a limited number of health services, making students pay tuition fees, reducing the number of state employees, and so on. Reduction of real wages was meant not only to ease government outlays, but also to reduce the unit cost of production and thus make Hungarian products more competitive. The shrinking of the domestic market also aimed at encouraging exports. In pursuing this goal, the forint was devalued instantly by 9 per cent, further small monthly devaluations were promised and a pre-announced crawling peg exchange rate was intro­duced. In addition, an 8 per cent surcharge on imports - with some exceptions, 12 -was imposed. Whereas the devaluation intended to promote exports, the surcharge had to restrict imports, give a greater chance to domestic production and bring some additional revenues to the state coffers (Czirjak and Radi, 1995; F, 1995, no. 22; Kornai, 1996, pp. 146-7; Petschnig, 1996b, pp. 34-5). In addition, the National

62 The Peiformance of the Economies

Bank applied a strict monetary policy by reducing money supply in real terms and restricting credit (Obl<ith, 1996). This provision, whose purpose was to prevent inflation from surging, was not a great success and in addition it negatively affected economic growth.

As to Bekesi's idea of giving priority to stabilization over growth, Bokros's package meant some softening. It still wanted to achieve sta­bilization, but also aspired to achieve a small rate of economic growth (Kornai, 1996, p. 167).

The reaction to Bokros's programme was mixed. The parliamentary opposition blasted it as unconstitutional and filed a complaint with the constitutional court; the latter agreed that some of the social provi­sions were unconstitutional.

Bokros's package was also criticized by economists. Koves (1995b) argued that the crisis resulted from structural deficiencies and an incorrect transformation strategy. According to him the architects of the transformation strategy disregarded the fact that most developed market economies are mixed economies, in which the government plays an important role by applying an industrial policy and where monetary and fiscal policy are not the only instruments of government policy and where the economy is protected vis-a-vis other economies. He also argued that the government misjudged the economic situation in the spring of 1994; that in that year the economy started to recover, exports as well as investment began to grow and the financial situation of many enterprises was stabilized. In this point he had the support of Matolcsy (1996a), a former high official in the Antal! government, who believed that the austerity programme was the result of an incor­rect diagnosis and interrupted an economic cycle, which could have produced 5 to 6 per cent growth. 13

Kbves also argued that the huge budget deficit was not due to exces­sive consumption but to high interest payments on domestic and foreign debts. In 1993 they amounted to 157 billion forints, but in 1994 to 295 billion, almost as much as the deficit. In other words, if Hungary had no debts, there would not be a deficit. In 1995 interest payments continued to grow (from 20 to 29 per cent of total govern­ment expenditure (N, 19 October 1994; A vilciggazdasag ... , 1994, pp. 101-2; Economic Trends ... , 1996, no. 1, p. 50).

The IMF praised Bokros's programme as courageous. It considered it, however, to be only the first stage of the reform and formulated a whole package of provisions to undertake in order to obtain a standby loan (Camdessus, 1995, p. 15); indeed the loan was only granted in 1996.

Hungary 63

Bokros's tenure was short; he resigned for the same reason as his predecessor. The new finance minister, P. Medgyessy, who had the same function in the last socialist government (1998-9), continued Bokros's policy. He came up with a three-year strategy programme, which was already in the process of being compiled before he came to the head of the ministry. The programme is in substance a prognosis of economic growth, according to which economic growth will slowly accelerate and achieve a rate of 4 to 5 per cent in 1999. It is supposed to be driven by exports and investment (Hungarian Government, 1996).

Bokros's programme has to a great degree achieved its goals, but at high social costs. It brought about a substantial decline in the current account deficit and in the state budget deficit. The current account deficit declined in 1995 to US$2.5 billion from $3.9 billion in 1994 (from 9.8 per cent of GDP to 5.5 per cent) and continued to decline in 1996 (1.7 billion- 3.8 per cent of GDP). There were two main reasons for this improvement in the current account. Perhaps the most impor­tant was the decline in Hungarian foreign indebtedness. The net foreign debt was US$18.3 billion in 1994, $15.9 billion in 1995 and $12.9 billion in 1996. This relatively large reduction was enabled by exceptionally large receipts from privatization in 1995 (Csabai, 1997; IMF Su1Vey, 21 July 1997).14

Another reason for the decline in the current account deficit was an improvement in the balance of trade and a surplus in the balance of invisibles (foreign tourism). In 1995 imports grew at a slower rate than exports, but imports were still higher in absolute terms (Table 2. 2). Exports were helped by a 29 per cent devaluation of the forint, which was 0.8 per cent higher than the increase in consumer prices. Undoubtedly, the huge decline in real wages and consumption also contributed to the good results in exports. The increase in exports to the former socialist countries and developing countries also helped. The decline in imports was aided by the import surcharge and a decline in consumption. All this meant that the trade balance deficit was reduced, but not eliminated. The increases in exports were not combined with an improvement in their structure. The share of exports of machinery, transportation means and investment goods continued to decline, whereas exports of material and semi-products continued to increase (Oblath, 1996, p. 13).

The balance of trade situation did not change substantially in 1996. The same is true of 1997. Exports grew faster than imports, but imports were still higher and, as a result, Hungary still had a trade

64 The Performance of the Economies

deficit and a current account deficit. There was, however, some improvement in the structure of exports (Internet reports of the Ministry of Trade, 17 February 1997, 12 August 1997 and April1998).

The austerity programme brought about a decline in the state budget deficit which in 1994 had climbed to 7.5 per cent of GDP. In 1995 the deficit declined to 5.4 per cent and in 1996 to 2.3 per cent to increase again to 4.4 per cent in 1997. Budgetary revenue increased in 1995 by comparison to 1994 by 27 per cent whereas expenditures increased only by 21 per cent. The introduction of an import sur­charge and also the fact that many export-orientated enterprises managed to increase their profitability had a positive effect on rev­enues. The smaller increase of expenditures was achieved to a great degree by a reduction of some social programmes (limiting family allowances to the needy, restricting certain services, increasing drug prices and so on.) The decrease in the foreign debt, mentioned above, required a lower cost of servicing it (Economic Trends ... , 1996; Petschnig, 1996b, p. 37).

The methods used to improve the deficits in the current account balance and state budget was not without cost. In the first year of the austerity programme application, GDP grew by only 1.5 per cent and in 1996 by 1.3 per cent. However, in 1997 GDP increased by 4.4 per cent. The increase in GDP helped to reduce the rate of unemployment.

The austerity programme pushed up the inflation rate of 18.8 per cent in 1994 to 28.2 per cent in 1995. This big deterioration was due to the large devaluation, increases in energy prices, the introduction of the import surcharge and, of course, inflationary expectations (Economic Trends ... , 1996, no. 1 p. 47). In 1996, the inflation rate declined to 23.6 per cent and in 1997 it was 18.3 per cent.

Real wages fared the worst. 15 They declined in 1995 by 12.2 per cent and continued to decline in 1996, though at a smaller rate (5.4 per cent). Only in 1997 did they start to increase ( 4.7 per cent). Private consumption declined too. The social safety net was weakened; inequities in incomes have increased: ordinary people paid the bill for the economic crisis. (There will be more about all this in Part III.).

CONCLUDING REMARKS

It has been shown that Hungary, despite its option for a gradual solu­tion, did not fare much better than Poland or the CR. If we confine the discussion to output, Hungary is nowadays in a worse position

Hungary 65

than Poland. As to unemployment, Hungary is worse off than the CR. Does this mean that the transformation strategy does not matter or that shock treatment is a better strategy? I have tried to answer this question in a previous article (Adam, 1994b ). Here I shall only discuss the question very briefly.

In my opinion a gradualist strategy may be preferable, but it is not the only factor which determines the performance of the economy. In other words, a gradual strategy may produce worse results if blunders are committed in economic policy, as has been shown in the case of Hungary with regard to agriculture, bankruptcy legislation and exchange rate policy. These blunders, combined with a change to a more restrictive monetmy policy, had a negative effect on the economy. Thus there is no wonder that Hungarian performance, which in the first years of transition was better than that of its two neighbours, later worsened. Therefore Sachs's and Woo's (1994) statement that 'Poland, the Czech Republic, and the Baltic republics acted boldly, [meaning that they applied shock treatment] and growth has returned to their economies. Hungary, which stuck to its gradual reform strat­egy, may see its decline bottoming out only in 1994' is an example of what happens when important forces which determine economic performance are ignored.

In comparing the two strategies one should not confine oneself to output and unemployment. How the strategies contribute to political stability is also of great importance ( cf. Fischer, 1993). In Poland the deep recession destabilized the political system to some extent and generated great social tension, and in Czechoslovakia it contributed to the split of the federation. In Hungary the gradual strategy, even if it was not consistent, helped avoid great social tensions.

More research is needed in order to find out to what extent Koves's and Matolcsy's suggestion was correct that Bokros's austerity package was not needed because the economy would have recovered anyway. Let assume for the sake of argument that the two authors were correct. In such a case two questions can be raised: Did the govern­ment know this? (It is known that the government was reluctant to adopt the austerity programme.) Or, was an environment of crisis intentionally created in order to make the government cut real wages and social programmes?

Facing a very high budget deficit and current account deficit, the Hungarian government seized upon the well-known weaponry from the neo-liberal arsenal at the urging of the IMF - an austerity pro­gramme, a programme which tries to improve the performance of the

66 The Performance of the Economies

economy at the expense of ordinary people. It did not give thought to an alternative strategy, which would include a moderate restriction of consumption with at the same time a programme of making the private sector contribute its fair share to government revenues, 16 and reducing luxury imports.

During my 1996 visit to Budapest friends showed me 20 to 30 finished mansions and others in the process of construction (in fact there are more than 100) on the hills of Buda, which in their size and comfort are not much behind luxury mansions in the USA. The Hungarian mansion-owners belong to the nouveau riche. According to my friends, tax reviewers have ascertained that most of these owners paid negligible amount of taxes. One would expect that the govern­ment would launch an investigation and send the tax evaders to jail and impose hefty fines. Nothing of the sort happened; allegedly there are no laws on the books, according to which they could be prose­cuted. I have doubts about this reasoning; it seems to me rather that the government is afraid that rigorous action might antagonize the business community and be viewed negatively in the West.

Many entrepreneurs not only fail to pay taxes, but with their luxury consumption contribute to high imports. One would expect that a socialist government finding itself in such a situation would curb imports of luxury goods (mainly luxury cars) and/or tax them heavily. Such a policy cannot be fully implemented because of pressures from business.

Ordinary people are made to pay not only for the cost of coping with the economic crisis which has arisen, but also for the cost of making business more competitive. Yet it was disregarded that far­reaching restrictions on real wages and thus on consumption must have a negative effect on economic growth and this, in turn, affects negatively the standard of living. In addition a decline in real wages brings about a decline in savings at a time when the government is trying to encourage savings in order to give a boost to investment and to contribute to the effort to achieve financial equilibrium as much as possible by domestic means.

No doubt the austerity programme has brought about an improve­ment in economic growth and internal and external equilibrium as well as in the competitiveness of the economy, but at the expense of high social costs. Still, the balancing of the state budget and foreign trade remain worrisome problems. The budget deficit in 1997 again increased. It is not yet clear how strongly imports will grow once con­sumption improves. Inflation is still high. The question can be raised

Hungary 67

whether Hungary has already achieved the necessary economic stabil­ization needed for long-term growth. The answer seems to be posi­tive. Of course, much will depend on the two right-leaning political parties (Fidesz - the Citizen Party - and the Party of Rural Smallholders), which have come to power as a result of the May 1998 elections, and to what extent they will be able to give Hungary a stable government.

6 Privatization

INTRODUCTION

One of the important goals of transformation has been the privatiza­tion of state-owned enterprises and the creation of an environment for the rise of new private enterprises. Lavigne (1995, p. 157) distin­guishes privatization in the broader sense and the narrower sense. The former includes, besides transfer of property rights from state enter­prises to private hands, which can be characterized as privatization in the narrow sense, also state enterprises which are managed by market rules and commercialization of state enterprises. In this study privat­ization is understood in the narrow sense.

Privatization leads to the rise or expansion of the private sector. In Poland and Hungary a private sector had already existed before the collapse of the socialist system. In the CR the private sector was minimal. The transformation has brought about economic freedom: whoever wants to be an entrepreneur is free to do so and free to own means of production. And many citizens have done so.

Large-scale privatization (which includes large enterprises) has turned out to be more difficult than was assumed. Politicians in all three countries promised rapid privatization, but they have been able to deliver this only in the case of small-scale privatization, which includes small and medium-sized businesses. Large-scale privatization has been hampered by political and economic obstacles. In a demo­cratic country the authorities cannot entirely ignore the views of the public. In all three countries, but primarily in Poland, where the trade unions have been the strongest, working people, especially after the transformation provisions brought about a decline in production and standard of living, followed the privatization with apprehension and also with some opposition. Many people were afraid of the possible consequences of privatization for employment and the standard of living. In addition, in Poland the politicians could not agree on the methods of privatization.

Large privatization is a complicated process which requires a well­thought-out legislation which takes account of various political, social and technical aspects, and a well-organized administration run by skilled and experienced economists, accountants and administrators.

68

Privatization 69

Before such an organization can be put in place, some questions must be resolved, such as what should be the role of the government and its agencies as well as that of managers in the divestment of assets. Hasty decisions can be costly. Before the sale can be started, it is necessary to estimate the value of the assets to be sold. And the sale itself is time-consuming. Therefore economists who predicted that privatiza­tion would require a long period of time were correct. And those politicians in the East who ignored this prediction hurt the economy. In the hope that enterprises would be sold quickly, no proper provi­sions were made to improve their performance. ( cf. Economic Commission ... , 1992, p. 192).

The methods used for small-scale privatization were much similar in the subject countries, whereas in the case of large-scale privatization the methods were quite different.

First, I shall discuss the goals of privatization, then briefly small privatization and finally large privatization.

THE GOALS OF PRIVATIZATION

Most economists believe that privatization is not a goal in itself, but an instrument for achieving certain ends. Judging from the literature, as well as from what happens in practice, it can be said that privatization in post-socialist countries is carried out for four reasons, not necessar­ily in the following order:

1. redistribution of economic power and influence 1

2. strengthening of democratic institutions 3. promotion of economic efficiency and 4. acquisition of revenues.

Changing from state to private ownership means redistribution of economic power and political influence in favour of the private owners at the expense of the government and its bureaucratic appara­tus, and also at the expense of self-managed institutions in enterprises, where such exist. It brings into being a new elite. Most economists believe that without an owning middle class, including an upper middle class, a market economy and democracy cannot be sustained. The well-known Hungarian-American sociologist, Szelenyi, says in an interview (1993): 'In the last five-six years I have come to the conclu­sion that there cannot be economic prosperity, national independence

70 The Performance of the Economies

and a democratic institutional system without a national owning middle class.' He also maintains that the new middle class should emerge from the existing small entrepreneurs who learned the rules of the market in the second economy and that it would be wrong to allow the members of the old nomenclature to become part of the process of embourgeoisement.2 Kornai (1990) expresses a similar sentiment: 'A most important element of the social transformation we seek is the development of a new middle class, whose core would be composed of industrious, thrifty entrepreneurs who want to move upward in society' (p. 50).3

It is believed, and rightly so, that in a system where the state is the only owner of the means of production, as it was in the socialist system, and thus more or less the sole employer, democratic institu­tions can only be a formality. The introduction of democracy requires restoration of the right to own means of production and the right of owners to dispose of them according to their own will and interest. Needless to say, society can impose by law certain limits on this right.

It is often stressed that the middle class (owning class) is the guar­antor of democratic institutions and in order to create such a middle class, privatization is needed. Such a belief indirectly indicates that blue-collar workers cannot fulfil the function of a guarantor, which, workers feel, as an insult.4

Private ownership is not a sufficient condition for having a demo­cratic regime. There are many countries whose economy is based on private ownership and which have an authoritarian system. It is also known that excessive private ownership, mainly of land, may be a hin­drance to democracy.

The usual reasoning that private ownership is a prerequisite for an efficient economy is that state ownership is ownership of property which belongs to everyone and therefore to no one. State bureaucrats, who manage state property, do not risk their own money and there­fore do not take as much care of assets as private persons, who are personally interested in an efficient performance of assets. If assets are not put to the best use, bureaucrats mostly do not suffer person­ally, whereas a private owner is financially affected. In addition, the state as a producer, unlike private persons whose entrepreneurship is driven by the profit motive, has many functions, and profit maximiza­tion may not be the most important.

Despite what has been said above, the relationship between owner­ship and economic efficiency is not that simple. The Economic

Privatization 71

Commission ... (1992, p. 196), discussing the experience of market economies, writes that

the superiority of private enterprise depends critically on the degree of competition prevailing in the market, the incentive structures in alternative organisational forms, and the coherence of regulatory policies ... [When all this is in place still] the key factor determining the efficiency of an enterprise is not whether it is publicly or pri­vately owned, but how it is managed.

This view is supported by Chandler (1990), who examined the factors determining the economic efficiency of enterprises. According to him, it depends very much on the abilities of managers to innovate and organize the production process (pp. 594-605).

From the foregoing it can be assumed that large state-owned enter­prises under competitive conditions with skilled managers can be as efficient as private enterprises. After all, large enterprises, regardless of their ownership, are run by hired managers.

In this connection it is important to mention that not every privat­ization leads to promotion of efficiency, as the experience with privat­ization in Western Europe has shown:

divestment of state-owned assets in market economies has not unambiguously led to lower product prices, improved allocative efficiency, ameliorated internal efficiency in privatized enterprises, brought about people's capitalism, or generated better service or quality of delivery. Moreover, public enterprises were often divested well below their 'market value' thus generating sizeable short-term capital gains at the expense of the state- ultimately the taxpayer at large. (Economic Commission ... 1992, p. 196).

In the West, one important reason for privatization is the need for revenues resulting from sale of state assets. This consideration has played a varying role in the individual subject countries. On the whole, it played the greatest role in Hungary, mainly after 1995, when the economy found itself in a critical situation. In the CR it played the smallest role; there speed has been the most important criterion and to achieve it, the government has been willing to sacrifice revenues. It seems that it has been a victim of the illusion that once privatization is carried out, many problems of transition, such as restructuring and economic efficiency, will be solved.

72 The Performance of the Economies

SMALL-SCALE PRIVATIZATION

This privatization included not only retail shops, service outlets, artisan establishments, but also parts of broken-up large trade and service enterprises. In all three countries small-scale privatization pro­ceeded quite rapidly because of its decentralization to local govern­ments. Auctions were the most frequent methods of selling small businesses; this was primarily true of the CR. This was so because, the CR did not give preferential treatment to existing managers or employees of small businesses in privatization. It could be argued that this was not a very good idea; after all, it could be assumed that man­agers and employees had cumulated experience and knowledge in their jobs and therefore they would do even better if they owned the business. On the other hand, many of these managers had abused their positions at the expense of the consumers and had enriched themselves. It is not clear to what extent this fact played a role in the determination of the attitude of the former CSR to small-scale privat­ization. It is not precluded that the CR authorities took such an atti­tude because many of the managers had obtained their positions through connections to the old political or economic elite.

In Hungary and Poland the authorities were forced to take a differ­ent position. There many small businesses were leased to managers for a certain period before the collapse of the socialist system, and if managers had insisted on their rights, the authorities would have been unable to proceed with the privatization until after the leases expired. Therefore the authorities in both countries agreed to sell small busi­nesses to managers without competitive bidding. In addition, many small businesses were leased with a buy-out option.

In all three countries the rule was laid down that small businesses should not be sold to foreigners. Nevertheless, foreigners were not excluded entirely. Quite a few citizens were willing, for a bribe, to be a front for foreigners in auctions.5 In addition, in the CSR foreigners had access if the auction had to be repeated because no buyer was available in the first round.

LARGE-SCALE PRIVATIZATION

Privatization of large state-owned enterprises has been carried out by different methods in the subject countries. Generally, the methods can be divided into two groups: (1) privatization through sale (the capital

Privatization 73

route) and (2) free assets distribution. There was also a third method, namely restitution (reprivatization), but only in the CR did it mean a real return of assets belonging to the former owners or their inheri­tors. In Hungary the former owners have received (and in Poland will receive) vouchers for their property nationalized by the old regime. (For more on this see Bornstein, 1997.)

The first group has involved a variety of solutions and has been applied in individual countries to a different extent, the most import­ant being sales to domestic and foreign buyers and privatization through liquidation. Sales have been applied in two forms: sales to specific buyers and public offering of shares. Both forms have been applied in the countries under review. Privatization through liquida­tion has been applied primarily in Poland.

The second group includes what is known under the name 'mass privatization', and has been applied primarily in the CR and Poland. (For figures broken down according to the applied methods of privat­ization see Table 6.1).

The Capital Route

It was clear from the beginning that even if the countries wanted to sell state-owned enterprises to domestic buyers only, they could not do so. The book value of large state-owned enterprises considered for privatization was much higher than the domestic savings which could be used for purchase of enterprises. Some economists estimated that many decades would be needed to accumulate savings equal to the value of the state assets to be privatized- and the governments of the subject countries were eager to privatize as soon as possible. They were also under pressure from international financial institutions, which viewed the speed of privatization almost as a litmus test of the post-socialist countries' willingness to get even with the past. It is not precluded that the international financial institutions pressed for fast privatization out of their own self-interest. Under these conditions foreign firms had to be considered as the primary buyers.

There were other reasons which involved foreigners in privatization. One of the principles of the systemic change has been the opening of the economy to world markets, which included a free flow of capital among countries, and foreign firms have been eager to take advantage of such a possibility if it could serve their interests. On the other hand, the subject countries hoped that foreign investors would introduce to the enterprises their own up-to-date know-how, effective managerial

Table 6.1 Methods of privatization of medium and large state-owned enterprises a

Sale to Management- Equal access Restitution. Otherb Still in outside employee voucher state hands owner buy-out privatization

Poland (no.)c 3 14 6 0 23 54

Hungary no.c 3Sd 7 0 0 33 22 valuee 40d 2 0 4 12 42

Czech Republic no.c 32 0 22d.f 9 28 10 valuee 5 0 50d 2 3 40

Notes: a Per cent of the total as of the end of 1995. bTransfer to local authorities and social insurance organizations, debt-equity swaps, sales through insolvency proceedings. c Number of privatized firms as a share of all former state-owned enterprises, including parts of firms restructured prior to privatization.

dDominant method of privatization e Value of firms privatised as a share of the value of all formerly state-owned enterprises. fJncludes assets sold for cash as a part of voucher privatization through June 1994.

Source: World Bank, 1996a, Table 3.2, p. 53.

-..J

"""'

Privatization 75

methods and increase access to foreign markets which would benefit the whole economy.

But only in Hungary was sale to foreigners the most important form of privatization. In Poland and the CR, but especially in the former, there was popular resentment at foreign ownership. It was fed by the fear that foreigners would dominate the economy and that these foreigners would to a great extent be Germans, who are not very popular in these countries because of the Second World War. Also, the knowledge that foreign firms' interest is dictated by the profit motive and that they are therefore only interested in profitable enter­prises or potentially profitable ones and at the lowest possible pur­chase price, added to the resentment. In the CR the neo-liberals were looking for fast privatization which would at the same time strengthen their popular support, and sale to foreigners did not satisfactorily solve either of these objectives.

The Hungarian authorities were determined from the beginning to privatize by sale, though there were some voices which called for free distribution of state assets. Considering that Hungary has the highest foreign debt per capita, it was no wonder that it did not want to imitate the CR. A year before the 1994 parliamentary elections the right-wing government of the day came up with a popular plan which was supposed to involve citizens in the privatization of large enter­prises.6 The new coalition that resulted from the1994 elections can­celled the plan and focused on rapid cash privatization. During the whole privatization period, with the exception of 1994, proceeds from the sale of state-owned enterprises came mostly from abroad, in foreign currency. In 1995, which was a very successful year in terms of the acquired proceeds from privatization, foreign exchange made up almost 90 per cent. The sales in that year included utilities, oil and communications, and a year earlier two large banks (Voszka, 1996 and 1997, p. 153; and Tfmar, 1996). Sale to foreigners has had a positive effect on foreign direct investment (see Table 2.2).

Foreigners also played a role in the Czech and Polish privatization processes, but a much smaller one by far than in Hungary. In the CR as of the end of 1996 foreigners' purchase of shares amounted to 1.9 per cent of the total value of sold shares. In addition, 34 933 busi­nesses, which is 2.4 per cent of the total, were registered in 1996 as being under foreign control. Most of these were in trade, motor vehi­cles repair shops, retail stores, followed by real estate and manufactur­ing (SRCR, 1996, pp. 507 and 527). Furthermore, there was extensive foreign involvement in voucher privatization.

76 The Peiformance of the Economies

In Poland, foreign investments had already started before the col­lapse of the socialist system. In the late 1970s, Polish emigrants were allowed to found small firms, a right which was later extended to other foreign firms. Only in 1985 were joint ventures allowed (Blaszczyk and Dgbrowski, 1994, p. 106).

In 1990 foreigners were allowed to participate in the privatization of individual corporations as well as in public sales of shares. These forms of privatization included large enterprises, which were first turned into commercialized enterprises and then into state-owned corporations belonging to the state treasury. As of 31 December 1995, 937 corporations were included in this transformation, but only 159 were sold. A great proportion of the rest (515) were privatized within the so-called 'mass privatization'. In 73 of the 159 corporations sold there is foreign participation. Foreigners also have a stake in enter­prises which have arisen as a result of liquidation (RS, 1996, pp. xlix-1; Ernst et al., 1996, p. 107).

In all the subject countries assets were sold to domestic buyers. In the CR, in order to enable potential buyers to acquire assets, some were granted huge loans. Some of these buyers have not been able to make sufficient profits to service their debts and their businesses will probably have to be sold to foreigners (Kunert, 1997).

Privatization Through Liquidation

This form of privatization has been applied primarily in Poland to small and medium-sized profitable firms. It has usually been initiated by insiders, mostly by managers, and has to be approved by the authorities. Liquidation has been carried out by sale of assets or, more frequently, by leasing with the option of a later buy-out. The lessees must pay down 20 per cent of the book value, instalments towards the agreed price, and interest equal to 50 per cent of the discount rate.

The rise of employee partnerships (spolki pracownicze ), the term for the new firms resulting from privatization by liquidation, has its roots in the self-management tradition. The employee partnerships are usually dominated by managers. They are supported by workers because of their apprehension about their jobs and welfare. By the end of 1995 there were 954 enterprises leased to employees, with a work­force of 300 000. Most of these enterprises are in manufacturing, con­struction and trade (RS, 1996, p.l; Pietrewicz and Hebda, 1996, p. 367).

The Polish authorities, like those in the other two countries, have also applied real liquidation in the case of enterprises performing poorly.

Privatization 77

Voucher Privatization

Voucher privatization is the Czech version of mass privatization, which was carried out in two waves, from 1992 to 1995. The principles of voucher privatization were as follows. Every citizen over 18 years of age could buy 1000 investment points with the vouchers he or she bought from the authorities for 1000 crowns, which was approximately 35 per cent of the average monthly wage. 8.5 million citizens of the CSR (approximately 74 per cent of the eligible population) took advantage of this opportunity, almost twice the number that was expected. Holders of investment points could buy shares in enterprises in five privatization rounds which made up the so-called first wave of privatization, or use their investment points to buy shares in one of the investment privatization funds (IPFs)- a quasi-mutual fund and a holding company in one institution, which could be founded by indi­viduals or organizations - or a combination of the two. The IPFs bought shares with the points received from point-holders. In the first privatization round, all the shares had the same price, with a twist -shares in enterprises for which the demand exceeded the supply by more than 25 per cent were not sold and were offered again in the next round at higher prices, whereas shares in enterprises which attracted little demand were sold in the first round, with the rest of the shares being available at lower prices in the next round. As a result of this price manoeuvre, the shares of the same company could be bought at different prices, and the difference between the most expen­sive and the cheapest share amounted to 600:1 in the last round (see Mejstrik, 1994, p. 26).

The second wave was limited to the CR, was based on the same prin­ciples as the first, and included fewer enterprises. In the two waves, 1864 enterprises with a book value of 360 billion crowns were subject to privatization. Usually, the whole package of shares in an enterprise was not subject to voucher privatization. At the end of the privatization 70 per cent of shares were in the hands of the IPFs and the rest in the hands of individuals. Voucher privatization made up approximately half of the privatization (SRCR, 1997, p. 513. (Sulc, 1996b, pp. 87-8, believes that the share of voucher privatization was much higher.)

In the first wave, 250 IPFs participated, most of which were tiny. Of the ten largest, nine belonged to banks (one is Austrian); after the first wave they controlled 40 per cent of all voucher points issued and 56 per cent of all voucher points in the hands of IPFs (Mejstrik, 1994, p. 19).

78 The Performance of the Economies

The government opted for voucher privatization primarily for two reasons:

1. It promised to be a good instrument for gaining and regaining the political support of the public. Voucher privatization offered itself as a partial compensation for the losses in real income and pur­chasing power of savings, which a great proportion of the public suffered at the beginning of transformation.

2. The authorities believed that this method would accelerate priva­tization and they were convinced that privatization must be rapid in order to create conditions for the restructuring of the economy.

Polish Mass Privatization

In Poland free distribution of assets was included in the 1990 law of privatization. True, the government first came up with a more detailed proposal in 1991, under the name of mass privatization. Due to dis­agreements and changing governments, it was approved in a modified form for the first time by the Sejm in May 1993. Soon after taking power, the new left-leaning government committed itself to imple­menting mass privatization.

The programme included 515 large and medium-sized enterprises (in relatively good shape) turned into joint stock companies; their value was estimated at 10 per cent of the remaining state property (Bornstein, 1997). 60 per cent of their shares were distributed to adult citizens for a nominal price (10 per cent of the average monthly wage); 15 per cent to employees (apparently of the enterprises included in the mass privatization)? without charge; and 25 per cent to the Treasury. The adult citizens' shares were exchanged for National Investment Funds' shares in 1997. Almost 95 of adults claimed privat­ization shares (Kolodko and Nuti, 1997).

In accordance with the mass privatization programme, 15 National Investment Funds (NIFs) have been created by the authorities. The NIFs, with the help of foreign experts, administer the shares of pri­vatized enterprises. They are under the control of a supervisory board, initially nominated by the ministry for privatization and approved by the prime minister and later selected by the sharehold­ers. The shares were distributed among the NIFs in the following way: each enterprise had a leading NIF which received 33 per cent of the shares; the remaining 27 per cent were distributed equally among all the NIFs.

Privatization 79

Apparently, in order to reduce risk, every share claimant received a share from each fund. In contrast with the CR, where citizens had the right to buy (with their investment points) shares in an enterprise of their choice (provided they were available) or invest in an investment fund, Polish mass privatization did not allow choices. This disadvan­tage was compensated for by a much smaller risk connected with the investment. One could say that in this manner every investor received the same book value of assets. Once selling of shares starts, an individ­ual can make a greater gain than his fellow citizen, depending on the unit prices of individual shares at the date of sale.

Free Distribution of Assets and the Goals of Privatization

Because of limited space, I would like to concentrate on the evalua­tion of free distribution of assets, which attracted great attention. It can be assumed that foreign firms, as long as they did not purchase assets in the subject countries for the purpose of silencing competition or with similar intention, but were simply driven by the profit motive, have tried without great delay to restructure the firms according to their needs. It would be, of course, of great interest to find out to what extent foreign firms have introduced new technical and managerial know-how and to what extent the economy benefits from it.

Also of interest is how the Polish employee partnerships perform and what their chances for survival are. At the start of their rise, they went through hard times; many were forced to dismiss workers and to reduce wages. But with the improvement of the economy their situa­tion improved too8 (Jarosz, 1996, pp. 8-9; see also Nuti, 1997, p. 176).

No doubt, free distribution of assets fulfils the first-mentioned goal of privatization; in the CR and in Poland it transferred physical capital from state hands to private hands and thus redistributed economic power and influence. Most of the shares resulting from the voucher privatization in the CR are under the control of IPFs, and thus the managers of investment funds have gained a tremendous power base. True, in Czechoslovakia the government decree of 1991 limits the share of an investment fund in enterprise shares to 20 per cent, but individual founders of multiple funds can own 40 per cent (Economic Commission ... , 1992, p. 238) and under conditions of dispersed own­ership this is more than enough to control an enterprise. The power of IPFs has increased with the sale of shares by private owners. In addi­tion, it is only natural that the large IPFs have tried to buy shares in such a way as to have a monopoly position in the branch in which they

80 The Performance of the Economies

have invested or have tried to buy shares of enterprises which are the backbone of the economy. The government did nothing to prevent such a possibility. The danger of monopolization was also in Poland (Mujzel, 1992)

The IPFs are a part of the hierarchical build-up brought about by the voucher privatization. They are at the bottom of the hierarchy and above them are the big Czech banks which control a large proportion of the big IPFs. At the top of the hierarchy is the National Property Fund, a government agency, which administers property not yet priva­tized or which is destined to remain in government hands, and owns the control package of shares of the four biggest banks (for more see Mertlfk, 1996). The hierarchy which has arisen is, in some respects, similar to that under the old system; it has not brought about the ideal owners the neo-liberal ideology had propagated (cf. Kysilka, 1997). Andreff (1996) expresses a similar view when discussing mass privat­ization. He writes: 'they [enterprises] do not clearly solve the problem of having well identified owners who actually control and govern newly privatised enterprises'.

The beneficiaries of the concentration of power are primarily the existing managers. This was also the case during the preparation for the voucher privatization. The managers' privatization projects, in spite of the fact that outsiders had the right to submit projects, almost always prevailed. Because of the great number of projects, the author­ities, which approved the projects were in no position to scrutinize them thoroughly. In addition, they did not have enough skilled staff who could perform the job. So Frydman and Rapaczynski's (1997, p. 269) statement that insiders were not given special privileges is not in tune with reality.

Many observers of the Czech scene have liked the provision that every participant in the voucher privatization was given the same number of points regardless of his or her position and qualified this as equal treatment (for example, Frydman and Rapaczynski, 1997, p. 269; Hashi and Sinclair, 1996). In reality, the equal treatment prin­ciple was only a formality, because individual people had unequal access to information about the performance of individual enterprises and their prospects in the future, and about IPFs, and did not always get the shares of the enterprises they wanted. Most people, even if they had access to information about the IPFs, did not have the skills to evaluate the IPFs and the abilities of their management. In addi­tion, some people bought shares in enterprises which were very indebted and on the brink of bankruptcy. (The amended bankruptcy

Privatization 81

law protected such enterprises only for a very short period of time -see Rude pravo, 26 March 1993.) Finally, the information given to the public about the performance of enterprises was not complete and reflected the situation of almost 18 months before. All this con­tributed greatly to the fact that the shares individuals bought have not yielded the same income.9

In Poland, as already mentioned, the principle of equal treatment is less a formality than in the Czech case, since every person received shares from all investment funds. On the other hand, employees get 15 per cent of shares of enterprises subject to mass privatization, a privilege not available to other people. Some authors regard this pro­vision as unjust (see Karpinska-Mizielinska and Smuga, 1996).

One of the objectives of privatization is to promote economic efficiency and thus to achieve a better performance of the economy. Two of the factors which determine the economic efficiency of enter­prises, as mentioned above, are the quality of managers and the degree of competition. In post-socialist countries there is a further precondition for economic efficiency and that is a restructuring of the economy in a way to minimize costs and adjust the supply to the needs of domestic and foreign demand. Since large investment funds have under their control a great number of enterprises, the question arises: do they have the skills and experience to co-ordinate the activities of so many enterprises? For the time being there are no strong positive indications. Kenway and Chlumsky (1997), on the basis of a survey of 35 firms, came to the conclusion that the IPFs 'lack the managerial and technical know-how necessary to fulfil their control role.' They also maintain that voucher privatization has so far brought almost no change in the behaviour of enterprises.

Quite a few owners of large packages of shares of the IPFs are more interested in making a fortune quickly than in pondering how to improve the working of enterprises. Some do not mind engaging in unethical or even illegal practices to achieve their goal. The lax legal framework within which voucher privatization works lends itself to various misuses, including fraud and corruption. HI

The government has failed to create a legal framework which would guarantee an effective and transparent oversight of the process of privatization in general and of the voucher privatization in particular, as well as the workings of the stock market, and protect small share­holders against abuses. There were two reasons for this: the rush to implement the voucher privatization and, perhaps more important, the naive idea that market forces and competition would take care of

82 The Peiformance of the Economies

everything. As already mentioned, only in April1997, when the Czech economy faced an economic crunch, did the government promise to create a security commission which would oversee the working of the stock market (seep. 48).

The architects of the transformation took the position that there was no need for the government to worry about restructuring the microsphere, that the privatized enterprises would take care of it. However, not much has happened in this respect in enterprises con­trolled by the IPFs (Sulc, 1996a, p. 132; Svejnar, 1996; Aghion and Carlin, 1997, p. 251). 1( Some authors believe that the neglect of the restructuring of the microsphere is one of the reasons for the econ­omic crunch the Czech economy finds itself in (for example, Kysilka, 1997).

The free distribution of assets deprives the government of revenues which could be used to reduce domestic and foreign debt or to miti­gate the budget deficits. This is mainly true of Poland, which still does not have a balanced budget and is grossly indebted to foreign coun­tries. Even the CR, which for several years had a tiny budget surplus, but in 1996 had a small deficit, could use the missed revenue for a good purpose. Both countries suffered from huge flooding which caused great damage. In the CR, the government wants to sell its packages of shares in the four largest banks, among others, because it needs the receipts. In both countries there is a shortage of funds for important services, such as health care and education, and a great number of pensioners receive pensions below the poverty line. 12

Free distribution of assets also deprives enterprises of possible capital urgently needed for modernization and development. If enter­prises are sold, a portion of the acquired funds can go to them. In addition, in the CR in a very short period of time a great proportion of shares in the hands of individuals have been sold and used for con­sumption. It can be assumed that this development has contributed to the fast growth of imports and thus to the rise of the large current account deficit.

The Remaining State Enterprises

None of the subject countries had from the beginning a well-thought­out plan about which enterprises should remain in the hands of the state. Only during the process of privatization have they been forced to consider the question; it seems that they do not have a final plan. It is interesting that little attention has been devoted to this problem in

Privatization 83

the literature. Neither has it been a frequent topic for public discus­sion. With some exaggeration it can be said that the problem has been treated as non-existent.

Of the subject countries, in Poland privatization proceeded at the slowest pace and the number of enterprises not yet privatized was the highest. According to the World Bank study (From Plan to Market, 1996a), by the end of 1995, 54 per cent of state enterprises were still in the hand of the state (see Table 6.1). It can be assumed that the value is also high.

In all three countries traditional state enterprises, such as railways, the post office and some utilities, have not been privatized. Furthermore, most of the biggest banks are still controlled by the state or the state owns a minority of their shares. Some foreign banks have expressed interest in buying the profitable banks and in this endeavour they can count on the help of international financial institutions. The present managers of the banks are not happy with the idea of privat­ization, especially if the buyers are foreign banks; they are primarily afraid for their positions. Of course, they do not go public with their fears; rather, they stress the threats to the economy from foreign banks, in the form of different credit policies which might force many enterprises into bankruptcy (for an example, see Kunert, 1997). They have a point: this is the reason why some advanced capitalist countries try to prevent their banks from falling into the hands of foreigners.

CONCLUDING REMARKS

As has been shown, privatization has been carried out in the subject countries quite differently. Polish privatization can be characterized primarily as an insider privatization; insiders have had access to shares of enterprises without charge (mass privatization) or to whole enter­prises (privatization by liquidation) under preferential conditions. Voucher privatization is characteristic of Czech privatization. In both countries (in the CR to a much greater extent than in Poland) free distribution of assets has been applied. In Hungary privatization by foreigners played a much greater role than in the other two countries.

It is too early to make a definitive judgement about the individual methods of privatization. There has been a tendency on the whole to evaluate the Czech voucher privatization most positively. Three fea­tures of this privatization have been particularly singled out: the speed of privatization; the lack of a role for insiders; and equal treatment for

84 The Performance of the Economies

all participants in voucher privatization. I have already expressed my critical views about voucher privatization in general and about the last two features in particular. Here I would like to mention that the Czech economic crunch has brought about some shift in views. More and more economists in the CR have come to the conclusion that the economic crunch is to some extent the result of voucher privatization. Now even in the West, which had only praise for voucher privatiza­tion, critical remarks are being voiced. The Economist writes : 'The heart of the problem [in the economy] was a sloppy mass privatization, which in theory handed ownership of thousand of firms to citizens but actually left them to be mismanaged by bank controlled investment funds, which gained control of most of the shares'. The North Atlantic Assembly also criticized the voucher privatization, at the same time praising the Hungarian privatization for applying the method of sales in privatization (Hospodarske noviny, 15 October 1997, quoted accord­ing to the Internet).

Both criticisms are correct to a great degree. 13 In my opinion, the whole idea of free distribution of assets was an ill-thought out idea for reasons already mentioned. But what was especially wrong was to allow a spontaneous rise of IPFs (in this respect the Polish authorities have been much more inventive and imaginative) and on top of it to start the process of voucher privatization without having in place a legal infrastructure which would regulate the behaviour of IPFs. This opened the way to abuses and corruption.

Part III

The Social Costs of Transformation

86 The Social Costs

INTRODUCTION

In the following chapters I shall discuss social costs of transformation. Given the manner in which the transformation from planned economy to a market economy was carried out, social costs were unavoidable, all the more so because the transformation meant not only a radical systemic change, but also a radical restructuring of foreign trade ori­entation. The social costs, whose extent has not yet been recovered and probably will never be fully recovered, manifested themselves in a drop in output and welfare. Part III deals with social costs in terms of a drop in welfare and does not deal with the costs of the decline in output.

Some of the changes brought about by transformation, such as the decline in the average standard of living, are only temporary; other changes will be permanent, such as unemployment, the widening of income and wealth inequalities, substantial weakening of the social safety net and expansion of poverty.

In the following four chapters I shall discuss how the transformation affected employment, the standard of living in general and incomes of different socioeconomic groups, social policy and poverty.

7 Unemployment INTRODUCTION

All the countries in transition, especially the CSR, suffered from labour shortages during the communist regime. Reformers, and also the public, knew that with transformation to a market economy labour shortages would turn into unemployment. Some reformers even went so far as to see in unemployment an indicator of the progress in trans­ition. One Czech minister noted that 8 per cent unemployment would indicate that the republic was on the right path to a market economy.

And indeed, in all three countries the transformation brought about unemployment, though not of equal magnitude (see Table 2.1). Poland suffered and is suffering the most, and the CR had from the beginning the lowest rate of unemployment and managed to maintain its position. It should be added that according to Czech estimates, some 260 000 foreign workers, a great proportion of them illegal, work in the CR.

In this chapter I shall discuss the causes of unemployment; the rela­tionship of unemployment to economic growth; the reasons for the CR's success in employment; and policies to fight unemployment.

CAUSES OF UNEMPLOYMENT

The transformation strategy brought about a dramatic decline in output which triggered a gradual stream of worker dismissals. Most economists agree with this general explanation. However, when it comes to the causes of the dramatic decline in output, great disagree­ments emerge, as already mentioned in Chapter 2. 1

Kornai (1992) indicates indirectly several reasons for the rise of unemployment. He puts anti-inflationary monetary policy in first place. To him this 'accelerates natural selection and the destruction that clears the decks for creation' (p. 8). Unemployment is also fed by the sectoral restructuring, by the decline in manufacturing and the rise in services, by redirection of exports, and by the reduction of concen­tration of production. He also mentions as one of the causes of open unemployment the elimination of hidden unemployment, but he does not see in it the main cause of unemployment as some economists do.

87

88 The Social Costs

It is not clear what he includes in his anti-inflationary monetary policy, whether this is a short hand for the whole strategy of transfor­mation. If this is the case, one can fully agree with him.

In his 1995 paper (p. 157) Kornai is more concrete. He sees unem­ployment as a result of macroeconomic changes on the one hand, and of microeconomic changes on the other. Among macro changes he mentions stagnation and a decline in macro demand, caused by income and monetary policy. The situation has been made worse by the recession accompanying the transformation. In the microsphere he refers to the hardening of the budget in state-owned enterprises and the rise of private enterprises. Both changes mean that cost­sensitivity increases and with it the decline in labour demand.

Unlike Kornai's paper, which is based on Hungarian experience, as are most of his works, Kabaj's views on the causes of unemployment are based on Polish experience. He (1994, p. 165) blames the strategy of transformation for the high rate of unemployment, especially the excessive opening of the economy, which undermined the competi­tiveness of Polish products in the domestic market and allowed higher imports than exports. Kabaj maintains that a third of the cases of unemployment in 1990-1 were due to the excessive opening of the Polish economy to imports. He also blames unemployment on the drop in output and investment. In his 1996 study, written for the ILO, he repeats what he wrote in 1994 and explicitly rejects the view that the main causes of unemployment have been structural changes and a drop in hidden unemployment.

Nuti (1996b) distinguishes three periods in unemployment. During the first period unemployment is caused by a lack of aggregate demand; he calls this kind of unemployment 'Keynesian'. The follow­ing period, which comes into being in the early years of stabilization and is characterized by insufficient capital to employ jobless people productively, he calls 'classical'. The last period is triggered by the fast increase of real or dollar wages and he calls this kind of unemployment something close to 'neoclassical,' because of high wages. Nuti main­tains that in Poland real dollar wages increased by the end of 1993 to US$300 from $50 in January 1990.

One can agree with Nuti's characterization of the first two periods. As to the third period, in my opinion, the premise itself seems to be wrong, if the author really had in mind real wages in terms of zlotys. There was no fast increase in real zloty wages; on the contrary, during the whole period 1990-3 real wages declined. It is true that there was an increase in dollar wages that resulted from a dramatic increase in

Unemployment 89

prices which brought a much smaller increase in zloty wages. The zloty value declined much less than the price surge, one reason being the increase in public confidence in the economy and, with it, in the zloty. But this increase in dollar wages had no effect on real wages because Polish employees were and are paid in zlotys. They might have had some negative effect on exports and in turn on unemployment. But as the author himself maintains, they could not be regarded as the main cause of unemployment.

For Chilosi (1993) unemployment has been brought about by the drop in effective demand, the collapse of trade between the former CMEA countries and the restructuring of the economy. According to him the rate of unemployment also depends on the development of real wages. An increase in real wages brings about an increase in unemployment and vice versa. He demonstrates his thesis with East Germany and Poland. He believes that in East Germany unemploy­ment shot up so dramatically only because real wages were allowed to increase substantially; and that in Poland the compression of real wages led to a much smaller unemployment rate.

Chilosi is, no doubt, correct in maintaining that there is some corre­lation between real wages and unemployment in both directions. However, it also true that an increase in real wages, especially if it is not large, can under certain conditions bring down unemployment and vice versa. In Poland unemployment increased to 16 per cent at a time when real wages were declining, and in the CR real wages grew fast in the last four years but unemployment increased only slightly in 1996. The relationship between real wages and unemployment is also influenced by other factors, among them changes in productivity.

UNEMPLOYMENT AND ECONOMIC GROWTH

At the beginning of the transformation, decline in employment lagged much behind the drop in GDP, but even more behind the drop in industrial output, a phenomenon which produced a decline in produc­tivity. For example, in Poland in 1990-1 GDP dropped by 14 per cent and industrial output by 30.7, whereas unemployment reached only 12 per cent. There were several reasons for this phenomenon. Many managers, influenced by old thinking contrary to how managers in market economies react, were not psychologically prepared to take drastic actions. The welfare of their workforce and the desire to have a good relationship with them was to some extent on their mind. In

90 The Social Costs

some enterprises, where the trade unions (or workers' councils) were active, managers could not ignore their negative stand on mass dis­missals. For all these reasons, managers of enterprises tried to miti­gate the consequences of declining output by giving many employees paid and unpaid leave and reduced working hours and/or by working for the 'warehouse'. Enterprises tried to juggle employment in such a way that they would have enough money to pay their employees regardless of the requirements of production. This was all the more possible at the beginning of the transformation because of the cheap­ening of labour costs due to the decline in real wages ( cf. Jackman and Pauna, 1997, p. 383; Nesporova and Uldrichova, 1997, p. 51). Perhaps some role was also played by the regulation that a dismissal of workers en masse entailed severance pay (Koltay, 1994; Ernst et al., (1996, p. 26; Belka et al., 1992)2

The subject countries made some provisions for the mitigation of expected unemployment. Czechoslovakia extended the paid vacation time (to 4-5 weeks), the number of holidays (to 10 annually) and maternity leave with some modest allowance first to three years and later, in 1995, to four years. The authorities also allowed workers to retire two years earlier without any effect on the level of their pen­sions (Horalek, 1996). Poland and Hungary also introduced an early retirement scheme in order to mitigate unemployment.

In Poland in the second half of 1992, when a reversal in economic growth occurred and both GDP and industrial output grew (by 2.6 and 2.8 per cent respectively), unemployment continued to grow and reached its peak in 1993, when GDP grew by 3.8 per cent and indus­trial output by 6.4 per cent. At the same time the number of econ­omically active population continued to decline. In Hungary, when the economy recorded a diminishing decline in both GDP and indus­trial production, unemployment continued to grow. There was a great jump in unemployment from 1.9 per cent in 1990 to 7.5 per cent in 1991 and to 12.7 per cent in 1992. Only the CR was an excep­tion; the diminishing drop in GDP was combined with a small decline in unemployment. In Poland and Hungary growing unemployment was also the result of the adjustng enterprises to the pressure of a developing market economy.

With the acceleration of economic growth in Poland and the CR there was a decline in the rate of unemployment. In the CR in 1996 there was a small increase in the employment rate combined with a smaller economic growth rate. In Hungary, despite a decline in GDP, there was a decline in the employment rate.

Unemployment 91

All this indicates that there is not a large positive correlation between economic growth and an increase in employment or decline in unemployment. An increase in economic growth need neither reduce unemployment nor increase employment. Whether an increase in economic growth is translated into a reduction of unemployment and/or an increase in employment depends on how the growth of GDP came about and on demographic factors. If it was the result of growth in productivity, unemployment need not decline and employ­ment need not increase. Whether an increase in employment trans­lates into a reduction in unemployment depends on demographic factors. It is necessary to agree with Commander and Tolstopiatenko (1997, p. 336), who argue that there is little evidence of economic growth having a great positive impact on unemployment.

THE LOW RATE OF UNEMPLOYMENT IN THE CR

There are several reasons why unemployment in the CR did not end up with rates similar to those of its neighbours. Under the old regime in the CSR the private sector was negligible, whereas in Poland and Hungary it was quite developed. The transformation offered great opportunities for entrepreneurship. Very soon after the revolution, small-scale privatization got under way; it was possible to acquire a retail business for even a small outlay of capital. Opportunities for new businesses were also very good, especially in services. The service sector was quite neglected under the old regime; prices for many ser­vices were set very low and therefore the authorities were reluctant to expand them, since this would have meant bigger subsidies. With the change in the system, the service sector has grown rapidly and many have found employment in services. In addition, many have found jobs in new branches of the service industry (finances, insurance) con­nected with the working of a capitalist economy.

The restructuring of the economy in the CR is proceeding slowly and still has a long way to go. As mentioned before, this is mainly the result of two factors: first, the voucher privatization, which was sup­posed to accelerate restructuring, turned out to work slowly in the direction of rationalization of production; and second, unlike the Hungarian authorities, the Czechs carefully applied the bankruptcy law, after several postponements.

This does not mean that the CR will be able to maintain a low rate of unemployment for a long time. Sooner or later the new owners of

92 The Social Costs

the firms privatized through vouchers will start the process of 'ratio­nalisation of enterprise employment and slimming of some enter­prises' (Klaus, 1994 ). The economic crunch in 1997 has already pushed unemployment to a higher rate.

Low unemployment benefits, much lower than in the other two subject countries, have certainly contributed to the low unemployment rate. It is, however, difficult to estimate their concrete impact. Jackman and Pauna (1997, pp. 384-5) believe that low unemployment benefits and selective subsidies to enterprises have encouraged many state enterprises not to lay off workers despite declining demand.

The sharp devaluation of the crown, sharper than the devaluation of the Polish zloty, let alone of the Hungarian forint (Hungary did not carry out huge devaluation when the transformation started, see Chapter 5) boosted tourism and employment, all the more because the CR, with its unique historical monuments and buildings and its geographical location, is very attractive to foreign tourists.

The CR also has the advantage of a relatively sophisticated indus­trial structure,3 definitely more so than its neighbours, combined with a relatively evenly distributed settlement of the population. Furthermore, few regions are dependent on one employer. All these factors favourably influence employment (Rusnak, 1994).

Finally, if the comparison is limited to Poland, the CR has the advantage of a lower retirement age (60 years for males against 65 in Poland).

CHANGES IN THE STRUCTURE OF EMPLOYMENT

Before starting to discuss unemployment in greater detail, it is impor­tant first to discuss briefly the impact of transformation on the size of the labour force.The transformation brought about a drastic decline primarily in the number of the employed (working population) and employees (working for a wage or salary) in the civilian economy. 4

The most drastic decline in the size of the working population was in Hungary. There, in the period from 1990 to 1996, the decline amounted to 1 498 000. According to Tfmar (1994) in Hungary the number of jobs in the period from 1989 to 1993 declined by more than the old regime created during the 40 years of its existence. Poland fol­lowed by 658 000 and the CR by only 386 0005 (see Table 7.1). One explanation is that the transition has deprived many retirees of their jobs - which have been mostly part-time - though their number

Unemployment 93

Table 7.1 Some indicators of employment in the civilian economy (in thousands)

1990 1991 1992 1993 1994 1995 1996 1997

Working age population"

CR 6 029 6 049 6114 6 181 6 243 6 291 6 589 Hungary 5 957 5 997 6 056 6 072 6 082 6 081 6145 Poland 21962 22 055 22181 22 333 22 502 22 647 22 820

Economically active11

CR 5 436 5196 5 170 5194 5137 5176 5 211 Hungary 5 496 5 404 5 202 5 015 4 768 4 565 4 470 4 452 Poland 17 529 17 367 17 122 17 004 17 064

Working populationc

CR 5 387 4 889 4 766 4 774 4 807 4 940 5 001 Hungary 5 472 5 304 4 796 4 352 4136 4 045 3 974 3 975 Poland 16 145 15 443 15 011 14 761 14 924 14 968 15 487

Employeesd CR 5 088 4 305 3 657 3 425 3 287 3 124 3 030 Hungary 4 795 4 669 4 242 3 867 3701 3 636 3 615 3 611 Poland 10 797 9 921 9 449 9 158 9 676 9 758 9 993

Working population in private sec tore

CR 376 917 1 483 2 250 2 548 2 824 2 946 Hungary 1038 1162 1276 Poland 7 902 8 390 8 404 8701 9 046 9 345 10 075

Notes: a Figures refer in the CR to annual average, in Hungary to 31 January and in Poland to 31 December; in the CR and Hungary to males aged 15-59 and women aged 15-54; in Poland to men aged 18-64 and to women aged 18-59.

"In the CR figures refer to 31 December, in Hungary to 31 January and in Poland to November of the year in question to men and women older than 15 years.

cJn the CR and Poland figures refer to 31 December and in Hungary to 31 January.

din the CR figures refer to the annual average; in Hungary, not listed and refers to workers aged 15-74; in Poland to 31 December; in Hungary members of cooperatives are not included.

ern the CR and Poland figures refer to 31 December. In Hungary the figure refers to non-financial corporations. Cooperatives are included in the Polish figure

Sources: Statistical yearbooks of the subject countries.

94 The Social Costs

increased. Again, in Hungary the decline was the biggest: in the period 1989-96 it was 312 000 (see Table 9.3).

The transition has brought about an increase in the number of pen­sioners as a result of the introduction of early retirement schemes and also in the number of disabled people. Many people who were afraid that they might lose their job and had some health problems were able to get disability status. In Poland the number of old age pensioners and disabled people increased by 1 438 000 in the period from 1990 to 1996.6

Many people used the freedom to travel abroad, which the change in the system brought about, for working there. However, this phe­nomenon has not been significant enough to make a difference. On the other hand, foreign workers already have some impact on the size of the labour force. In the CR in 1995 there were 160 000 legal sea­sonal workers in addition to some 100 000 illegal ones.

As Table 7.1 shows, the number of employees (salaried and wage workers) declined dramatically too, even more than that of the working population (which also includes the self-employed, employers and the unemployed). In this case the decline was biggest in the CR (2 058 000). In addition to the causal factors already mentioned (the drop in the number of working retirees and the increase in old age pensioners and disabled people), there are new factors: the emer­gence of unemployment and a dramatic increase in businesses. A large number of people who had been employed in the old system became entrepreneurs or self-employed. This category increased in the CR in the period 1990-6 much more than in the other two countries, where the process of privatization started long before the collapse of the socialist system.

If all the factors mentioned are added up there is still not a full explanation for the decline in the size of the working population and employees. There is no doubt that the explanation is to be found in underground employment. The Polish statistical office estimates the number of people who have their main occupation in the underground economy to be 800 000 to 1.1 million (GN, 1996, no. 10, p. 55). Horalek (1996, pp. 19 and 20) estimates their number in the CR at 250 000 in 1992.7 Needless to say, underground employment also had a declining impact on the size of the working population.

In all three countries there was a shift in the structure of employ­ment. Employment in agriculture and industry declined and that in services increased. In Hungary and the CR in 1995 employment in services exceeded 50 per cent (in the former by 9 per cent and the

Unemployment 95

latter by 1 per cent). In both countries the role of agriculture in employment diminished dramatically (to 8 per cent in Hungary and to 7 per cent in the CR) whereas in Poland it is still very high (in 1995, 23 per cent) (Commander and Tolstopiatenko, 1997, p. 334).

CHARACTERISTIC FEATURES OF UNEMPLOYMENT

As Table 7.2 shows, unemployment peaked in Poland in 1993 and in Hungary in 1992. Afterwards, it began to decline in both countries. In Poland and Hungary, but mainly in the first, it is still high: in Poland 13 per cent and in Hungary 10.4 per cent in 1997. In the CR the unemployment rate has been low all the time; however, it increased slightly in 1996 and much more in 1997. The figures for the rate of unemployment are based on the number of registered people looking for jobs. If people feel that their chances of finding a job are slim and they have exhausted unemployment benefits and social assistance to which they are entitled, they may not register as job-seekers. People who are not entitled to unemployment benefits because they have not worked before, or who do not fulfil the conditions for benefit eligibil­ity, may act similarly. Many economists argue that the official unem­ployment rate understates the real number of the unemployed, and they may be right. It should not, however, be forgotten that there is also an abuse of unemployment. Some people become unemployed in order to work in the underground economy and be able to collect unemployment benefits at the same time. There are no reliable figures about this phenomenon.

In Poland and the CR women are usually more affected by unem­ployment than men. Apparently the industrial branches where women are over-represented shrank more than male branches. Some discrimi­nation against women has surely played a role:many managers still regard women as supplementary wage earners.

Young people are the most affected by unemployment. In the CR it was ascertained that in the period between December 1995 and February 1996 the unemployment rate of the 15-19 age group was three times higher than that of the 30-4 age group. The 20-4 age group was only 40 per cent more affected by unemployment than was the 30-4 age group (SRCR, 1996, p. 278). Especially affected are those who do not have marketable skills, and these are usually people with little education. There is also another factor which makes it hard for young people to find a job, which is that they cannot commit

96 The Social Costs

Table 7.2 Number of unemployed (in thousands )a and benefits

1990 1991 1992 1993 1994 1995

No. of unemployed CR 39 222 135 185 166 153 Hungary 106 406 663 632 520 496 Poland 1126 2156 2509 2890 2838 2628

No. of unemployed women CR 127 78 104 97 88 Hungary 273 256 217 211 Poland 574 1134 1339 1507 1495 1448

Length of unemployment" CR 8.7 23 27.3 34.7 36.2 Hungary 80 159 177 185 Poland 1134 1295 1255 891

No. of unemployed benefit receivers

CR 25 160 62 93 78 68 Hungaryc 62 312 450 293 158 162 Poland 892 1703 1312 1395 1421 1548

Unemployment benefits as a percentage of gross wagesd

CR 41 29 27 26 25 Hungary 55 52 46 46 Poland 39 34 35 37

Notes: a Figures refer to year-end, with the exception of the last three rows. hFigures refer to those unemployed for more than a year.

1996

186 477

2483

105 202

1416

37.6 193 791

93 139

1332

24 49

cThe first two figures include assistance for new entrants to the labour force. "In domestic currency; in Hungary the figures refer to a percentage of net wages.

Sources: Statistical yearbooks of the subject countries. Figures about unemployment benefits as a percentage of wages in the CR and Hungary come from the statistical offices at my request.

themselves to long-term employment: boys may be conscripted and girls may have children.

In all three countries people with university education have a tremendous advantage vis-a-vis people with no or low education. For example, in Poland in 1995 there were 20.6 times more people

Unemployment 97

unemployed who had elementary education than those with university education (RS, 1996, p. 137).

Unemployment is not spread out evenly through the countries. There are great differences between regions. Capitals have smaller rates of unemployment than other regions of each country. Prague prides itself on almost no unemployment, but there are regions in the country which have more than 5 per cent unemployment. In Poland the regional diversity is much greater; in 1994 it ranged from 7.5 per cent in Warsaw to 30.5 per cent in one rural region (Horalek, 1996; Juszczynski, 1995, p. 104).

UNEMPLOYMENT BENEFITS

At the beginning of transformation the authorities were quite gener­ous with unemployment benefits. Perhaps the socialist ideology had some part in it or the new rulers wanted to show that they were sens­itive to the plight of the unemployed. More importantly, the author­ities tried to mitigate the potential shocks unemployment creates. It should not be forgotten that unemployment, especially if it lasts long, may have very negative social and psychological consequences: to mention some, it may affect the self-esteem, dignity and social status of the jobless. Economic activity gives people the feeling that they are needed and a part of society. Many unemployed people blame them­selves for their situation. Unemployment often disrupts family life. The shocks of unemployment have been stronger in post-socialist countries than in the West because to most people it has been a new phenomenon.

Unemployment also has negative economic consequences. The unemployed do not contribute to the growth of the economy; their potential contribution during the phase of unemployment is lost forever. In addition, not only do they not contribute to state revenues, they receive assistance from the unemployment fund and social assist­ance from the state. They are forced to participate in the distribution of national income produced by other people. Unemployment expands the ranks of people who collect welfare and many of those who are doomed to long-term joblessness are pushed into the rank of paupers.

Soon, when the numbers of unemployed people started to grow fast and thus the outlays on benefits grew fast too, new considera­tions entered into the deliberations about unemployment benefits.

98 The Social Costs

Benefits have been given, besides their social role, an economic one; they have become an instrument for encouraging workers to look hard for new jobs and thus shorten the unemployment period and also for making employed workers work hard so that they do not lose their jobs. And thus the benefits have been reduced, mainly in CR, where the period for which unemployment benefits may be collected has also been shortened. Unlike in the other two countries, where the unemployed may collect unemployment benefits for a year, in the CR this collection period was reduced to 6 months. Jobless people who lose their benefits are entitled to means-tested social assistance for some time.

From Table 7.2, which shows how the unemployment benefits as a percentage of average wages developed,8 it is clear that they declined in the course of years. In the CR in 1991 the average unemployment benefit made up 41 per cent of the average gross wage; in 1995 it was 25 per cent per cent; and in 1996 24 per cent. In 1997, in connection with the economic crunch and flooding, it was further reduced.9

In Hungary, the unemployment benefits, as a percentage of wages, are the most generous, but even there, there was a clear decline in their relative magnitude. In 1992 in Budapest, they amounted to 55 per cent of net average wages; in 1995 46; and in 1996 49 per cent. In the countryside they were smaller.10 In Poland, the unemployment benefits as a percentage of wages, which are between the Hungarian and the Czech benefits in magnitude, did not change much in the course of time.

To get a precise picture about the real value of the unemployment benefits, it is also necessary to consider the evolution of wages com­pared to price changes. If we consider real wages, then the picture is the following. In the CR the real value of unemployement benefits declined by 17 per cent in the period of 1991 of 1996. In the period 1992 to 1995 the decline in Poland was 8.3 per cent and in Hungary 24.1 per cent from 1992 to 1996.

When discussing the material situation of the unemployed one should not forget to consider the number of benefit recipients com­pared to the number of the unemployed, conditions for eligibility to benefits and duration of unemployment.

The number of the unemployed collecting unemployment benefits has declined dramatically from 1991 to 1996. In 1991 in the CR the number of benefit receivers as a percentage of the unemployed was 72 per cent, declining to 50 per cent. In Hungary the figures were 77 per cent and 29 per cent, and in Poland 79 per cent and 54 per cent.

Unemployment 99

Social assistance is much smaller than the unemployment benefits. For example, in Hungary it is 80 per cent of unemployment benefit. In addition, not every unemployed person who does not obtain unem­ployment benefit gets social assistance, which is means-tested. In Hungary, in 1996, 126 000 unemployed people obtained neither unemployment benefits nor social assistance.

Conditions for obtaining benefits have become stricter in the course of time. It has already been mentioned that the collection period has been shortened in the CR. In addition, in the CR, the guaranteed minimum benefit has been eliminated, but there is a ceiling. In Hungary both exist. The minimum benefit in Hungary was initially set at the level of the minimum wage, but in 1993 it was set at a fixed amount 11 which was not indexed to price increases, despite the existing high inflation rates (Frey, 1997, p. 96).

The severity of unemployment depends on the share of long-term jobless (longer than one year) in the total number unemployed. In this respect the three countries differ, apparently because of the differ­ence in the rate of unemployment. In the CR it is quite low (in 1991 it was 4 per cent and in 1996, 20 per cent). In Poland in 1993, when unemployment reached its peak, it was 45 per cent, declining to 32 per cent in 1996, in connection with the decline in unemployment. 12

In Hungary it grew from 12 per cent in 1992 to 40 per cent in 1996 (see Table 7.2).

As has already been mentioned, the reduction in benefits has proba­bly had a positive effect on unemployment and of course on outlays per jobless person. But it has also had negative effects. It probably encouraged many unemployed people to break the law, which forbids them to work for remuneration. Perhaps what is more important is that the reduction is felt by the unemployed, and rightly so, as a pun­ishment for something for which they are not responsible. Only extreme individualists can argue that the core of the unemployed are responsible for their plight. It is sad enough that some people are exposed to unemployment, but the authorities add to their plight by giving them low benefits which throw a great proportion of the unem­ployed into the rank of paupers. The Czech case is especially ques­tionable; the government uses a great portion of the tax collected for employment policy, paid by employers and employees, for purposes other than those intended, for balancing the budget. The Czech government can afford to follow such policies because a great proportion of the unemployed are Gypsies, who are treated as third­class citizens.

100 The Social Costs

ACTIVE EMPLOYMENT POLICY

The capitalist system, to which the transition aspires, is marked by unemployment, which fluctuates with the cyclical development of the economy. This is not to say that nothing can be done to mitigate unemployment. There is available a whole variety of methods which can ease unemployment: from an information system which helps to harmonize the demand for labour with the supply, through training, to the direct creation of jobs.

The governments of the three countries maintain that they are com­mitted to an active employment policy, whose aim is to reduce the rate of unemployment with the help of various programmes. However, their primary objective is not to cope with the causes of unemploy­ment. For the purpose of this active employment policy and for the so­called passive policy, which is earmarked for mitigating the consequences of unemployment through benefits, the countries have established a fund, which is named differently in individual countries and which here I shall call the labour fund. In Poland the labour fund is financed by taxes and by government subsidies. In 1994 employers paid 3 per cent of gross wages and this made up only 37.2 per cent of the expenditures; the rest was paid by the state. In the CR, by con­trasts, financing was done fully from taxes; in 1996 employers paid 3.2 per cent and employees 0.4 per cent of gross wages. In Hungary most expenditures from the fund are covered from taxes: employers pay 4.2 per cent and employees 1.5 of gross wages13 (Juszczynski ... , 1996, p. 114; Passman, 1996; Magyar Kozlony, 1995, no. 116).

The Czech expenditure on passive (unemployment benefits) and active employment policy amounted to 0.24 per cent of GDP in 1994 (of which 0.07 went on passive employment policy). In 1992, when expenditure reached its peak, it was 0.40 per cent of GDP. In Hungary in 1994, it was 2.50 per cent of GDP; expenditure on active employ­ment was 0.41 per cent (Frey, 1997, pp. 101 and 103; Nesporova and Uldrichova, 1997, pp. 72-3). The Polish figures were in tiie range of 2-2.5' per cent (Commander and Tolstopiatenko, 1997, p. 338).

As might be expected in the CR, where the unemployment rate was low, the percentage share of expenditures on active employment policy in the total expenditures was mostly higher than in Poland. In the CR in 1994 it was more than two-thirds. In Poland the expenditure on active employment made up only 12 per cent on average in 1993-5. However, in 1990 it was 32 per cent, falling to 4.7 per cent in 1991, when unemployment accelerated. In Hungary the share of expendi-

Unemployment 101

tore on active employment policy was 22 per cent in 1992, increasing to 37.3 per cent in 1995 (Kabaj, 1996, p. 31; Sirovatka 1996; and Hungarian unpublished source, 1996).

The active employment policy has been focused on several pro­grammes: job creation by wage subsidy, training and retraining, public works, helping the unemployed start a business, helping incapacitated people to jobs by subsidizing the wage they receive, and easing regional unemployment. Special attention has been devoted to youths who have difficulty finding jobs, because of lack of experience, among other reasons. The programmes are in substance designed according to those in OECD countries, with the difference that their funding in the subject countries is much smaller (Rutkowski, 1996).

In all three countries the focus of the employment policy was on subsidized jobs, training and public works. In Poland in 1993-4 more than 40 per cent of the beneficiaries of labour market policy were engaged in subsidized work and the rest mostly in public work and retraining. In the same years, only 10.2 per cent (on average) of the unemployed were covered by the employment programmes (Kabaj, 1996; see also G6ra, 1997, pp. 128 and 130). In the CR most of the labour fund, earmarked for active employment policy, was used for subsidized work; in 1992 it was 75 per cent and in 1994 more than 50 per cent. Naturally, the number of jobs so created declined over the years. The rest of the fund was used for retraining and public works. To ease youth unemployment, their employment was subsidized to the tune of 50 000 crowns annually (Nesporova and Uldrichova, 1997, pp. 66, 72-3). In Hungary, in 1994, 35 per cent of the beneficiaries of the labour market programmes were engaged in training, and 26 per cent in public works and subsidized jobs. The author of these figures (Frey, 1997, p. 102) also maintains implicitly that the programmes covered 52 per cent of the unemployed, a figure which seems to be high.

The question is: to what extent is the active employment policy effective? One possible, not very reliable, criterion is the percentage of the unemployed covered by the employment programmes. The reli­ability of this criterion is questioned because there are no common principles for the design of the programmes. Nevertheless, it is worth while having a look at the numbers. It is clear that in Poland, where the active employment policy has been most needed, the number of the unemployed covered by programmes is small. The high Hungarian numbers (52 per cent) alone do not tell us what was really achieved as a result of the programmes.

102 The Social Costs

A more reliable measure of the effectiveness is the percentage of people who have found jobs (or kept jobs in the case of subsidized employment) after going through a certain programme compared with the total number of people who participated in the programme. Kabaj's calculations (1996) for Poland in 1994 show that people who went through a training programme fared the best; 40 per cent of them found a job. Compared to some Western countries, where 70 to 80 per cent of ex-trainees find job (World Bank, 1995, p. 71), the results in Poland are not very good. It can be assumed that in the course of time the training programmes will improve and with them the finding of jobs will improve. Of those who worked in subsidized jobs, 33 per cent found employment. Participants in public works fared the worst. Only 2.9 per cent found jobs after completing public work. This programme is also criticized because it is much more expensive than unemployment benefits; enrolees in public works in Poland usually get 75 per cent of the average wage, whereas unem­ployment benefits are around 36 per cent. On the whole the results of the active policy are not very good. Some economists, for example Rutkowski (1996), express some doubts about the rationality of the programmes because of their low effectiveness. Still, econometric testing shows that subsidized employment as well as public works help make up for insufficient labour demand (World Bank, 1995, p. 69).

The argument against public works is valid provided the work per­formed in public works is worth less than 39 per cent (the difference between 75 and 36) of the average wage. But even if it were worth less than 39 per cent, it is still useful because the more people who can be removed from the ranks of the jobless, the better.

CONCLUSION

One of the most negative features of capitalism - unemployment - is already fully entrenched in Poland and Hungary. For the people affected by unemployment it is all the more distressing that for them it is a new phenomenon. People in the transition economies knew for some time that a change in the system would bring about unemploy­ment. Knowing about it and experiencing it are two different things. The job security people enjoyed in the socialist system disappeared and has been replaced by insecurity, which disturbs not only the people directly affected, but a much broader community. When people learn that their friends or acquaintances have lost their jobs,

Unemployment 103

many of them are tormented by fears about their own jobs. Only cor­porations like uncertainty, because they believe this makes employees work harder and eases the pressure for wage increases.

The jobless are exposed not only to all the negative social and psy­chological effects I have briefly mentioned above, but also to low unemployment benefits. They are punished for something for which the system is to blame.

The provisions for fighting unemployment have not turned out to be very effective, on the one hand because the authorities lack experi­ence, commitment and, of course, sufficient funds; 14 on the other hand because the fight against unemployment is not geared to the causes of unemployment, but rather to its effects. 15 Unemployment has been accepted as something unavoidable, as a necessary component of a capitalist economy. Therefore fighting unemployment has not been a primary goal, especially in the first years of transition. In this respect Kornai's recommendation to the government is interesting. He (1992, p. 9) appeals to the government not to relax monetary policy in order to fight unemployment. On the other hand, Kabaj (1994) proposes accepting as a principle that intended major economic policy decisions should be examined using cost-benefit studies to see how they will affect unemployment and that subsequent action should be taken accordingly.

8 The Standard of Living

INTRODUCTION

The applied transformation strategy aimed at bringing down demand in order to achieve internal and external market equilibrium. As a result of this strategy, output declined and unemployment came about, and with it also a decline in the standard of living 1 and an increase in poverty. The consequences of the transformation for the standard of living came as no surprise. All that was surprising was the extent of the decline.

As was to be expected, the decline in the standard of living has not affected all income and social groups and individuals equally. As already mentioned, one objective of the transformation has been to create a strong property-owning middle and upper middle class, and the only way to achieve this under conditions of declining standard of living has been inter alia to shift the burden of transformation onto the shoulders of the majority.

In this chapter it is impossible to discuss all the aspects of the stan­dard of living which have been affected by the transition to a market economy. I shall confine myself to the transformation impact on real wages and incomes, private consumption, rents and the purchasing power of savings. Close attention will be paid to the impact of the transformation on the differentiation of incomes.

REAL WAGES AND INCOMES

A restrictive wage policy was an integral part of the transitional macroeconomic policy. It has been practised in the first years of trans­formation by imposing hefty penalties for violating the rules for wage growth (see country studies). Later the authorities tried to achieve the same goal through tripartite negotiations, in which the governments of the subject countries used persuasion and pressure to make the other two partners, primarily the trade unions, accept their concept of wage growth (or decline).

Many economists, especially Sachs (1993b )2 argue that Polish official figures on real wages were inflated. They maintain that figures

104

The Standard of Living 105

about the drop in real wages do not mean much if in the base year for comparison extreme shortages of consumer goods exist and people are forced to stand in queues for hours. They have a point. Some adjustment should be made in the drop in real wages, but not to the extent they would like to see, for two reasons. First, they exaggerate the extent of shortages. Second, perhaps more importantly, how do they explain an even bigger drop in real wages in the CR than in Poland? It is generally known that the CR applied the same strategy as Poland and that the supply situation in the CR was bearable.

In the first year of transformation the decline in average real wages was, as mentioned, biggest in the CR (26.3 per cent in 1991), followed by Poland (24.4 per cent in 1990). In Hungary, where the transforma­tion was not strictly bound to a certain year and has been applied gradually, real wages declined gradually too, by smaller percentages than in Poland and the CR (see Tables 2.1 and 8.1).

The recovery of average real wages started first in the CR, and in 1996 they almost achieved the 1989 level. Poland and Hungary were not so lucky; the former is still far from the 1989 level; in 1996 it was short by almost 21 per cent. Hungary plunged into an economic crisis in 1994, in 1995 real wages dropped by 12.2 per cent and in 1996 by 5.4 per cent. In 1996 the level of real wages lagged behind the 1989 level by almost 25 per cent (Table 8.1)

Real incomes, which besides wages also include non-wage incomes, may be an even better indicator of the standard of living than real wages, since they determine in the first place what income receivers are able to buy. The percentage share of nominal wages in incomes has been declining as the transformation proceeds, apparently because the share of profits, dividends, interests and some other non­wage incomes has been increasing. Official figures for nominal incomes are less accurate than those for wages; neither includes incomes (wages) from the underground economy. But incomes are also not precise because business people do not report correct figures for the profits produced, in order to pay less in taxes.

Real incomes in Poland and Hungary declined less than real wages because the authorities were not able to reduce some non-wage incomes to the extent they reduced real wages. In Poland, in 1990, when real wages dropped by 24.4 per cent, social cash benefits dropped only 14.7 per cent (Juszczynski, 1995, p. 169). Pensions espe­cially did not drop to the extent that real wages did in 1990, and during the following years they improved their level. Real incomes almost reached the 1989 level in 1996. In Hungary in 1996 real

106 The Social Costs

Table 8.1 Real wages, real incomes and consumption"

1989 1990 1991 1992 1993 1994 1995 1996

Average real wages Poland 100 75.6 75.3 73.2 71.1 71.4 74.8 79.4 CR 100 94.5 69.6 76.7 79.5 84.6 91.1 98.8 Hungary!' 100 96.3 89.5 88.3 84.8 90.7 79.6 75.2

Average real incomes Poland 100 85.4 90.4 90 85.5 88.5 93.8 97.6 CRc 100 98.7 74.6 81.6 78.9 80.5 88.5 91.4 Hungary 100 98.2 96.5 93.1 88.7 91.1 86.2 86.1

Poland Private consumptiond 84.7 106.3 102.3 105.2 104.3 103.6 108.7 Private consumption 100 84.7 90 92.1 96.9 101.1 105.6 113.8 Public consumptiond 100.5 110.2 106.4 103.8 102.8 102.9 103.4

CR Private consumptiond 103.2 76.4 109.1 101.5 105.3 106.4 102.6 Private consumption 100 103.2 78.8 85.9 87.2 91.8 97.6 100.2 Public consumptiond 100.9 95.4 95.3 101.1 97.7 95.7

Hungary Private consumptiond 96.4 94.2 100 101.9 99.8 93.6 96.9 Private consumption 100 96.4 90.8 90.8 92.5 92.3 86.4 83.7 Public consumptionct 102.6 97.3 104.9 127.5 87.3 95.9 94.6

Notes: a Figures on consumption come from national income accounting. b1989 and 1990 figures refer only to employees; for the subsequent years figures also include collective farmers.

c Refers to nominal incomes per capita of employees with children. dPrevious year = 100%.

Sources: Statistical yearbooks of the subject countries; Hirsl (1997a); Ehrlich and Revesz (1995), p. 148.

incomes were still 14 per cent lower than the 1989 level. The average real value of pensions was in 1996 much behind the 1990 level (see Table 9.3).

In the CR there was an opposite development: real wages grew faster than real incomes.3 Non wage incomes did not recover at the rate wages did. The growth of pensions is one indication (see Table 9.3). What happened to social programmes is another indication. Social assistance to families with children grew during 1990 to 1996 (inclusive) by 85.5 per cent, whereas consumer prices grew by 174 per

The Standard of Living 107

cent, which means that the latter grew 88.5 per cent faster than the former (SRCR, 1996, p. 242). According to Hirsl's computation (1997a), family allowances, the most important socia1 assistance pro­gramme to families, dropped in 1996 to 49.7 per cent of the 1989level (see Table 9.2).

PRIVATE CONSUMPTION

The fact that underground incomes are not included in official statis­tics is not such a great shortcoming in the case of private consump­tion: after all, underground incomes, as long as they are not saved or invested, are used for private consumption. In other words, private consumption reflects to some extent incomes from the underground economy.

There are, however, some impediments for the computation of private consumption if it is to be limited to what is really consumed during the year from current domestic incomes. Private consumption may be impacted by savings; at times of declining standard of living many people may reach for a portion of their savings, that is, to previously saved incomes. In the same way, wealth may be converted into cash and serve for the purchase of consumer goods or services. Consumption also reflects sales to foreigners. In the CR, where the influx of foreign tourists has been the highest, the figures on consumption show more than domestic households have really consumed.4 On the other hand, under­ground incomes can be more easily concealed than private consumption as long as the latter takes place inside the country.

Table 8.1 shows that Poland has already exceeded the 1989 level in private consumption in 1994, though it is still far from the 1989level in real wages. It seems that the CR achieved the 1989 level two years later. No doubt, the underground economy and tourism are to be cred­ited for the faster growth of private consumption than real incomes.

In Hungary, private consumption is still far behind the level of 1989; in 1996 it was only 83.7 per cent of the 1989 level. The authorities have tried to cope with the economic recession which befell Hungary in 1994 by curbing private consumption.

There is not a remarkable difference between total private con­sumption and private consumption per capita. In the period researched (1989 to 1996) there were only small changes in the size of the population. In Poland there was an increase of 1.5 per cent. In the other two countries there was a decline in the size of the population;

108 The Social Costs

in the CR it was negligible (0.3 per cent) whereas in Hungary it reached 2 per cent.

CHANGES IN THE STRUCTURE OF CONSUMPTION

As is known, in the socialist system prices had to serve a social purpose and for this reason prices of important food staples were rela­tively low compared with other prices. The same policy was applied to children's clothing and shoes. Rents were set far below the costs required for operating and maintaining the housing stock. Utility rates were also set below costs. Rents and utility rates in state dwellings made up on average less than 5 per cent of household expenditure. The transformation brought about great changes in price relativities. In health care and education, which were available to the population without charge, payment for some of the services is now required. Rents and utility rates, transportation rates, ticket prices to cultural performances and so on, have already been increased and will increase still further in order to bring them to the level of market prices. On the other hand, some products, mainly electronic ones, are now available at lower prices than under the old regime, when some of them were available only at black market prices. Needless to say, reduction of free services and service price increases have greater weight in household budgets than a drop in the prices of electronic products.

Due to a decline in real incomes in first the years of transforma­tion, and an increase in prices and a change in their relativities, there has been a considerable shift in the structure of per capita household consumption (see Table 8.2). Even though the statistical yearbooks of subject countries, except those of Hungary, do not give figures for the percentage share of services in the total expenditure on consumer goods and services, one can conclude from expenditure on various service items that expenditure on services has grown more rapidly than that on consumer goods. In all three countries expenditure on housing increased dramatically. In Poland in 1995 it made up 20.3 per cent of total expenditure, which means a doubling compared to 1987. The main cause of this increase was the increase in utility rates and rents. The situation is quite similar in the other two subject countries. It can be expected that expenditure on housing will grow in the coming years, since rents and utility rates have not yet been increased to the market level.

The Standard of Living

Table 8.2 Changes in the structure of net household expenditures per capita(%)

109

Poland CR Hungary

1987 1995 1987 1995 1989 1996

Foodstuff 43.1 40.7 34.9 31.3 27.7 33.1 Beverages, coffee, tea 12.3 5.6 Clothing and footwear 13.6 7.3 11.6 9.3 8.6 5.9 Household equipment 5.3 9.2 9.9 4.6 Other industrial goods 19.5 Housing 10.3 20.6 14.3 4.1 17.9 Rent and utility rates 6.4 9.8 Utility rates 2.7 10.7 5.0 Hygiene and health care 2.8 5.8 5.6 2.6 4.8 Culture, sport, tourism 8.2 5.3 11.1 7.3 6.4 Transport and communication 4.6 8.4 11.6 12.3 12.3 Other services 9.2 Miscellaneous expenditure 17.4 11.9 13.1 7.6 10.2 9.4

Notes: Polish and Czech figures for 1987 refer to blue-collar households, whereas the Czech figures for 1995 refer to employee households. The pre­transition and transition figures are not fully structured in the same way, at least for the Czechs. Net expenditures are meant to be without savings, taxes and social and health premiums.

Sources: Poland: RS, 1988, p. 142; 1996, p. 167. CR: SRCSR, 1988, p. 534 and SRCR, 1996, p. 244. Hungary: SE, 1990, p. 215; MSZs, 1995, pp. 62-3 and SE, 1996, p. 97.

Transportation and communication rates and postage have also increased their share in total expenditure. The same is true about expenditure on health care.

In the CR, where the statistical yearbooks quote only gross expendi­ture figures and therefore expenditure on taxes, including insurance payments, are listed, social and health insurance premiums paid by employee households made up 11.2 per cent of the total gross expen­ditures in 1995, while in 1989 no such expenditures existed.

There was also a structural change in per capita household expendi­tures on consumer goods. In all three countries expenditure on food­stuffs, and on clothing and footwear, declined relatively. The decline

110 The Social Costs

in clothing and footwear was dramatic in Poland. Considering the decline in percentage terms in Poland, one can assume that there was also an absolute decline. In my opinion, the main cause of this phe­nomenon was the fact that the transition forced people to spend money on services which previously had been free or inexpensive. Under new conditions people limit expenditures which they regard as less essential. The decline in Poland and the CR this was perhaps also caused to some extent by the fact that the prices of clothing and footwear grew faster than the prices of foodstuff (RS, 1996, p. lxiii; SRCR, 1996, p. 220). In Hungary, where foodstuff prices grew much faster than those of clothing and footwear the difference in the share of the latter in total expenditure between 1989 and 1995 was much smaller than in Poland. The decline of expenditures on foodstuffs, and clothing and footwear was perhaps also caused by higher expenditures on durable goods, such as electronic products, cars and so on.

The transformation has brought about changes in the consumption of foodstuff, caused by the decline of incomes, changes in relative prices and perhaps also by changes in preferences brought about by health considerations and imitation of Western preferences. It would exceed the scope of this study to try to figure out the role of all the factors in the structural changes in food consumption. What is clear from Table 8.3 is that for many important food items there was a decline in consumption, and in a much smaller number an increase. The Hungarian and Polish statistical yearbooks provide figures about the development of intake in terms of kilojoules. From Table 8.3 it is clear that the daily nutrient consumption in Hungary was in 1994 87.2 per cent and in 1996 only 85.2 per cent (as a result of the recession) of the 1989 level.

Consumption of meat, which is often characterized as an important indicator of the performance level of the economy and the standard of living, has declined in all three countries during the period under review. In Poland after 1989 there was an increase in consumption of meat, but only for two years. In addition, it is important to bear in mind that 1989 was a year of shortages.5

From the foregoing it is clear that figures for real incomes and private consumption alone do not give an accurate picture of the real situation in private consumption. Due to the extensive changes in the structure of per capita household expenditures, resulting from huge increase in rents and utility rates and the necessity to pay for certain services which under the old regime were available without charge, consumers must limit the purchase of certain consumer goods. Table 8.3,

The Standard of Living 111

Table 8.3 Consumption of selected food items per capita

Poland CR Hungary

1989 1991 1995 1989 1991 1995 1989 1991 1995

Meat (kg) 67.6 73.2 61.2 97.4 88.4 82.0 78.2 71.7 65.8 Fish (kg) 6.2 6.2 5.3 3.8 4.9 2.8 2.6 2.7 Milk and dairy

products (I.)" 261 231 83.8b 91.4 87.2 77.3 189.6 167.9 133.4 Eggs (no.)" 197 175 181.3 336 328 290 17.6 21.6 16.7 Shortening (kg) 22.2 20.1 19.1 19.3 21 20.6 39.2 37.1 37.1 Sugar (kg) 47 35.4 23.5 39.8 42.3 38.9 40.5 35.1 37.7 Vegetables (kg) 116 126 68.7 73.6 78.0 Potatoes (kg) 61.2 60.9 55.2 55.5 60.9 Fruits (kg) 30.4 37.2 42.4 70.5 64.4 72.1 Wheat flour (kg)~ 118 116 85.6 86.5 88.1 107.7 97.7 84.1 Daily nourishment 14 637 13 460 12 473

(kj)

Notes: "In the CR dairy products are not included. hThe 1995 Polish figure for milk is probably wrong. ern Hungary eggs are calculated in kg. The data refer to 1980, 1990 and 1995. ~The Polish figures for flour are products of four different grains.

Sources: Poland: MRS, 1990, p. 85; 1994, p.111 and RS, 1996, p. 168. CR: SRCR, 1997, pp. 32-33 and 249. Hungary: MSZs, 1991, p. 29; 1994, p. 37; 1995, p. 61 and SE, 1996, p. 92.

which gives figures for per capita consumption of selected· food items, confirms this. One can make the conclusion from all this that figures which seem to attest to the fact that private consumption achieved the 1989 level, need not be fully in tune with reality. In other words, figures about the achieved 1989 level may be formally correct, but not in terms of the composition of private consumption. Perhaps, to put it more precisely, the same real income in the old and new systems does not provide the same basket of goods and services.

What has been discussed about private consumption has been based on averages. Needless to say, averages hide great differences in con­sumption between different income groups. These differences are

112 The Social Costs

quite intense in the case of durables. An increase in the ownership of expensive durables does not mean that the incomes of the majority of the population have increased.

HOUSING AND RENTS

Housing was one of the many problems the socialist system was not able to solve to the satisfaction of the population. Especially at the beginning of the communist regime, housing was low on the list of pri­orities. Housing shortages made the life of many citizens, especially of newly-weds, miserable. This was one of many factors which turned many people against the regime.

People who had apartments had the advantage of low rents, low to the extent that they did not cover depreciation and maintenance costs. And this was one of the main reasons that the communist regime was not eager to build enough apartment houses. Every additional housing unit meant an increase in the total amount of subsidies. Up to the mid-1950s the construction of housing in urban areas was the respons­ibility of the government. Later on, the authorities in all three coun­tries gave a greater role to co-operative and private housing in order to accelerate the construction of dwellings and reduce government financial involvement (for more on this see Adam, 1991).

The new system inherited housing shortages and a system of low rents and utility rates. Most people, mainly those who remembered the pre-Second World War situation, assumed that rents and utility rates would eventually go up. On the other hand, they expected that housing shortages would soon disappear.

To the surprise of many people, housing shortages became much worse. The new governments did not manage to create an environ­ment for adequate housing construction. The decline was biggest in the CR. In 1985 the number of new dwellings built was more than five times higher than 11 years later (see Table 8.4). In 1985 the number of newly constructed dwellings amounted to 6.4 per 1000 people whereas in 1995 it was only 1.2. Poland, which in relation to the size of its population, had the worst record among the three countries for new residential construction during the old system, had a less dramatic decline than the CR, and in 1995 1.7 housing units per 1000 people were built.

There are several reasons for the huge decline in residential con­struction. In the old system the state subsidized dwelling construction

The Standard of Living 113

Table 8.4 Housing construction (in thousands)

1985 1989 1990 1991 1992 1993 1994 1995 1996

New apartments CR 66.7 55.1 44.6 41.7 36.4 31.5 18.2 12.7 14 Hungary 72.5 51.5 43.7 33.1 25.8 20.9 20.9 24.7 28.2 Poland 189.6 150.2 134.2 136.8 133 94.4 76.1 67.1 62.1

Sources: Statistical yearbooks of the subject countries.

in several ways. With the transition to a market economy, subsidies dried up considerably. In Hungary, where the subsidies seemed to drop the least, in 1989 subsidies made up 18 per cent of the average dwelling cost and in 1994 they dropped to 11 per cent (Durst, 1995). In Poland, in 1991 subsidies to the communal and housing administra­tion amounted to 3 per cent of the total expenditures, and in 1995 the figure was 0.5 per cent (RS 1996, p. 501).

One can question this policy, considering that it can have a favourable impact on employment. An increase in housing construc­tion creates new jobs, reduces unemployment benefits and increases revenue. State aid granted in the form of subsidies in cash or subsidies to the interest to be paid on loans for housing construction may return fully or to a great extent. Financing of such subsidies can come partially from the fund earmarked for unemployment benefits ( cf. Kabaj, 1996).

High interest rates, mainly in Hungary and Poland, due to still high rates of inflation are an important obstacle to housing construction by private companies and co-operatives, since they make dwellings very expensive. Furthermore, bank credit is now less available than before. 6

In the past such credit was or more less guaranteed by the state, whereas now the banks must bear the risk. Finally, private companies are not eager to invest their capital in housing constructions consider­ing that they can get a higher return from other activities.

The drop in government subsidies has had a devastating impact on co-operative housing. In the past it played an important role; in the CR in 1985 its share in completed dwellings was 44 per cent, declining to 9 per cent in 1995. A similar situation is in the other two countries.

Finally, the strong demand pressure for the expansion of new housing units eased as result of high prices 7 and high rents. In the past

114 The Social Costs

an acquisition of a new apartment did not mean a great burden on the household budget; this is not the case any longer.

Under the old system the quality of housing did not depend very much on income; this is especially true for the period before the major economic reforms. Because rents were very low, one could afford even with a small income to have a relatively good apartment. In allocating apartments to new housing seekers the authorities scarcely considered their social status. As a result, the pre-Second World War situation when people of the same or similar social status and the same income groups lived in the same districts and neighbourhoods (there were rich and poor districts), was undermined to some degree. Growing wealth and income differentiation, the emergence of unemployment and the continuing adjustment of rents and utility rates to market criteria, are all gradually renewing the old system in housing. Furthermore, there is increasingly a social gap in the quality and availability of housing. On the one hand, a small group, due to great fortunes accumulated in legal and in illegal ways, is able to build mansions, and on the other hand many people cannot afford to buy a modest dwelling or rent an apartment. It seems that in none of the three countries have provi­sions been adopted about social housing.

It has already been mentioned that rents and utility rates increased considerably, but they have not yet reached the market level. The architects of the transformation realized that a sudden application of market principles to rents and utility rates would endanger social peace and therefore exempted them from the price liberalization introduced, with the intention of tackling the problem gradually.8

In the CR there were two increases in rents, in 1992 and 1994, amounting to a 140 per cent increase. Starting in 1995, the increases in rents were made dependent on the rate of inflation. Before this provi­sion rents in newly constructed apartment houses had already been lib­eralized. In February 1997 the government coalition agreed to accelerate the rent increases with the objective of fully liberalizing them by the year 2000 (E, 1997, no. 12, p. 21 and Respekt, 1997, no. 10).

In Poland in 1995 the authority to set rents was transferred to municipalities. However, the government set an annual maximum which the municipalities were not allowed to exceed and this was 3 per cent of the replacement value of the dwellings. This has been only the beginning of the adjustment process of rents to market crite­ria (GN, 1996, no. 10, p. 57).

In Hungary the authority to change rents is in the hands of munici­palities. In 1995 the Budapest authority decided to increase rents by a

The Standard of Living 115

maximum of 150 per cent. The rents are differentiated by the quality of the dwellings and their location (F, 1995, no. 40, p. 7).

An increase in rents means a serious blow to the family budget of low-income groups- and even of some middle-income -all the more because low income groups still experience the impact of the huge declines in real incomes. If consumers pay more in rent, they must restrict expenditures on other items, and in many cases on necessities. In the CR and Poland, many tenants solved this problem by simply not paying rent.

In all three countries allowances for low-income groups have been introduced with the rent increases. In the CR the allowance was intro­duced in 1994 and is available to all families who have an income lower than a certain amount and pay rent regularly. Only a small per­centage of the expected claimants took advantage of this offer (Cervenkova, 1994). Many did not claim because it is cheaper not to pay rent at all than to claim an allowance. In Hungary the allowance is available to families whose rent and other expenses connected with keeping the dwelling increased to more than 35 per cent of earnings (F, 1995, no. 40, p. 7). In Poland the allowance depends on income and the size of the apartment ( GN, 1996, no. 10, p. 56).

PURCHASING POWER OF SAVINGS

When discussing social costs one cannot disregard the impact the transformation had on the real purchasing power of savings. One of the objectives of the transformation was to restrict demand in order to achieve market equilibrium. This meant, among other things liquidat­ing the money overhang, to the extent that it existed. Several Western economists, among them Dornbush (1991) and Fischer and Gelb (1991) suggested a money reform (a freeze of savings or a write-off of savings above a certain level) as a preferable method of liquidating the money overhang. None of the three countries followed this advice, for a good reason. At the beginning of the 1950s all three countries (the CSR in 1953) carried out such a currency reform and the experi­ence was not good. In the CSR, it generated great social tensions; in a small number of cities there were even strikes, an extraordinary event in a system which did not tolerate dissent. In the mind of the people currency reform was one of the most horrible experiences under com­munism. Therefore post-socialist countries did not dare apply cur­rency reform. Instead, they left the job of liquidating the money

116 The Social Costs

overhang to an indirect method: inflation. Needless to say, this pro­duced a loss in the purchasing power of savings. The extent of the loss depended primarily on two factors: the inflation rate generated by price liberalization and currency devaluation; and the interest rates on savings. The first factor was the same for all savers, whereas the second was differentiated. Term deposits were rewarded with a higher interest rate than demand deposits.

The loss in purchasing power of savings was, of course, largest in Poland, where the inflation rate was the highest. According to Calvo and Coricelli (1992a), real deposit rates lagged behind the inflation rate by 27.3 per cent in January 1990 and for the whole year by approximately 34 per cent.9 In 1991 and 1992 the inflation rate was still high and therefore losses in purchasing power in savings contin­ued, although not to the extent they had in 1990. In a debate with Sachs, Rosati (1991) maintained that Poles lost 80 per cent of the pur­chasing power of their savings, which seems to be exaggerated.

In the CSR the average interest rate on deposits (term and demand) in 1991 (from January to September) was 11 per cent (Kohoutek, 1991). At the same time the cost of living increased by 45 per cent, and therefore it can be assumed that the purchasing power of savings declined by approximately 34 per cent. Another study (Jflek, 1994) maintains that savers lost approximately one-third of the purchasing power of their savings in the first quarter of 1991.

The loss in purchasing power of savings did not affect all savers evenly. Owners of term deposits fared much better than owners of demand deposits. In the CR in 1991 the interest rates on term deposits were on the average approximately 3.5 times higher than those on demand deposits. More than two-thirds of the deposits were term deposits.

According to Kohoutek (1991), 18 per cent of the population did not have bank savings at all. It can be assumed that these were mostly low-income groups. As far as these people held money in cash, their loss in purchasing power was the highest.

Owing to a lack of information about the preferences of different saving groups as to kinds of deposits, it is impossible to draw conclu­sions about the distribution of losses in savings. One can speculate that a considerable segment of large savers, who arrived at this posi­tion thanks to their 'entrepreneurial' spirit, could use their savings for profitable investment and therefore get compensation for their losses. During the transformation period, when state businesses were sold at relatively low prices, people with cash and some experience could acquire very profitable businesses.

The Standard of Living 117

I have primarily discussed losses in the first year of the transforma­tion. Needless to say, savers continued to suffer losses in the following years due to high rates of inflation, primarily in Poland and Hungary.

DIFFERENTIATION OF WAGES AND INCOMES

The transformation has brought about a widening of wage and income differentials in all directions to different degrees in the three coun­tries under review. It would exceed the scope of this study to discuss more than some aspects of this differentiation. Distribution of income in the old system was quite egalitarian, especially in the CR. Education was not appreciated very much, unless it was combined with a managerial position. It is known that an engineer with a univer­sity education, but without a managerial position, did not earn much more than a highly skilled manual worker. The latter's remuneration was on the average not very much higher than that of an unskilled worker. This was primarily true about the CR. Many unskilled workers, who performed unskilled, but physically demanding work, earned more than skilled workers. Top managers' salaries were very modest compared to those in the West. This egalitarianism was applied for ideological, but even more for political reasons; the com­munist rulers wanted in such a way to acquire the support of manual workers, whom they regarded as natural allies. Needless to say, this policy of alienating a great part of the intelligentsia had an unfavourable impact on the efficiency of the economy and was one of the reasons for the collapse of the socialist system.

The transformation brought into play two new factors in the distrib­ution of income: the market and a new political and economic elite. In the beginning of the transformation wage growth in individual enter­prises was strictly regulated; this is mainly true in Poland and in the CSR (see pp. 25 and 40). The governments tried to gain the support of trade unions and the association of employers for its policy by involv­ing them formally in the determination of wage growth. In the course of time, regulation had become less strict and market forces played an increasing role. But even now the governments are trying to hold wages under their control; nowadays this is mainly true of Hungary, which has been through an economic crisis. 10

The new elite is chiefly 'new' in the sense that it has, of course, a new outlook on the economy and remuneration. Unlike the commu­nist elite, it regards remuneration primarily from an economic view

118 The Social Costs

point because this best serves its interest in the maximization of profit. The new elite understands that knowledge, experience and managerial skills must be properly rewarded in order to encourage their bearers to work hard and to use their abilities to the full. Needless to say, the captains of the economic elites appreciate their own work especially highly.

These two factors brought about, among other things, changes in intersectoral incomes and incomes of socioeconomic groups. Both these data also give a general insight into the changes which came about in occupation incomes.

Before starting to discuss changes in intersectoral income differen­tials, a note of caution is in order. The data which are going to be listed are not fully comparable within individual countries and among countries. Nonetheless, they still give a relatively good insight into the evolution of income differentials.

Under the old regime the material sphere was treated more favourably than services in terms of wages. The main reason for this policy was that the communist leaders believed, in accordance with Marx's writings, that national income is produced in the material sphere, whereas services are not productive and are financed from the incomes produced in the material sphere. Within the material sphere, heavy industry was treated preferentially, primarily because of its importance for the arms race. There was an attempt to back up this policy by an erroneous 'theory', according to which economic growth depends on a faster growth of producer goods than consumer goods. Within the heavy industry mining was treated preferentially; under conditions of full employment, it was difficult to attract workers into coal mining, which requires physically strenuous labour in an unpleas­ant, depressing and dangerous environment. To have sufficient labour it was necessary for the authorities to respect the laws of supply and demand. 11

People working in textiles belonged to the worst paid because most of the workers were women, who lacked political power and influence.

Services on the whole were treated poorly. Education and health care were close to the bottom. Finances were in the lower half of the list of the poorly paid sectors.

As Table 8.5 shows, the transformation brought about a change in intersectoral differentials. The most remarkable change has occurred in the ranking of finances (financial intermediation) among sectors of the economy. Average wages in the financial sector have grown at the fastest rate and occupied the first place in ranking in Hungary and the

The Standard of Living 119

Table 8.5 Development of monthly gross average wages and salaries of employed in main sectors of the economy, in national currencies"

Polandb CR' Hungary'1

1987 1995 1989 1995 1986 1995

Agriculture 95.7 (6) 90.4 (5) 103.5 (6) 84.1 (8) 89.7 (6) 77 (7) Industry' 114.4 (3) 110 (3) 104.3 (5) 99.7 (4) 104.9 (4)

Extraction' 200.8 (1) 193.8 (1) 148.5 (1) 122.5 (2) 152.2 (1) 130.5 (2) Textiles 74.4 (10) 81.1 (9) 78.4 (10) 71 (9) 88.1 (7) 64.1 (8)

Construction 110.9 (4) 87.1 (7) 110 (4) 108.1 (3) 110.2 (3) 83.7 (5) Transportation 97.6 (5) 105.4 (4) 112.4 (3) 90 (7) 103.7 (5) 106.5 (3) Finances and

insurance 93.6 (7) 145.1 (2) 95.6 (7) 171.5 (1) 183 (1) Education 79 (8) 89.6 (6) 89.6 (9) 90.9 (6) 89.6 (4) Health and

social services 76.6 (9) 83 (8) 91.5 (8) 92.1 (5) 83.4 (6)

Foreign trade 120.6 (2) n.a. 113.5 (2) n.a. 122.7 (2)

Notes: "Whole economy= 100; figures in parentheses indicate ranking 1-10. h In 1995, agriculture includes fishing and hunting; transportation includes storage, and communications. In 1987 the figure for textiles includes garment and leather products.

' Data for 1989 and 1995 are fully comparative with the exception of extraction, which refers to 1987 and for coal only. In 1989 health is without social services. In 1995, agriculture includes forestry and hunting; transportation includes storage, mail and communications. In 1989 and 1995, figures for textiles include garments. The first figures for textiles refer to 1987.

dIn 1986 and 1995 agriculture includes forestry and fishing; transportation as in the CR. The 1986 figure for textiles refers to light industry. The 1986 and 1995 figures for textiles include garment and leather products.

'Industry here means extraction and manufacturing. 1 Refers to extraction of coal and raw materials

Sources: Poland, RS, 1988, pp. 157 and 218; 1996, pp. 146 and 414 CR: SRCSR, 1988, p. 361, SRCR 1993, pp. 183 and 237; 1996, pp. 266 and 386 Hungary: SE 1986, p. 57; MSZs 1995, pp. 54-55; SE, 1995, p. 19.

CR. In the CR they grew by 168 per cent between 1991 and 1995, while those in the economy as a whole only grew by 115 per cent. This development shows that capitalism is taking root in these countries; managing and dealing with money is bringing the greatest reward. In the CR there was an outcry about this development and as a result the government took measures to curb the growth of financial sector

120 The Social Costs

wages. In Poland in 1995 average wages in extraction were still the highest in 1995. Workers there managed to maintain their position due to strikes, all the more because of the great importance of coal for the Polish economy.

At the end of the 1980s, foreign trade in the three countries reached a second place in the ranking, an occurrence which had much to do with the effort at maximizing exports and with partial liberalization of trade in Poland and Hungary. 12 In the new system foreign trade has sustained its position in the rankings.

Wages in industry (here understood as manufacturing and extrac­tion of coal and raw materials) more or less maintained their position. In Poland, agricultural employees did not fare as poorly as private peasants (see Table 8.6a); they even improved their position. Health care, but primarily education, got a small boost in the CR.

Figures about changes in the incomes of socioeconomic groups are differently structured in each of the subject countries and therefore are presented separately for each country (Tables 8.6a, 8.6b and 8.6c ). Nonetheless, some common features can be observed. In all three coun­tries, the beneficiaries of the transformation are non-manual workers. Professionals have fared the best among the non-manual workers. There is no mention in the tables about the incomes of top managers, but from other sources, it is known that there has been a dramatic increase in their salaries, mainly in Poland and Hungary. Education is now rewarded much more than in the past. In Hungary, an average pro­fessional with a university education in 1982 earned 29 per cent more than the average employee and in 1996 it was 65.1 per cent more. I have figures on business incomes only for Poland and they show a consider­able improvement, but smaller than one would expect. The category of businesspeople includes, of course, people of different success in incomes; the average conceals the tremendous success of a small group of business people who made fortunes, both legally and illegally.

The great losers are the peasants. Although there are no income figures for the unemployed for all three countries, it is obvious that they are great losers, too. In Poland, in 1989 the per capita income of peasants exceeded the average for the economy by 20 per cent, in 1994 it was only 58 per cent. 13 Among the manual workers the unskilled have been the losers.

Pensioners did not fare the same in the three countries due to the transformation. In Poland, they have more or less managed to main­tain their position and to a lesser degree this is true of the CR. However, in Hungary they fared poorly (see also Table 9.3).

The Standard of Living 121

Table 8.6a Distribution of per capita income by socioeconomic groups in Poland (average income = 100)

Intelligentsia and white-collar workers Manual workers Peasants Private owners of businesses Pensioners and invalids Unemployed

Note: a Refers to 1992

Source: Beskid, 1995, pp. 55-6.

1989

112 95

120 143 92 64"

Table 8.6b Household incomes by occupation in the CR (average household income =100)

Professionals Middle non-manual Entrepreneurs Self-employed Supervisors Skilled manual Unskilled manual Farmers Working pensioners Non-working pensioners

Note: a Refers to 1988

Source: Vecernfk (1996, p. 80).

1984

111.6 105.8

99.5 89.7

107.8 lQOa lOOa

1992

121.1 98.4

137.4 118.9 111.5

95.1 89.7 90.9 79 71.1

1994

157 91 58

182 97 55

1996

143.2 112.7

137.8 110.3 91.7 79.7 77.4 90.4 80.1

Figlfres for pensioners have been calculated on the basis of an inter­nal study of the Statistical Office and the paper of Moravova, Friedlander and Bulkova (1995).

122 The Social Costs

Table 8.6c Distribution of per capita income by socioeconomic groups in Hungarya (per capita for the whole economy = 100)

1987 1993 1995

Top and middle managers 125b 162 211 Clerks 93 120 124 Skilled manual workers 102 100 93 Unskilled workers 81 90 83 Farmers and agricultural workers 90C 85 84 Old age pensioners 94 96d 95 Unemployed 78 68 Self-employed tradespeople and shopkeepers 122 131

Notes: a Figures for 1987 refer to per capita household incomes and therefore are only roughly comparable with 1993 and 1995 figures.

bRefers to managers and intelligentsia c Refers to agricultural workers only d Also includes widows' pensions

Source: Andorka and Speder (1996).

The transformation has also brought a widening of income differen­tials for the whole economy. It can be assumed that one would obtain a good picture of the impact of transformation on differentiation if data about the changes in the purchasing power of average wages by income deciles were available. Unfortunately, I have such data only for the CR, and they show that the drop in earnings was distributed very unevenly. The loss of purchasing power of earnings in the ninth decile in 1993 compared with 1989 was only 6.7 per cent, whereas in the first decile it was 32.4 per cent. The losses increased from the higher decile to the lower. In other words, low-income groups were negatively affected much more than higher-income groups by the transformation (Bastyr and Kotynkova, 1995).

Most economists agree that the transformation widened income dif­ferentials; there is, however, disagreement when it comes to the degree of income inequalities in individual countries under review. As Table 8.7 shows, the World Bank in its From Plan to Market (1996a), Andorka, Ferge and T6th (1997) and Milanovic (1998) agree on the basis of their Gini coefficient calculations that before the collapse of

The Standard of Living 123

socialism the CR was the most egalitarian society, followed by Hungary. Poland had the widest income differentials. Unlike the World Bank and Milanovic, who maintain that transformation has had the smallest impact on Hungary and the biggest on the CR, with regard to widening of income differentials - therefore Hungary has become the country with the smallest income differentials- Andorka, Ferge and T6th, top Hungarian experts in this field, and Vecernfk (1996) (who is of the view that pre-transition Hungary was marked by the largest inequalities and Poland the smallest) believe that the trans­formation has brought about the greatest inequalities in Hungary. Andorka, Ferge and T6th indirectly criticize the World Bank for using household income figures without giving thought to the structure of households. The Hungarians take the structure of households into consideration in their calculations. The differences in the results have perhaps to a degree their origin in the difference in methodological approach.

A more detailed picture is given in Table 8.8, which shows clearly that in all three countries the share of the lowest 5 per cent per capita net income receivers declined considerably in 1994 compared to the pre-transformation period, primarily in Poland, and increased significantly in the highest 5 per cent of incomes, again mainly in Poland. Table 8.8, which was calculated differently, is not in tune with Table 8.7 as to the degree of income inequalities in the subject countries.

Table 8.7 Distribution of household incomes on the basis of the Gini coefficient

World Bank Milano vic Andorka et al Vecernfk

1987-8 1993 1987-8 1993-5 1988 1992 1988 1992

Poland 25 30 26 28 26 25 18 25 CR 19 27 19 27 20 22 19 23 Hungary 21 23 21 23 22 26 29 32

Sources: World Bank (1996a, p. 69); Milanovic (1998, p. 41); Andorka et al. (1997); Vecernik (1996, p. 61)

124 The Social Costs

Table 8.8 Distribution of net household income per capita (Income deciles as% of median incomes)

Poland CR Hungary

1989 1994 1988 1994 1987 1994

P5 44.9 22.4 59.7 44.7 52.2 45.5 PlO 54.5 32.2 66.9 56.6 61.3 53.9 P25 72.6 61.3 81.2 75 76.9 75.8 P75 135.9 150.5 128.8 133.3 133 134.7 P90 180.2 215 162.5 177.8 172.6 176.8 P95 217 274.1 185.7 222.2 208.8 217.2 P90!10 3.31 6.67 2.43 3.2 2.81 3.28 Var. coef. 0.548 1.074 0.379 0.499 0.504 0.75

Source: Ferge et al. (1995).

CONCLUDING REMARKS

In the first years of its existence, the transformation had a devastating impact on the standard of living of the population. This is true pri­marily about Poland and the CR. Real wages and consumption declined and the purchasing power of savings was decimated. The two countries have in the meantime reversed the situation. But still in some respects the 1989 level has not yet been reached. In Poland even after nine years of transformation, real wages are still below the 1989 level. All three countries have a dismal record in construction of dwellings. In Hungary, which recently underwent an economic crisis, consumption and real wages are still far behind the level of 1989.

As could be expected, the transformation has brought about an increase in income inequalities regardless of the way they are com­puted. This means that the situation of high-income groups has improved at the cost of low-income groups. Income differentials will probably continue to widen. It is important to bear in mind that with the strengthening of market forces and the legal system income distri­bution is strongly influenced by two forces. On the one hand, under­ground economic activities, plundering of state assets, smuggling of goods, evasion of taxes and other criminal activities, which enable a small segment of population to make fortunes, are gradually being

The Standard of Living 125

curbed, but are far from eliminated. Incomes illegally gained do not show up fully in statistics since criminal activities can only be guessed at. On the other hand, with a reversal in economic growth and the growing influence of business, incomes of entrepreneurs and man­agers increase. The total result is that income inequalities were growing with the increasing passage of years since the collapse of the socialist system.

9 Social Policy

INTRODUCTION

Under the socialist system the population was protected by compre­hensive social programmes. With some exaggeration it can be said that they took care of people from the cradle to the grave. Social pro­grammes were based on the socialist credo that society must take care of people who cannot work because of old age or disability or sick­ness, or because they have not yet reached the working age, and ensure that all citizens have access to health care. With the exception of social assistance programmes to families, including mostly family allowances, financial support was linked to employment incomes. Health services were supposed to be available on the basis of need. Great stress was put on free education, as a tool for bettering the well­being of the population (for more, see Adam, 1991).

The social policy was far from perfect; some of its principles were violated. In the priority list of funding, health care was almost at the bottom of the list. No sufficient provisions were taken to eliminate the shortage of housing. The social programmes were much too central­ized; the public did not have much say about their design, organization and implementation. Despite their shortcomings, the comprehensive social programmes introduced certainties: people knew that when they reached old age or became disabled, they would receive a pension and if they became ill, they would have access to health care without having to be concerned about payment. They also knew that if their children were capable, they would be able without great obsta­cles to get a university education and later a job.1

The capitalist philosophy is different: it is based on the idea of indi­vidualism, contrary to the socialist idea of collectivism. Individualism is the idea that individuals have the right to pursue their own interests rather than collective ones and the obligation to take care of their own welfare. According to this belief system, solidarity should be limited. Civil liberties and freedom to act- with some limitations- are an inte­gral part of the philosophy of individualism. Such a system of ideas is supposed to be a powerful incentive to hard and effective work.The extreme individualism of the early capitalist system gradually lost its rough edges. The Great Depression between the two world wars and

126

Social Policy 127

the competition of the capitalist and socialist systems brought about the establishment of a welfare system in the West.

Individualism and laissez-faire are two philosophies which comple­ment each other. Both call for very limited government activity and for an almost free role for market forces. This is important for the capitalist elite not only because it reduces government intervention in their econ­omic activities, but also because it can be assumed that it will make administration of government affairs less costly and thus the elite's con­tribution to the financing of the cost of administration smaller.

In the light of what has been said about individualism, which is an integral part of neo-liberal ideology, it is clear that the social policy of the socialist countries cannot be to the liking of the architects of the transformation and of the international financial institutions. Both believe that state care undermines people's will to take care of them­selves and thus is a disincentive to hard and efficient work. They also believe that the inherited social programmes go beyond what the countries can afford,2 that they are a great burden on the state budget, that they impose excessive taxes on business, and thus are an obstacle to reaching a competitive position in foreign markets. In addition, the international financial institutions' stand is also motivated by the fear that extensive social programmes may reduce the capacity of the subject countries to repay their debts. For all these reasons they favour a reduction of social programmes, weakening their solidarity elements, and making them more efficient, which in the thinking of the capitalist elite means privatizing them where it is possible and sub­jecting them to market forces.

Space constraints do not allow me to discuss the changes in the social programmes in great detail. First, I shall discuss briefly social assistance to families and then the reform of the pension system and health care system.

SOCIAL ASSISTANCE TO FAMILIES

Soon after seizing political power, the communist governments started to align and gradually expand social programmes. The CSR was ahead of the other subject countries with regard to the comprehensiveness of the social programmes, followed by Hungary and Poland. The CSR's leading position resulted not only from its higher level of economic development than in the other two countries, but also from stronger traditional social consciousness. The great role the left political parties

128 The Social Costs

played in the pre-Second World War CSR had its impact on social policy.

The transition economies inherited a comprehensive social safety net. It was and still is more comprehensive in terms of a percentage of GDP than in most West European countries, let alone in North America. Yet, the economic development of the three countries is far behind Western countries. The transformation brought about new programmes: unemployment benefits and housing allowance, which is supposed to mitigate the hardship of increasing rents and utility prices for low-income groups. To reduce the governments' involvement in social policy, the three countries encourage self-help and charitable activities.

What is also interesting is that the total expenditures on social pro­grammes, measured as a percentage of GDP, did not decline, as one would expect, but increased compared to 1989 (See Table 9.1). In Poland, and to a lesser degree in Hungary, the increase resulted from the growth in the number of retirees and disabled people, much larger than the demographic situation would justify, and the rise of unemploy­ment, both direct results of the transformation strategy. Furthermore, in Hungary the increase also has to do with the fact that the GDP in Hungary is still far below the level of 1989. If the expenditures caused by the transformation are disregarded, then the present outlays on social programmes are definitely smaller then those in the past.

In Poland in 1995, expenditures on pensions swallowed up 50.5 per cent of all expenditures on social programmes, which is, compared to other countries, too high, and affects negatively the financing of other social programmes (Golinowska, 1998).

Knowing that the new regimes in the subject countries are not com­mitted to social programmes to the extent that the socialist system was,

Table 9.1 Social transfers as a %of GDP

1989 1990 1991 1992 1993 1994 1995

Poland n.a. 25.2 32.1 32.3 31.2 31.4 30.7 CR 21.5 23 24.2 22.9 25.9 25.5 Hungary 22.5 22.7 28.6 31.9 31.5 32.3

Source: Golinowska (1998).

Social Policy 129

the question arises why they failed to curb social programmes even more extensively than they really did. Once introduced, social pro­grammes take on a life of their own and curbing them is not an easy matter. Social programmes usually serve the interests of certain groups and these use their influence to perpetuate them. The larger the com­munity a social programme serves, the greater the resistance against its restriction, a fact which politicians cannot ignore. In all three countries there was a tightening in some entitlements, such as unemployment benefits, social assistance, family allowances, pension benefits and health care services.

Among the social programmes, social assistance to families plays a very important role. It includes a great variety of programmes. For example the Czech statistical yearbook for 1997 mentions 13 pro­grammes; the situation in the other two countries is similar. Most of the programmes are geared to the welfare of children, and there is a good reason for this. In most households with a single breadwinner, and in many households with two breadwinners, the number of chil­dren determines whether the household belongs to a low income group per capita. If a single breadwinner earns only a low income, the number of children determines whether the household belongs to the poor. Social assistance in the form of family allowance can make the difference between whether a household will slip below the poverty line or float above it.

The figures on social assistance to families in the subject countries are not fully comparable since they differ to some degree as to their contents. What the figures in Table 9.2 clearly show is that there has been an erosion in the outlays for social assistance. In the CR in 1990 social assistance made up 2.9 per cent of GDP, while in 1996 it was only 2.1 per cent. In Poland in 1995 it was 2.1 per cent of GDP. In Hungary the figures for 1989 and 1994 are 4.37 and 3.94 per cent respectively.

Family allowance (or child allowance as it is called in the CR )3 is the most important social assistance programme. In setting the family allowance, the question arises whether it should be universal or only for the needy. The latter solution enables the government to give greater support to the needy without increasing the total outlay or to reduce the outlay without affecting the support to the needy. Left­leaning political parties mostly prefer a universal system because they believe that a non-universal system loses the support of higher-income groups in the course of time and as a result the social programme gradually erodes. The right-leaning groups are usually against the

130 The Social Costs

Table 9.2 Social assistance to families and family allowances

1989 1990 1991 1992 1993 1994 1995 1996

Social assistance" CR 2.9 3.0 2.9 2.5 2.4 2.2 2.1 Hungary 4.37 4.38 5.04 4.67 4.67 3.94

Family allowancesh Poland 100C 87.7 92.8 87.6 70.1 55.2 52.6 CR 100 90.7 73.9 71.1 64.9 49.7 Hungary 3.09 3.09 3.47 3.3.0 3.13 2.75 1.4

Notes: a Figures for social assistance are calculated as a percentage of GDP. In Poland in 1995 outlays on social assistance amounted to 1.3 percentage of GDP.

bQnly the figures for Hungary are calculated as a percentage of GDP. c Refers to 1985

Sources: Poland: based on RS 1996, p. 163; and Golinowska (1998 ) CR: based on on SRCR 1994, p. 16, 1997, p. 241; Hirsl (1997a) Hungary: Sipos and T6th, 1998. •

principle of universality in the hope that this will bring down the outlay for the programme.

In all three countries for most of duration of the transformation, family allowances were based on the principal of universality. It seems that Poland was the first to abandon universality, followed by the other two countries. In Hungary the change was introduced in Bokros's package (seep. 61). It was introduced in the CR in 1996. In Poland, the family allowance is nowadays available only for low­income groups and it is graduated depending on the number of chil­dren. In the CR the allowance depends on the income compared to the social minimum (see p. 163) and on the age of the child or chil­dren. In Hungary, the allowance for one or two children depends on net income; families with net income above a certain amount are not eligible. Families with three or more children are entitled to a family allowance, regardless of their income (World Bank, 1995, p. 90; Dzienik Urzedowy, 5 February 1998; Vecernfk, 1996, p. 203; World Bank, 1996b, p. 42). This adjustment was probably motivated by demographic considerations.

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Family allowances, like social assistance, have declined during the transformation (see Table 9.2).

REASONS FOR PENSION SYSTEM REFORM

Soon after the start of the transformation there were calls for a reform of the pension system. These were substantiated by referring to econ­omic arguments and to demographic factors. In all three countries the number of pensioners has increased; most dramatic were the increases in Poland (by 40.7 per cent from 1990 to 1996) and in Hungary (13 per cent from 1989 to 1996). In the CR the increase was moderate ( 4 per cent from 1990 to 1995). There was also a strong increase in the number of old age pension recipients, primarily in Poland and Hungary (see Table 9.3). The dramatic increase in the number of pen­sioners was the work of the transformation. As mentioned, in all three countries, the governments introduced early retirement schemes in order to ease unemployment, and many took advantage of them. In addition, many people, afraid of possible unemployment, found ways to become officially disabled. In the CR the early retirement scheme did not have a great impact because of the low unemployment rate.

As a result, in Poland and Hungary the number of employees and insured people supporting one pensioner has decreased and the outlook for the future is not good. In Poland in 1989, 2.54 employees supported one pensioner and in 1995 the figure was 1.64. In Hungary the figures were 2.32 for 1990 and 1.32 for 1996 and in the CR 1.73 for 1990 and 1.58 for 1995.4 This decline was the result not only of an increase in the number of pensioners, but also of a huge decline in the number of the employees in subject countries.

The dramatic increase in the number of pensioners has necessarily had an impact on the outlays on pensions. They increased, especially in Poland, where they went from 8.2 per cent of GDP in 1989 to 15.2 per cent in 1996. The figures in Hungary and the CR are more favourable; in the former they increased from 9.3 per cent in 1989 to 9.7 per cent in 1996 and in the latter from 8.3 per cent in 1989 to 8.8 per cent in 1995 (see Table 9.3).

The large outlays on pensions in Poland have meant a great burden for employers and a smaller burden for the state budget. In all the countries the employers have been the main contributors to the financing of pensions. In Poland in 1996, employers were the sole contributors at a rate of 45 per cent of paid out wages for all social

132 The Social Costs

Table 9.3 Pensioners (in thousands), their benefits and outlays on pensions

1989 1990 1991 1992 1993 1994 1995 1996

Recipients of old age, disability and other pensions"

CR 2933 2952 2997 3033 3052 3051 3057 3052 Hungary 2358 2556 2554 2798 2870 2689 2790 3059 Poland 7104 7944 8495 8730 8919 9085 9200

Recipients of old age pensions

CR 1737 1777 1804 1815 1811 1811 1806 Hungary 1371 1516 1546 1568 1589 1600 1621 Poland 2353 2775 2982 3 081 3 155 3 230 3313

Working pensioners

CR 518 519 294 279 271 276 306 317 Hungary 441 432 384 292 223 181 157 129 Poland 579 430 396 327 304 312 304 323

Old age pensions as% of net wagesh

CR 53.6 53.6 55.6 49.1 48.5 49.7 46.3 47.8 Hungary 66.1 64.0 60.8 57.4 54.7 57.9 56.7 Poland 53.5 56.8 65 63.8 63.9 65.9 65.8 61.5

Outlays on pensions as a% of GOP

CR 8.3 8.0 7.8 8.1 8.2 8.3 8.8 Hungary 9.3 10.5 10.4 10.4 11.4 10.5 9.7 Poland 8.2 12.6 14.6 14.6 15.4 14.6 15.2

Real value of pensionsc

CR 100 85.4 81.3 82.3 87.5 93.3 Hungary 100 86.7 77.6 70.9 Poland 100 84.9 97.2 90.9 88.2 90.8 93.8 96.1

Notes: a 1989 and 1990 figures refer to employees; later years' figures also include farmers. h The Czech figures are percentage of gross wages c Czech figures refer to non-working old age pensioners. Hungarian ones to old age

pensions and Polish to old age and disability pensions.

Sources: Statistical yearbooks of the subject countries. In addition, Main economic ... (1998); Hirsl (1997a); Sirovatka (1998); Palacios and Rocha (1998); and Juszcsyhski (1995),'pp. 99 and 178.

Social Policy 133

security programmes. In Hungary the employers' contribution rate was 24.5 per cent and the workers' 6 per cent. In the CR in 1996 the figures were 19.75 and 6.255 (Golinowska, 1995 and 1996; MSZs, 1995, p. 77; Main economic ... , 1998; Rutkowski and G6ra, 1997).

To put the employers' contributions in proper perspective, it is nec­essary to mention that in the subject countries, primarily in the CR, labour costs are relatively low. This is not to say that a smaller contri­bution by employers to the financing of social programmes would not be beneficial to business.

The former socialist countries have been under pressure from the international financial institutions, mainly the World Bank, to reform their pension system. A World Bank study (Averting the Old Age Crisis, 1994),6 which turned almost into a bible for all those who favour a radical pension reform in the spirit of the study, called for a reduction of the role of the existing state-run, pay-as-you-go pension system (Pillar I) and the introduction of two additional pillars. The World Bank substantiates its proposal, in the following way: the public system alone cannot fulfil both roles of the pension system: to help the old and at the same time to promote the economy. More precisely, a pension system should fulfil three functions: it should be an instru­ment of savings and thus help the economy grow through strengthen­ing the capital market; it should help redistribute from the rich to the poor; and it should be a tool of insurance against possible develop­ments which erode savings for old age people or an insurance against insufficient savings. One state-run pension system cannot fulfil all three functions. The first generation covered by Pillar I is in a lucky position, it receives in pensions more than it invested. As a result, con­sumption may increase and savings decline and thus they are lost for capital development. Because of the maturation of the pension system and ageing of the population, the next generation may get less than it invested. In addition, the system leads to higher contribution rates and if these are to be paid by the employers, they may cut employment and thus affect output negatively (pp. 10-13).

For all these and other reasons the writers of the World Bank study propose a separation of the redistributive function from the savings function, putting them in two different mandatory pillars. In addition, they suggest introducing a voluntary pillar.

Pillar I in its new, reduced role would have a two-prong objective: to ensure a pension to the poor or a minimum pension to all; and to serve as co-insurance against unfavourable development of the economy. The writers of the study try to back up their proposal for a

134 The Social Costs

reduced role for the state-run Pillar I by alluding to the fact that ori­ginally the pension schemes intended to provide only 15-20 per cent of the average wage, as a help against poverty (p. 104).

Pillar II should be the most important, and mandatory like Pillar I, but unlike the latter, it should be fully funded and privately run. As might be expected, the study rejects government management of this pillar with the following reasoning: 'managers of centralized provident funds, which are compulsory monopolies, may have little incentive to operate efficiently or earn reasonable returns- and may be subject to political pressures to invest unproductively' (p. 208). Pillar III should be voluntary: personal or occupational. The private management of the second and third pillars is supposed to ensure higher returns than a state-run pillar would be able to achieve.

Only Hungary and Poland have followed the advice of the World Bank study to a great degree. They reformed Pillar I though not in a way the World Bank suggested and introduced Pillar II and Pillar III. The CR has introduced only Pillar III. True, some CR ministers expressed interest in solutions suggested by the World Bank, but the right-wing government, headed by Klaus, did not act on it as long as it had a majority in the parliament, perhaps because there was opposi­tion to it in the government itself. In addition, from the foregoing it is clear that in the CR the three factors, which, among others, are usually mentioned as a reason for the need for a radical reform, are not critical (see above).

PENSION SYSTEM REFORMS

In the old system there were no great differences in the pension system among the subject countries. They had in common several principles. The pension system was a state-run system, based on the principle of universality and transferability. Everyone, regardless of the character of his or her legal, remunerated economic activity, was entitled to a pension. The size of the pension depended on employ­ment income and service years. The latter, wherever acquired, were counted towards the number of service years required for eligibility. For men the retirement age in the CR and Hungary was 60 and in Poland 65. For women it was lower - depending on the number of children raised.

The old system was marked by several features which could be objectionable in a capitalist economy, but which the socialist

Social Policy 135

countries for various reasons (among others for solidarity, reduction of inequities) regarded as important. The different retirement age for the two sexes has already been mentioned. The principle that retirement benefits are dependent on service years was not carried out consistently; some activities (such as university studies, or long­term maternity leave) were counted towards service years. In the calculation of pensions, incomes above a certain amount were con­sidered on a sliding scale, although contributions, where they were collected, had to be paid from the whole earnings. In the CSR three categories of maximum pensions existed, depending on working conditions.

Czech Pension Reform

The government has carried out some changes in its old system (Pillar I) in 1955. Pensions are now financed from contributions of employers and employees. The retirement age, starting with 1996, is gradually increasing, so that in 2006 it will reach 62 years for men and 57-61 for women, depending on the number of children they have raised. Indexation of pensions has been introduced; first to wage and price increases, later only to price increases.7 The old system of categorizing pensioners into three groups according to working conditions and setting maximum pensions for each group has been abolished for new pensioners.

To receive a pension a person must be insured for at least 25 years or at least 15 years if he or she has reached the age of 65. The years spent in schools (high school or university) after the age of 18 years are counted towards the eligibility for a pension to a maximum of six years. Non-working mothers may claim four years for caring for small children.

Old age pensions depend on a minimum amount (in April 1996 it was 920 crowns per month), the number of insured years and the average gross earnings in the last 10 years. For each insured year, the retiree is entitled to 1.5 per cent times his or her average earnings. Pensions so calculated are paid in full if the pensioner's earnings do not exceed the sum of 5000 crowns monthly. One is entitled to only 30 per cent from earnings above 5000 up to 10 000 crowns monthly, and from earnings above 10 000, only 10 per cent (For more on this see Prib, Vorisek, et al., 1996, pp. 86-108). As in the old system, there is also in the new system a tendency, though a much weaker one, to a relative equalization. The new pension system does not have a ceiling.

136 The Social Costs

In 1994 a new private voluntary pension system (Pillar III), sup­ported by the government, was introduced. An additional insurance system, run by the government, already existed during the old regime.

The voluntary system is managed by private pension funds, organ­ized as joint stock companies. The preconditions for establishing a pension fund are not demanding: the founder must, among other things, make a security deposit of 20 million crowns (US$600 000) and this is the reason why the number of funds is high (in 1996 44 funds existed). The pension funds are allowed to invest the contributions they receive from the participants in the plan in state bonds, bank and enterprise bonds and stocks, and real estate. There are, however, certain limitations.

Government support is quite substantial. It is 40 per cent of the lowest supported contribution to the plan. With the growth of the con­tribution, government support declines relatively and at a certain point becomes steady.H

It is generally believed that the number of pension funds is exces­sive. It is estimated that in order to have an efficient pension fund, the number of participants should be approximately 100 000 (see interview with Pokorny, 1995). Even if all people who are regarded as potential candidates for insurance (an estimated 2-2.5 million) joined the pension funds (in 1997 there were 1.6 million participants in the funds), the number of pension funds would still be high. Presently, most of the participants are aged 45 to 54. Young people are not very interested in private insurance. The government's policy of not guar­anteeing the paid-in contributions makes the private pension system less attractive.

Profits made from investment must be divided in the following way. 85 per cent must be divided among the insured and credited to their accounts; 5 per cent must be channelled into the reserve fund for rainy days and the distribution of the remaining 10 per cent is left up to the shareholders. It can be assumed that the whole, or a great portion of it, is distributed among shareholders.

Polish Pension Reform

The Polish pension system has been in bad shape. As mentioned above, the number of pension recipients has dramatically increased, the dependency ratio has worsened, the outlays on pensions as a percentage of GDP has almost doubled, the contribution of employers to the pension system has been high. It is also argued that the govern-

Social Policy 137

ment subsidy to the pension fund is increasing from year to year at the expense of other important social programmes. In 1991 it was 5.6 per cent and in 1995, it was 6.7 of budget expenditure (seeRS, 1996, p. 501). It is also important to mention that despite this subsidy, Poland manages to maintain a budget deficit below 3 per cent. However, the government proposal warns that if the pension system is not radically reformed, by the year 2035 the outlays on pensions will increase to 22 per cent of GDP (Rutkowski and G6ra, 1997, p. 2).

In the first four years of the new regime's existence only changes were undertaken which were intended to reduce the great inequities in pensions that had arisen as a result of the high inflation rate (Rymsza, 1996).

In 1995 the Polish government approved a radical pension reform and submitted it to various organizations for comments, and in 1997 it submitted the final text of the reform to parliament. The government proposal was based on the study of Rutkowski and G6ra (1997) (from the Office of the Government Plenipotentiary for Social Security Reform) which in turn was based on proposals of various government institutions. Solidarity worked out its own proposal for a radical reform (see for more Lewicka et al., 1996).

After long negotiations which resulted in changes to the original proposal, the reformed pension system will come into effect on 1 January 1999 (see Rzeczpospolita, 22 June 1998 and 30 December 1998).

The study mentioned called for the abolition of mandatory retire­ment and its replacement by a minimum retirement age of 62 for both sexes. The study assumed built-in incentives for later retirement. The parliament left the previous retirement age, with some exceptions, untouched.

The study called for employees to pay 24 per cent of wages in insur­ance contributions and the remaining 21 per cent was to be paid by employers. It seems that employees' contribution was supposed to be tax deductible. This proposal was changed so that the employees' con­tribution at the rate of 23 per cent is only a formality, since it is refunded by employers in the form of increased wages. The contribu­tions also cover accident and occupational diseases insurance.

The insurance contributions of people who are in a precarious financial situation are mostly paid by the institutions who take care of them. Social welfare centres are to make contributions for people on welfare and contributions for unemployed are to be paid from the Labour Fund. The government pays for women on maternity leave.

138 The Social Costs

In the reformed pension system solidarity elements are to be greatly curbed and the principle of contribution-dependant benefits is to be gradually enforced. The maximum income from which contribution is paid is 250 per cent of average earnings.

Retirees, who reached the retirement age and had worked 25 years (women 20 years), are entitled to a full pension. Its monthly amount is to be 24 per cent of monthly average earnings of the ten years of work, selected by the retiree, plus 1.3 per cent for each service year.

Indexation was one of the most contentious problems. After long wrangling a compromise was struck. Pension benefits will increase annually at a rate of the forecasted consumer price increases. In addi­tion, a 15 per cent of the difference between wage increases and price increases will be added in the years 1999-2000. In the following years the sum will increase to 20 per cent.

The reform introduces a minimum old age and disability pension which is to be subsidized by the government if necessary. There will be a ceiling for old age and disability pensions. It can be a maximum of 100 per cent of the earnings of the pensioner in question and 250 per cent of average earnings.

Those insured in Pillar I and II will draw retirement benefits from both pillars. However, benefits from Pillar I will be much larger since most of the contribution goes to this pillar.

All those, who were born after 1 January 1969, will be obliged to sign up for Pillar II; other people younger than 50 years can do so vol­untarily. If they do so, 7.3 per cent of their insurance contribution goes to Pillar II; the remaining 15.7 per cent and the employers' con­tribution remains with Pillar I.

Pillar II will be different from Pillar I. The latter is administered by one non-profit institution (the Social Insurance Administration), whereas the former is to be initially administered by approximately 20 private pension funds (many of them foreign), each managed by its Universal Pension Fund Company. The companies are supposed to be joint stock companies. To obtain a licence for establishing a fund and a company, the shareholders must make a security deposit at least of 4 million ECU.

The main objective of the company is to administer the amassed contributions and invest them (the collection of contributions itself will be performed by the Social Insurance Administration, which administers Pillar I). Investment can be done in publicly traded assets. The company is not allowed to invest more than 5 per cent of the funds' assets in the securities of one organization.

Social Policy 139

In order to make safe the amassed assets, several provisions are to be made. One is the already mentioned limits on investment. A second is to be the establishment of a new Pension Fund Supervision Office, whose aim is to be the monitoring of the funds' activities. Furthermore, the assets of the insured are to be kept separately from companies' assets. In addition, there is to be a minimum guaranteed return on the contributions. Finally, the insured will have the right to change funds without a penalty.

If the company is unable to honour the minimum guaranteed return, it must use funds from its reserve fund; if this is not sufficient, the guarantee fund must step in. The latter fund is financed by all companies. The company must get two rewards for its activities: a fee for the accumulated assets to a maximum of 0.6 per cent of annually acquired assets and a certain percentage from the contributions.

Once the participant in the pension fund retires, he or she is obliged to buy an annuity from a licensed insurance company, which is also supposed to be a joint stock company. To obtain a licence, the insur­ance company will have to make a security deposit at least of 25 million ECU. In addition, it will not be allowed to be involved in other insurance activity.

Rutkowski and G6ra, (1967) assumed that the annual rate of return on contributions to Pillar I will be 1.5 per cent, whereas the return on contributions to Pillar II, will be 2.5 per cent. In other words, they assumed that the return rate on the capital market will be higher than the growth of the portion of wages which is the basis for the pension calculation in Pillar I.

The architects of the proposal assume that the transfer to a reformed pension system would involve a cost, since a portion of the premiums which now goes to the present system will have to be trans­ferred to Pillar II, but pension benefits from Pillar I are not be changed for some time. They assume that these additional costs will be tackled by rationalizing Pillar I, by using a portion of receipts from privatization for this purpose9 and by the sale of Treasury securities (Rutkowski and G6ra, 1997).

Hungarian Pension Reform

Parliament had already approved an orientation plan for the pension system reform in 1991. It envisaged a three-tier system, to a great extent similar to the one propagated by the World Bank. The parlia­ment also approved financial help for a transition to a reformed

140 The Social Costs

system. Little was implemented of these decisions. Some changes were carried out in 1992 and 1996. In 1993 a voluntary pension system was established, which can be regarded as Pillar III. In the same year, an elected self-governing body for social security management was estab­lished. In July 1997 parliament approved a reform of the old pension system (Pillar I) and the establishment of a new mandatory and pri­vately-run pension system (Pillar II) 10 (Ferge, 1997; Magyar Kozlony LXXX-LXXXII of 1997; Simonovits, 1998; Miiller, 1998).

The reform brought about several changes in Pillar I: an increase in retirement age, the setting of a retirement age for both sexes is to be at the same level, a gradual reduction of solidarity elements, and a new calculation of pensions. The retirement age for both sexes is to be gradually increased; in 2009 it will be 62. Men and women retiring after 31 December 1997 and before 1 January 2009 are entitled to a full old-age pension provided they have reached the age of 62 years and have 20 service years. In order not to make the transition to a higher retirement age too painful, a full pension is also available to those women who reached the age of 55 and men the age of 60 before 1 January 1991 and have 10 service years. There are exceptions to this rule, when it comes to partial pensions.

The reform applies more strictly the principle that service years can be achieved only through employment and payment of contributions and that retirement benefits must be dependent on the amount of contribution. Only women who were born before 1947 can retire three years earlier if they gave birth to three children. Only employees who performed work dangerous to health before the year 2000 are enti­tled to earlier retirement. Employees pay a contribution only from earnings up to 200 per cent of the average. On the other hand, the time spent on maternity leave is counted towards service years and the contribution is paid by the government.

Pillar I is financed by contributions by employers and employees. In order to ease the burden of contributions for employers, their contri­butions are declining and the employees' are increasing. In the first year of the reform (1998) employers pay 24 per cent of the wage bill, in the second year they will pay 23 per cent and in the third year 22 per cent. Employees pay 7 per cent in the first year, 8 per cent in the second year and 9 per cent in the third.

The amount of full old-age pension depends on the retirement date. Those who retire between 31 December 1998 and 1 January 2013, and have 10 service years, receive a pension amounting to 33 per cent of their monthly average net earnings. With the increase

Social Policy 141

of service years, the percentage grows, however, not always at the same rate: at 40 service years it is 80 per cent and for each additional year 1.5 per cent.

Retirees after 31 December 2012 are treated differently from their colleagues who retired earlier. Their pension is no longer subject to the sliding scale (see below) and is calculated from gross earnings. For 20 years of service the old age pension is to be 33 per cent of average gross monthly earnings. With the increase of the service years the pension grows at the same rate, 1.65. Since it is impossible to predict the income tax rates after the year 2012, it is difficult to assess whether this arrangement is favourable or unfavourable to an average insured. But it is surely advantageous to high income groups.

Pensions granted after 31 December 1997 are still subject to the principle of solidarity. In the first year monthly wages up to 35 000 forints are considered fully as a basis for the calculation of the pension. Amounts above the 35 000 are considered on a sliding scale. From 5000 forints above the baseline 90 per cent is counted and from 45 000 and more 10 per cent. After January 1999 the sliding scale is gradually removed and in 2013 ceases to exist.

Old-age pensions of Pillar I are indexed; first to the expected real wage growth, later to the forecasted average increases in consumer prices and nominal wages, at a ratio of 30 per cent and 70 per cent and from the year 2001 at a ratio of 50 to 50 . Apparently, this mode of indexation is a concession to the trade unions as well as to the left wing in the Socialist Party (Barotanyi, 1997a and 1997b; F, 1997, no. 30, p. 13).

Pillar II is private, mandatory, and quite complicated. All persons who have not yet reached the age of 42 and become eligible for insur­ance after 30 June 1998 (new workers) are to be insured mandatorily in Pillar II. All those who are insured prior to 30 June 1998 can be vol­untarily insured in Pilar II. The person to be insured can choose the pension fund and is allowed to switch from one fund to another against a nominal penalty.

The objective of the pension funds is to collect contributions, invest them and provide pension benefits. The funds are supposed to work on the principle of self-government; fund members are to make the most important decisions. A pension fund may be established by employers, professional associations, chambers of trade and territorial authorities. The funds can operate only if they get licence from the Fund Supervisory Board, which is entrusted with the task of overseeing the activities of the funds. Its president and vice president are appointed by

142 The Social Costs

the Ministry of Finance. It seems that it is not very difficult to obtain a licence, because no specific security deposit is required. The founders have only to prove that they have the resouces needed to operate the fund. In May 1998 29 licences had already been issued (F, 1998, no. 28, p. 27). It is assumed that the funds will have a least 2000 members, a number which does not promise efficient management.

The fund is allowed to invest only 10 per cent of its assets in secur­ities of one issuer, and it is allowed to own only 10 per cent of secur­ities of one issuer. There is no limit to investment in Treasury bills. Investment in foreign securities is limited to 30 per cent. There are no special provisions for investment in real estate, the fortunes of which are exposed to great fluctuations.

Investment can be carried by the fund itself or it can be entrusted on a commercial basis to an assets management company. The returns on investment are not taxable. However, the retirement benefits are taxable.

All funds are obliged to be members of the Guarantee Fund and pay a fee.The Guarantee Fund guarantees the legitimate claims of funds members. If a pension fund cannot fulfil its financial obligations towards its members even after taking into consideration the reserve fund, which every pension fund must establish, the Guarantee Fund will do so. The solvency of the Guarantee Fund is guaranteed by the government.

The whole contributions of employees participating in the mixed system go to Pillar II, into their personal account, whereas employers' contributions remain with Pillar I. Fund members are obliged to pay membership dues. The retirement age is the same as in Pillar I.

Fund members are collecting two pensions: one from Pillar I and one from Pillar II. The pension from Pillar I is 24.4 per cent of gross earnings and growing with increase of service years at a rate of 1.22; at 40 service years it is 48.8 per cent. Retirement benefit from Pillar II depends on the amount saved in the personal account and this in turn depends on the total amount of contributions into the personal account and on the net return on the investment. 11 Those who will be insured at least 15 years in a mixed system, are entitled to 25 per cent of the pension from Pillar I (Simonovits, 1998).

Retirement benefits from Pillar II can be obtained in the form of annuities or as a lump sum. The retiree has the right to demand annu­ities to be bought for him from a private insurance company. Once the annuities contract is concluded, it cannot be annulled. Annuities with a private insurance are not guaranteed by the Guarantee Fund.

Social Policy 143

The pension fund is also allowed to grant annuities provided it meets the technical preconditions and has more than 25 000 members. On the other hand, the pension fund may entrust its management of assets and administrative obligations to an outside qualified firm on a commercial basis (Magyar Kozlony, 1997, no. 82).

Accumulated financial means in the personal accounts can be inher­ited if the insured person dies before the age of retirement. This is no doubt an advantage compared to Pillar I, where only the widow(er) or children can claim a reduced pension (Magyar Kozlony, 1997, nos. 81 and 82; Ferge, 1997; Palacios and Rocha, 1998).

The transfer of a portion of contributions from Pillar I to Pillar II, and the stipulated 25 per cent tax credit on employees' contributions will necessarily mean a cost which the government intends to finance by selling treasury bills and later by taxes.

As mentioned, Hungary has had a voluntary pension fund (Pillar III) since 1993. The funds are administered by managers elected and supervised by the contributors or their representatives. The profit motive is here eliminated. They are relatively small and organized on the basis of territory, occupation, branch and working place. At the beginning of 1997 the number of pension funds increased to 300, with 500 000 participants and contributions of 22 billion forints (N, 6 May 1996; BaroUinyi, 1997a). The pension funds are expanding quite fast, despite the regulation that the contributions plus earnings can be withdrawn by participants in the plan only after they have become entitled to a pension. The chief reason for the fast expansion is that a portion of the investment is tax deductible and employers' contribu­tions can be treated as costs.

Although the voluntary pension fund is growing fast and will con­tinue to grow in the following years, it probably will not play a great role (see Gal, 1998).

HEALTH CARE REFORM

Under the old system the subject countries had a comprehensive, free health care system which was financed from government revenues. It provided medical treatment, hospital services, dental, prenatal, pre­ventive and emergency care, medication (with some limitations), and stays at health spas, and so on.

The health care system had many shortcomings. The set principle of equal access to health services was violated by the authorities in two

144 The Social Costs

respects. First, the elite had special clinics and hospitals which were equipped with more up-to-date technology and which had access to foreign medications. What was worse was that the poor remuneration of physicians and nurses generated a corrupt system in the course of time; health care providers expected tips from their patients for their services in addition to their salaries. The quality of services depended to a degree on the amount of tips.12

The significance and appreciation of free health care was devalued to a great extent by the poor funding of health care, which was reflected in a neglect of modern medical technology and a shortage of foreign medications; in the distribution of state revenues, health care was low on the list. Despite all the shortcomings mentioned, it is possi­ble to argue that, on balance, the free health care system was a bless­ing, mainly for lower-income groups.

All three post-socialist countries committed themselves to a reform of the health care system. The purpose of the reforms is to reduce the state's outlays on health care and to reduce the role of the state in delivering health services. To this end the reforms are to be based on the principle of a genuine insurance, to increase the contribution of the population to the financing of health services and, last but not least, to make the delivery of health services more efficient.

Health Care Reform in the Czech Republic

The CR was the first to carry out a major reform in the health care system. The 1991 reform brought into being insurance compa­nies which administer the health care system. Unlike the voluntary pension funds, which are private institutions based on the profit motive, the health care insurance companies are a type of non-profit organizations.

There is one general insurance company, which admits everyone who is interested, and then there are departmental (ministerial), pro­fessional and enterprise insurance companies. Any organization is allowed to found an insurance company provided it can prove that it, alone or together with other organizations, employs at least 20 000 people. This neo-liberal policy has led to the rise of 27 insurance com­panies in 1995.

Health care expenditures are no longer funded from government revenue alone. The main contributors are employers (9 per cent) and employees (4.5 per cent) of gross wages. The government pays contri­butions for the unemployed, senior citizens, women on maternity

Social Policy 145

leave, children without support and so on. The government pays 13. 5 per cent per patient of the 80 per cent of the minimum wage, which is, of course, much less than employers and employees pay. According to some computations, the government contributes 14 per cent to the total outlays for approximately 50 per cent of the insured (Cermak, 1996). Yet the people insured by the government use up 80 per cent of the funds for health care (Fiala, 1996).

There is much dissatisfaction in the CR with the health care system and it is under a constant barrage of criticism. The government is accused of mismanaging the system, and it in turn is dissatisfied with the behaviour of the insurance companies; these in turn complain about the government's inadequate payments for its patients and its intention to centralize health care management. Physicians demand higher incomes and the public is concerned about government inten­tions to introduce user fees, the growing prices of medications, and the low quality of services.

The government is concerned about the growing expenditures on health care. In 1990 they amounted to 5.3 per cent of GDP and in 1994 they increased to 7.8 per cent, to decline slightly in 1995 (7.5 per cent), after some remedial measures. There have been several reasons for the increased outlays. Perhaps the most important has been that the expectation that a system with multiple health insurance compa­nies would promote competition that will be translated into growing efficiency has not materialized. The great number of insurance com­panies has made the operation of health care delivery very costly. Bureaucracy has necessarily grown with the growing number of insur­ance companies. Each insurance company needs buildings, equipment and furniture for its operation. And many insurance companies did not exhibit modesty when establishing their headquarters. In addition, the insurance companies pay higher wages to their employees than do other sectors of the economy. 13

The fast growth of outlays on medications, which is primarily caused by rapidly growing prices, much faster than general inflation, is another reason for the high outlays on health care. In 1994 outlays for medicaments were almost 50 per cent higher than in 1993 (see Rubas, 1995). The government's expectation that giving a free hand to phar: maceutical companies and pharmacies in the setting of prices for med­icines would hold down the rise of prices, has not materialized.

Some insurance companies are also in the red. One of the reasons is the high administration costs already mentioned. Another reason is government failure to pay adequate insurance contributions. Some

146 The Social Costs

enterprises and organizations are delinquent in their payment of insurance contributions (Stnisky, 1996).

The reformed health care system is marked by two inequalities which violate the principle of equal access to health services. One has its roots in the way the organization of health insurance companies was carried out. Since the contributions are a percentage of gross wages and these are differentiated by industries, individual insurance companies receive different contributions per capita. Only in 1994 did the government correct this: since then 60 per cent of received contri­butions is going into a single fund and is distributed among individual insurance companies depending on the number of insured. 14 In other words, one important inequality was reduced, but not eliminated.

Another, perhaps even more important, factor in inequality is the number of patients in the insurance companies for whom the govern­ment pays. The smaller the percentage of such patients in the total number of insured in an insurance company, if all other conditions remain the same, the better off the company and, in principle, the better its ability to serve its insured people.

In its effort to improve the efficiency of the health care system, Klaus's government was trying to come up wVh some changes. It was attempting to reduce drastically the number of health insurance com­panies; to make the public contribute much more to health care; to reduce the number of beds in hospitals; to change the criteria for remuneration of family physicians and to expand privatization. Only a little of the programme has been implemented, because of disagree­ments among the coalition partners.

Polish Reform

The health care situation in Poland is worse than it was under the old system. Unlike the outlays on pensions, which grew dramatically as a percentage of GDP, the expenditures on health care stagnated. In 1990, they made up 4.75 per cent, in 1994 4.45 per cent, and in 1996 4.11 per cent of GDP. 15 It is also important to mention that, unlike under the old system when the core of outlays on health care came from the budget, during the transition outlays from private persons increased dramatically (Baran, 1995).

These figures alone do not tell the whole story about the state of health care in Poland. According to the study 'Strategia dla Zdrowia' (1994), the amount of health services and their quality were declining. There was a lack of funds for preventive medicine and for early diag-

Social Policy 147

noses. The fixed capital of health care institutions was deteriorating due to a lack of funds for maintenance and repairs. It is no wonder that under conditions of shortages, tipping of doctors was expanding as in other subject countries. Things have not changed much since this char­acterization was written.

During the first post-communist government a proposal for a major reform was worked out and approved by the government, but was not passed by parliament before the government was defeated. The same fate befell the proposal worked out during the last Solidarity govern­ment (Wlodarczyk, 1996).

The Democratic Left Alliance government initiated the working out of a new proposal for health care reform and forwarded it to par­liament for approval in July 1995. Wal~sa, the President of Poland, came up with his own proposal, which was nothing else but the pro­posal of Solidarity. When Wal~sa was defeated in the 1996 president­ial elections, his proposal was dropped and in 1997 the government proposal was approved by parliament with the provision that it will go into effect in January 1999 (Sobczak, 1996 and 1998; Wlodarczyk, 1996). Since the Democratic Left Alliance government was defeated in the September 1997 parliamentary elections, the new Solidarity and Freedom Union government has made it clear that it intends to change the approved health care reform. To this end, Balcerowicz, the new minister of finance, appointed a committee whose task was to propose changes.

The adopted act of health care reform is based the principle of insurance. All economically active people and some others are to be insured and pay contributions. Unlike in the past, the contributions are to be paid by the insured themselves, but with many exceptions. For example, the Labour Office pays premiums for the unemployed and universities pay for their students. Most of the farmers are exempt from paying health contributions since they do not pay taxes and therefore cannot deduct the contributions from taxes. The govern­ment pays contributions for most of the farmers, however, at a lower rate. Employers are no longer obliged to contribute to the insurance contribution, a provision which has to ease the labour costs of doing business.

The approved act sets the contribution rate at 10 per cent of gross earnings; the new government reduced it to 7.5 per cent. 16 It is not yet clear whether the parliament will approve this. In order to ease the financial impact of the contribution, it is fully tax deductible (Dziennik Ustaw, 1997, no. 28; Donosy, 10 April, 1998).

148 The Social Costs

Payment of contributions does not mean that all the health seiVices are accessible without any charge. Patients must contribute to the costs of dental seiVices. Hospitalized patients must pay for lodging and food for no more than 10 days. Children, recipients of low pen­sions and some other groups are exempt from these payments. Patients are also obliged to contribute to the costs of medications used outside hospitals. There are set maximums payable for medications, depending on their importance. Some seiVices are not included in the package of essential seiVices which are insured. However, they can be insured for additional payment.

The implementation of the health care act is left to the regional and professional health funds. The regional funds are supposed to be autonomous units and financially self-sufficient. The contributions paid are going via district funds into their coffers. Regional funds con­clude contracts with deliverers, private or non-private, for very impor­tant health seiVices. They exercise their duties through the help of district funds, which are supposed to be organized on the basis of democratic rules. The assembly of representatives of the insured is a very important organ. The district funds conclude contracts for the delivery of seiVices which are in their jurisdiction.

The regional funds are members of the National Association of Funds, whose function is to co-ordinate and control the activities of regional funds. All the funds are non-profit organizations (Dzienik Ustaw, 1997, no. 28).

Regional funds also have to finance the contracted-out health ser­vices and their staff, investment, maintenance and repair of fixed capital. They are supposed to create a reseiVe fund for a rainy day. The Association of Funds has to set up a balancing fund, which is financed from the contributions of regional funds. Its purpose is to even out dif­ferences in receipts from individual regional funds. Large investments, medical research and medical education is to be financed by the state.

Privatization in health care has made considerable inroads. Private clinics exist. Most physicians practice medicine privately. Most of the pharmacies have been privatized.

Before the 1997 elections the Solidarity government portrayed the health care reform as a catastrophe; now, after the elections, it has watered down its rhetoric and talks only about the need for some changes. The committee appointed to come up with changes is assum­ing health care will be financed from taxes, though Balcerowicz is against it (Cichocka, 1998). The main suggestions of the committee are: to entrust the health care administration to the intended re-

Social Policy 149

organized local authorities, to increase the role of the private sector in delivering services; to ensure access to health care under equal condi­tions (meaning elimination of solidarity elements); to give the patient the right to choose the location for services and increase competition (Tymowska et al., 1998).

In the summer of 1998 the health act was substantially modified in some points. The number of regional health funds was limited to 16; one fund for each region, created by the reorganization of the territor­ial governments. In 2001 private health insurance can be established. With this provision the role of the private sector has been substan­tially strengthened. A loophole in the regulations has probably strengthened the private sector even more. As a rule, insured people should seek health services from providers which have a contract with that regional health fund or the professional fund. If patients are sud­denly inflicted, they are allowed to use the service of the private sector and can claim a refund from their insurers (Tymowska, 1998).

Hungarian Health Care Reform

The Hungarian health care system is in bad shape. True, statistics, at least for the period 1989-96, show an increase in outlays on health care as a percentage of GDP. In 1989 outlays on health care made up 4.9 per cent of GDP and in the 1990s they have fluctuated in the order of 6-7 per cent (Harsanyi, 1995; Ministry of Welfare, 1997). These figures do not correctly reflect the real situation in health care. First, it should not be forgotten that in 1996 GDP was still14 per cent below its 1989 level. Second, in the Hungarian system health care outlays cover not only health services, but also sickness benefits and pensions for dis­abled people, and outlays on these items have grown rapidly. As in the other two countries, many people have tried to avoid unemployment by choosing disability. Third, the real value of services was much smaller than one would assume on the basis of the figures mentioned. Prices for health services increased much more rapidly than prices of other ser­vices and foodstuff. The rapid increase in the prices of medications is to be blamed for this situation. In the early 1990s Hungary spent 30 per cent of all health expenditures on medications. Since the Hungarian government, being in a critical budgetary situation and being under pressure from international financial institutions to reduce its budget deficit, has not given health care high priority, some segments of health care had to suffer. Preventive medicine has been the greatest victim and this will be negatively felt in the long run. E. Orosz, the well-known

150 The Social Costs

Hungarian expert (1996, p. 456) maintains that in 1994 the real outlays on preventive medicine were 31 per cent lower than in 1989.

The health situation of the population has been getting worse and at the same time funds necessary to cope with this situation have been shrinking. The well-known Hungarian phenomenon of the high mor­tality rates of 35-40 year old males has not disappeared; on the con­trary, it has become worse.

The large number of physicians17 and hospital beds, 18 large com­pared to the shrinking health care services, contributes to the poor financing of health care. In addition, it has contributed to low remu­neration of doctors, which has fed dissatisfaction and encouraged doctors to make patients pay more in tips for services.

After gradual changes in the health care system, in 1997 a major reform, together with the pension reform, was carried out. The reform has introduced more or less the same changes as those in the two other countries with one great exception: it has only one central insur­ance company.

The reforms carried out up to now have been in the financing and organization of health care, privatization and the remuneration of physicians. In 1990 a change in financing of health care was executed; financing from government revenue was replaced by an insurance system. Employers pay a contribution rate of 15 per cent of the wage bill and on top of it contribute one-third to sickness benefits. Employees pay only 3 per cent of gross wages. The contributions are so high because the health care fund also finances, as has been mentioned, sickness benefits, disability pensions and subsidies to medications. The government contributes to the fund in the form of contribution pay­ments for certain groups of the population who cannot afford to pay. It is also committed to help if a deficit in the health care fund occurs, which is usually the case. At the beginning of 1995 the health care fund was short of 53 billion forints, approximately 1.6 per cent of the budget expenditures. This is not a big sum, but in a situation when the budget deficit is more than 5 per cent of GDP, every percentage counts all the more because Hungary has been under pressure, primarily from the World Bank, to put its health care system in order.

One of the causes for the health care fund deficit is that the govern­ment contributions for certain groups are below the cost of health ser­vices going to these groups. If the government paid its fair share in contributions, the health fund deficit would be smaller. Many enter­prises, including state enterprises, are delinquent in payment of con­tributions. At the end of 1995 the arrears amounted to 200 billion

Social Policy 151

forints (Orosz, 1995 and 1996). Finally, the high cost of medications is also an important factor.

Some reorganization of the health care system was instituted. In 1989 the National Health Insurance Fund was established and with this move outlays on health care were separated from the state budget. This fund collects contributions. In 1993 the Health Insurance Self-Government, with employer and employees representation, started its activity, which lies in overseeing the activities of the Health Insurance Fund and the Health Insurance Fund Administration. The function of the latter institution is to administer the revenues arising from payments of contributions and to purchase health services. In other words, what is done in the CR and is supposed to be done in Poland by multiple health insurance companies, is performed in Hungary by one central institution.

Some elements of privatization already existed before a non­communist government came to power. Many physicians practised medicine privately in addition to their job in the state-run health delivery system. 19 This arrangement, which was also applied in Poland, was intended to appease doctors by giving them an opportunity to earn more income and to give higher income groups access to better quality services.

With the collapse of the socialist system, physicians were allowed to go fully private and to enter into a contract with local municipalities, which are responsible for health care, about the conditions under which they would deliver health services. In 1996 80 per cent of family physicians were private. Hungarian physicians, in co-operation with foreigners, are involved in private, high-tech diagnostic activities (Ministry of Welfare, 1997). Pharmacies were privatized and many services demanded by hospitals come from private businesses.

There was also a change in the remuneration of physicians. Under the old system physicians received fixed salaries depending on their position and service years, regardless of their performance. In the new system there is a tendency to link salaries more closely to perform­ance. In the case of family physicians this is to be achieved by making salaries dependent on weighted capitation. For other services the principle fee for service is applied. In addition, a salary ceiling for both groups is set.

In 1992 parliament dropped the legal provision, which guaranteed access to health services as a right. This move prepared the ground for making changes in the availability of health services. Some services have been deinsured and some are available only if the insured person

152 The Social Costs

is willing to contribute to their cost. The 1997 law stipulates the patient's contribution to the cost of dental services, medications consumed outside a hospital, and some other services. For services above standard, contribution to the cost is required. (Magyar Kozlony, 1997, no. LXXXIII).

Increasing prices of medications and decreasing government subsi­dies to the prices constitute a hardship, mainly for low income groups. In 1993 the government subsidies amounted to 77.1 per cent of the prices and in 1996 64.6 per cent (SE, 1997, p. 152).

The government also established the legal basis for the creation of a voluntary health insurance fund in the hope that higher income groups would join. Unlike the voluntary pension system, which has been a success, this was a total failure (F, 1996, no. 15).

CONCLUDING REMARKS

For the time being only Hungary and Poland have revamped their pension system. They now have a multipillar system, but Pillar I remains the dominant system and has not been reduced to the role of a redistributive institution in the spirit of the World Bank's recom­mendations (see p. 133). In the reformed Hungarian system the minimum pension comes from a new social assistance programme. The 1997 Polish pension reform proposal also envisages a dominant role for Pillar I. Apparently, the two countries are reluctant to transfer most of their pension systems to the private sector. They are afraid of the risks involved if the retirement benefits depend too much on fluctuating prices in the stock markets. In addition, the governments were under strong pressure not to weaken Pillar I too much. A Social Democratic government in the CR, produced by the June 1998 parlia­mentary elections, will be even less inclined to adopt the reform prop­agated by the World Bank.

The reformed Pillar I in subject countries differs in several respects, one being the extent to which solidarity elements are kept. In the CR solution most of the solidarity elements of the old system are kept, in the Hungarian solution they will gradually be eliminated and in the Polish reform few remain. They also differ with regard to indexation. In the Hungarian solution, the level of pension benefits is linked to both prices and wages, whereas in the Czech system they are now­adays linked only to prices. In the Polish reform pensions are to be linked primarily to prices.

Social Policy 153

The introduction of Pillar II will involve quite large costs to the gov­ernment. Who knows when the benefits from these investments will be reflected in economic growth and to what extent they will benefit the majority of the population.

In Hungary, Pillar II is run, and in Poland is to be run, by a multiple of pension funds. The same is true about the Czech voluntary pension system. It is believed that such an arrangement will lead to healthy competition and to an efficient working of the pension funds. The greater the number of funds beyond a certain limit, the greater the chance that some advantages from competition would be offset by higher administration cost per one participant in the plan. It should not be forgotten that each fund would need headquarters and a bureaucracy. In addition, these countries do not yet have a sufficient number of experts in investment and therefore they may have to use outside experts, which would increase the costs. The larger the number of funds, the greater the danger of insolvency. Perhaps this is one of the main reasons why in the Polish reform the number of funds is limited. The Americans, who are the greatest admirers of the market and competition, created only one, non-private and non-profit institution for running the Social Insurance Administration. This has turned out to be an advantage. Its administrative costs amount to 1 per cent of the annual benefits, whereas in the US life insurance companies, whose number is huge, the costs range from 12 to 14 per cent of the annual benefits (Diamond, 1994, p. 25; see also Conclusions below).

One of the purposes of the reform has been to reduce substantially employers' contributions to the pension system in order to provide them with a labour cost reduction and thus make them more competi­tive. In Poland, employers' insurance contribution was in fact not changed and in Hungary only very little. One can speculate that in Poland Balcerowicz was against the reduction of employers' insurance contribution because this would have negatively influenced the state budget.

In both countries the reform will probably mean in the long run a decrease in pension benefits. Rutkowski and Gora (1997) expect an increase in poverty by one per cent as a result of the pension reform.

The reforms of the health care system aim at further reducing state budgetary outlays on health services, which means that the public will have to make increasing contributions to the cost of health services. This will be a great burden for low-income groups, all the more so because the prices of medications are increasing rapidly. Many

154 The Social Costs

patients will be faced with the dilemma, whether to use their scarce funds for food or for medicines.

The CR could have saved a lot of funds if the administration of the health care system had been concentrated in one institution, as is the case in Hungary. In Poland, which is almost four times larger in terms of population size than the CR and Hungary, perhaps a limited number of insurance companies is justified.

10 Poverty

INTRODUCTION

Poverty is usually understood as a standard of living below a certain threshold which can be called the poverty line. The latter expressed in terms of real incomes or of a basket of goods and services can be set in different ways; it should, however, be understood that it is relative in the sense that it varies in space and time. The poverty line is at dif­ferent level in different countries. An average American poor person is certainly better off than a poor person in a developing country. As Atkinson and Micklewright (1992, p. 185) point out: 'Subsistence needs must reflect in part the standard of living of the country in which those needs are being assessed.' With the increase in the stan­dard of living, the poverty line is adjusted after some time. The package of goods and services which is at the poverty line nowadays in North America is surely larger and richer than it was in the past. As long as there are large inequities, poverty will continue to exist.

Poverty also existed in the subject countries during the socialist regime, but to a much smaller degree than nowadays. In the first two decades of the socialist system, it was reduced, particularly in the CSR. Wage and price policies were set in such a way as to benefit low income groups. When compensation was given for price increases in the late 1940s and in the first half of the 1950s, low-income groups received the biggest amount. Prices for essential foodstuffs were set low. Rents and utilities rates were heavily subsidized. Health care and education were made available without charge. Young blue collar workers and peasants were encouraged to acquire education. Despite all these measures, there were poor people, in different numbers in individual countries under review.

For a long time the communist regimes did not publish statistics about poverty. It was embarrassing for them to admit that their coun­tries were also afflicted with poverty, which was portrayed in the pro­paganda as something characteristic of capitalism. Hungary was the first country where poverty estimates were made. But this was only a once-off occurrence, the result of the 1956 uprising. The economic reform of the 1960s renewed poverty calculations (see Atkinson and Mickelwright, 1992, p. 178). In the CSR in the mid-1960s, social

155

156 The Social Costs

scientists began devoting attention to social problems, especially to the social minimum. Hirsl's studies are the best known from this period. In 1971 he appealed to the authorities to construct a social minimum, which could serve as a basis for establishing social policy practice for setting the wage minimum, the family income minimum and so on (Hirsl, 1971a). Also in 1971 (1971b), he presented the results he achieved from calculations of the social minimum for the Czechoslovak population in 1958 and 1967. 1 In Poland a social minimum equal to the poverty line has been calculated since 1980 (Milanovic, 1993).

FACTORS OF POVERTY EXPANSION

A slide into poverty can be the result of two factors: decline in real incomes and/or the widening of real income differentiation. Needless to say, if both factors are at work, their impact can be stronger. The first factor is here meant in a broad sense; if we are considering society as a whole, it includes all variables which have an effect on real incomes. If we are discussing individual socioeconomic groups, then it is necessary to consider the kind of income the socioeconomic group receives. Before continuing, a warning is necessary. Real incomes are not a perfect gauge of the level of satisfaction of needs. The transformation has brought about a change in price relativities, and, more importantly, people are now obliged to spend more on health care and some other se!Vices which were available without charge and also more on subsidized services, such as rent, and utilities. This means that people must spend more than under the old system on the same amount of goods and services. In other words, no change in real incomes still means a decline in consumption of goods and services.

The decline in real incomes can be the result of wages lagging behind price increases. And this may affect all who are in employment or a great part of the employed. Some employees who are receiving wages close to the poverty line may slide below the poverty line as a result of such a decline, if all other components of real incomes remain the same. Non-wage incomes may also have an effect on employed people. For example, the replacement of wages by sickness benefits, which are usually smaller than wages, may push recipients below the poverty line, especially if they suffer from a long lasting illness.

Poverty 157

A significant proportion of large families belong to low income groups per capita. In such families there is often only one earner. If, in addition, the earner has a low-paid job because of poor education, there is a clear explanation as to why such families belong to low-income groups. In the old system the difficult financial situation of many large families was mitigated by family allowances. This social assistance kept many families above the poverty line. A reduction in family allowances and/or other assistance may expand the ranks of the poor.

A decline in real wages may reduce demand and indirectly affect some marginal businesses.

Some households supplement their meagre incomes from previous savings and are able just to remain above the poverty line. Inflation, particularly if it is high, as was the case in Poland in 1990, or to lesser extent in the CR in 1991, reduces the purchasing power of savings and thus may throw many people into the ranks of the poor.

Economically active peasants' incomes depend on output and prices of products they sell at market. Under the communist regime procure­ment prices of agricultural products were heavily subsidized. The com­munist leaders followed a policy of bringing the level of peasants' incomes close to that of industrial workers. A decline in prices and/or subsidies may spread poverty into the ranks of the peasants.

Unemployment may be an important contributor to poverty expan­sion. People with low incomes, who were above the poverty line as long as they worked, may be pushed below it. Unemployment benefits are much smaller than wages and, in addition, the unemployed have a claim to unemployment benefits only for a short period of time. If they do not find a job during this period, they can receive social assist­ance, which is even smaller than unemployment benefits only tem­porarily (see Chapter 7). Therefore unemployment, as a factor of poverty, becomes more powerful the greater the difference between wages and unemployment benefits and between the latter and social assistance, and the greater the proportion of long-term unemployed people.

The incomes of old age pensioners depend on two sources: amount of the retirement benefits and wages coming from employment. If the retirement benefits are reduced, pensioners with low benefits can be pushed into the ranks of the poor. Under the old regime old age pen­sioners could work part-time for remuneration, in some cases even full time, and collect pension. If pensioners are not allowed to collect their pensions and work for remuneration, pensioners with low pen­sions may slide into poverty.

158 The Social Costs

A widening of income differentials may bring about or expand poverty. Under conditions of declining average real incomes, an increase in real incomes for one group is necessarily reflected in a decline in incomes of other group( s ). If these groups have a standard of living which is slightly above the poverty line, they can easily slip below. Even under conditions of growing real incomes, widening of real incomes can continue and so can the spread of poverty.

The rise of unemployment is another factor which contributes to the widening of income differentials for the same reasons as men­tioned above.

If poverty is short term, say because of a temporary loss of job, it is not so tragic. However, if poverty is long term, it usually has accompa­nying consequences, on the one hand material and on the other psy­chological and social. The long-term poor after some time must adjust to substandard living conditions. Due to increasing rents and utility rates, poor people must sooner or later vacate standard apartments, if they lived in them. They may have difficulty getting access to health care if user fees are applied. Access to cultural events and entertain­ment are also restricted.

THE POOR IN THE TRANSFORMATION PERIOD

According to Hirsl (1971b), under the old system in the CSR, old people, children and private peasants were the main groups which made up the poor. As to old people, these were mainly so-called old pensioners, whose retirement benefits were determined before the price stabilization (1953) and pension reform, and because of lack of proper valorization, their pensions were low. Furthermore, many recipients of widows' and disability pensions were affected by poverty.

Children belonged to the poor mostly in households where their number per one working person was above average: poverty is corre­lated with the size of the household. The bigger the household and within it the greater the number of small children, the greater the chance of poverty. Whether such a household was really poor depended on the number of earners and their incomes. Hirsl found that in 1967 8.73 per cent of the population was below the soCial (he called it existential) minimum.

It can be said that in Poland and Hungary the situation was not much dissimilar from that in the CR, with the difference that the

Poverty 159

poverty rate was higher. In the CR it was lower because inequalities were lower.2 With the continuing narrowing of income differentials in the 1970s and 1980s and slowly growing real wages, the incidence of poverty declined. In 1988, 7.3 per cent of households had incomes below the social minimum (calculated as 56 per cent of income) against 10.9 per cent in 1958. The figures for children were 11.7 and 10.0 respectively (Hirsl, 1992, as quoted by Vecernfk, 1996, p. 94).

The factors of poverty from the socialist era nave not disappeared; they now work in an intensified form in combination with new factors. This is especially true about child poverty, whose expansion is the result on the one hand of a decline in social assistance and on the other hand of the emergence of unemployment. Households with many small children not infrequently have an unemployed household head. This is so because many children are more frequently in house­holds where the parents have lower education and this in turn is com­bined with a greater chance of being unemployed. Households with many children are also doomed to poverty, if only one of the parents works and in addition in a low-paying industry. Needless to say, single­parent families with several children are in an even more precarious situation and on average worse off than in the old system. In the old system, day care centres were available for affordable payments, whereas in the transforming countries many single parents cannot take a job because they cannot afford the payments for day care.

As has been shown in Chapter 8, in the first years of the transforma­tion decline in real incomes and widening of income differentials came into existence. Poland and the CR have probably managed to reach the pre-transitional level of real incomes and it can be assumed that Hungary will do so in the future. However, income inequalities will probably continue to widen. The growth of the middle, but mainly of the upper middle class, one of the goals of transformation, has been an important contributing factor to these growing income differen­tials. A great part of the new class (or expanding class in Poland and Hungary) has emerged as a result of allowing people to establish private businesses in almost all sectors of the economy. Privatization has also been helpful in this respect, because it allowed many people to acquire assets far exceeding the price they paid for them. The greater appreciation of knowledge and skills, mainly managerial, also works in the direction of greater widening of differentials.

The transformation introduced new poverty-creating factors, of which unemployment is the most important. For reasons already men­tioned, many workers are pushed below the poverty line as a result of

160 The Social Costs

unemployment. Unemployment affects all the socioeconomic, age and skill groups, but to a different degree. As already indicated in Chapter 7, it affects more young people, women (with the exception of Hungary) and people with low education, and therefore it can be assumed that these groups are more represented in the pool of poor people.

The transformation brought about a change in the incomes of pen­sioners. Many pensioners, mainly the younger ones, were more affected by the loss of the possibility of working than by a decline in pensions. As a result, many pensioners with low pensions have slipped under the poverty line. Many recipients of widows' and disability pen­sions, who were already in the old system close to the poverty line, have been pushed beneath it.

Among the socioeconomic groups which have lost the most due to the transformation are peasants. The transformation meant a double blow to the incomes of peasants. On the one hand, subsidies have been cut and on the other hand, peasants must face strong foreign competition. As a result of this development, peasants of all the socioeconomic groups are the most affected by poverty. This is partic­ularly true in Poland. Peasants who in addition to their agricultural work performed factory work, have been the most affected among the employed; they have usually been the first who have been dismissed.

Poverty is linked to the level of education. Figures show clearly that the lower the level of education of the household head, the higher the poverty rate in this group. For example, in Poland in 1996 households with a head with elementary education were five times more likely to be in the ranks of the poor (calculated on the basis of the existential. minimum, which in terms of a percentage of incomes is lower than social minimum) than households headed by people with secondary education and 27 times more compared to households headed by people with post-secondary education (Beskid, 1997).

The size of the place where people live is indicative of the distribu­tion of poverty. The Polish statistical data show that towns with a population smaller than 20 000 have had twice as many people below the social minimum than cities with a population larger than 500 000 (ibid., 1997). This is because in big cities the unemployment rate is lower.

Poverty is also linked to social origin, as many studies show (Ferge et al., 1995) Offspring of unskilled and semi-skilled workers are rela­tively more represented in the poverty pool than workers of parents with skill and education. This is so because unskilled and semi-skilled

Poverty 161

workers do not feel so strongly as other groups the need to give their children an education and perhaps a more important reason is that they want them to enter the labour force as soon as possible in order to contribute to the family budget.

Poverty in subject countries also has an ethnic dimension. In the subject countries poverty affects Romas (Gypsies) much more than the rest of the population. This refers primarily to the CR and Hungary, where the number of Romas as a proportion of the total population is not insignificant. The Romas are more exposed to poverty because unemployment is more widely spread in their ranks than in the rest of the population. This has to do with several factors: their education level is on the average low, they are held in low esteem and hated, which is mostly the result of racism.

DETERMINATION OF THE POVERTY LINE

The line indicates a minimum standard of living and all those who can afford only a standard of living below the minimum are regarded as poor. 3 The poverty line can be relative; expressed as a percentage of an average income (or median) of an average household or as a percentage of its expenditures, or a percentage of another indicator of the standard of living. It can be set as an absolute amount in terms of a basket of consumer goods and services, consumed by an average household. Needless to say, in order to make this basket an object of research, it must be expressed in terms of value. As such, it can also be expressed as a percentage of income. The difference between the above-mentioned relative gauge and the absolute one is that in the latter the basket of goods and services is always a departure point and the basis for the value calculation. The absolute gauge is usually calculated not only for an average household, but also for the average household of different socioeconomic groups and house­holds with a different number of children. The two possibilities men­tioned can be regarded as objective methods. Sometimes social scientists also use the subjective method; they estimate poverty on the basis of polls.

If the gauges are to be reliable, both methods must take into consid­eration the demographic structure of the population and be adjusted to each countries' standard of living. The subject countries, as will be shown, use the absolute method, expressed in terms of value, for determining the poverty line.

162 The Social Costs

But first let me discuss briefly Milanovic's (1996 and 1998, pp. 60-2) and the World Bank's (1996a,b) approach to measuring poverty. Both of them use an absolute measure. Milanovic, who is a well-known expert in this field, uses as his point of departure for the setting of the poverty line for all the former socialist countries US$120 per capita and per month. This figure is the value of a certain amount of con­sumer goods at international prices in 1993. For individual former socialist countries the poverty line in terms of domestic currency is calculated by finding out the purchasing power of one 1993 dollar in domestic currency in terms of consumer goods in the country in ques­tion and this amount is multiplied by 120. The purchasing power of the dollar is different in each of the three countries, therefore the countries need a different amount of dollars to be able to buy the same amount of consumer goods. For example, in Poland in 1993 the poverty line was at $51 and in Hungary at $57. The poverty line for further years is inflated by the increase in cost of living. The World Bank's study (1996a, pp. 68-9) applies the same approach.

Milanovic's and the World Bank's approach has the advantage that it shows how individual countries relate in the purchasing power of their currency; however, it does not give an accurate picture of the poverty line as it relates to the internal standard of living of each country in question.

Andorka, et al. (1997) criticize Milanovic's method of measuring poverty and his findings; they argue that using $120 as a gauge for all countries must lead to the conclusion that no poverty exists in the USA or Canada, which, as every one knows, is in conflict with reality. They also maintain that the two World Bank studies (1996a and 1996b) underestimate the magnitude of poverty in Hungary.

Milanovic's (1997) response to the Hungarian authors' criticism is that '$PPP 120 was chosen for a comparative cross-country study. There is no reason why this line need to be relevant for any individual country'.

In the subject countries the poverty line is expressed as a social minimum (in Poland it is called 'minimum socjalne', in the CR 'zivotni minimum' [living minimum] and in Hungary 'letminimum' [existential minimum]), which is usually defined as the value of a basket of certain goods and services needed for an average household or individual in order to be able to maintain a minimum standard of living. The minimum should ensure a size of consumption of goods and services which would enable the reproduction of the life of people in question at different stages of biological development, enable them to raise children and to work and maintain a social life (Deniszczuk, 1995).

Poverty 163

This implies not only sufficient food, shelter, clothing and footwear, but also access to health care, educational and cultural services.

The social minimum is not constructed by simply choosing a certain percentage of average consumption, but by finding out, with the help of scientific methods, the rational nutritional standards and on their basis other needs important to be able to satisfy the criteria men­tioned above. In Hungary the value of foodstuffs, which has been accepted as a rational normative, is multiplied by 2.3 in order to obtain the value of the social minimum (Central Statistical Office, 1997, p. 7). As will be shown later, in the CR the relative method played a role when the social minimum was constructed.

Besides the social minimum, some social scientists also use another gauge and this is existential minimum, which in Poland makes up 70 per cent of the social minimum. This is a consumption minimum, below which the physical existence of people is threatened. The social minimum and the existential minimum make up a band, of which the former is located at the upper part and the latter at the lower part of the band (Beskid and Deniszczuk, 1995, p. 34). In order to avoid con­fusion, the term 'social minimum' is here used for all three countries and the term 'existential minimum' is used when the lower part of the band is discussed.

There is no agreement among scientists about the nutritional stan­dards and perhaps for this reason in compiling the poverty line consid­eration is given to the consumption pattern of low-income groups. This means that the poverty line is in fact a result of a combination of normative and empirico-analytical methods. The compilation of the basket is very laborious, because it must include goods other than foodstuff, and also services, and therefore it does not change often.4

In the CR the basket is made up of two parts: personal needs of individuals and collective needs of households (in which housing plays a very important role). In constructing the social minimum, the Czech authors, as they themselves admit, were led by two ideas: on the one hand, they wanted to make sure that the minimum guarantees an acceptable standard of living, and on the other hand, they kept in mind that it should not be a disincentive to work. They also tried to make it close to what the EU countries apply. The social minimum was set approximately at the level of 50 per cent of average net income (Bastyr et al., 1995).

The sociar minimum is calculated not only in order to find out the number of poor, but also to serve a practical purpose in social policy. In the CR as well as in Hungary, it serves as a basis for the determination

164 The Social Costs

of various social benefits. In the CR, it has been used since January 1995 for the determination of some social benefits, such as family allowances, allowance to apartment rents, allowances to families of conscripts and so on. For example, families with net incomes up to 110 per cent of the social minimum are entitled to an increased family allowance, those with net incomes between 110 and 180 per cent are entitled to a standard allowance, and those with net incomes above 180 and 300 per cent are entitled to lower family allowances (Ciganek, 1996).

In Hungary up to 1995 social benefits were linked to the pension minimum. Since pensions come from a different source than social benefits, it was decided in connection with Bokros's package for over­coming the economic crisis (seep. 61) to separate the two and to link social benefits to the social minimum (T6th, 1995). In Poland the social minimum is for the time being not used for the determination of social benefits.

THE POVERTY RATE AND TRANSFORMATION

By poverty rate is understood the ratio of the number of poor to the total size of the population or socioeconomic group, if this is the subject of examination.5 The poverty rate depends, of course, on the poverty line. The relation between the two is direct: if the poverty line is set high (which in the case of a relative gauge means that the percentage of the social minimum to average (or median) income is high, and in the case of an absolute method, the basket of goods and services is large) the poverty rate is also high and vice versa.

Needless to say, the study of poverty, more than any other problem, is politically influenced to a great degree. Barr (1994, p. 193) points out 'all definitions of poverty, ultimately, are political'. Adherents of the applied transformation strategy have a tendency to underestimate poverty; on the other hand, opponents of the neo-liberal transforma­tion, may have a tendency to overestimate it. Therefore figures about poverty must be judged with some reservation.

Since authors use different methods for the computation of the poverty line, poverty rates vary. As is shown in Table 10.1, Milanovic (1998, p. 68) estimates that in Poland in 1993-5 the poverty rate was 20 per cent compared to 6 per cent in 1987-88. In the CR the poverty rate was less than one per cent in 1993-5 against zero in 1987-8, and in Hungary 4 per cent and one per cent. The World Bank study (1996a, p. 69) comes to different results, mainly with regard to Poland.

Poverty 165

Table 10. 1 Poverty in Poland, the CR and Hungary in % of the population

Poland CR Hungary

1989 1994 1989 1994 1989 1994

Milanovic (1998)" 6 20 Ferge et al. (1995) 16 Beskid (1997)h.u 14.8 47 Central Statistical Office (1997) Andorka and Speder (1996)" Vytlacil and Kuchatova ( 1994 )c."

Notes: "Refers to 1987-8 and 1993-5. hThe second figure refers to 1996. c Refers to 1992. "Based on social minimum.

0 <1 1 3

10

2.8

4 4

25-30 30-35

According to it, the poverty rate was 12 per cent in 1993. These rates are much lower than the economists of the subject countries have calculated.

There is a relatively rich Polish literature about poverty in Poland, perhaps because poverty is a serious problem in that country. In this study I shall mention only the views of several well-known authors. Beskid (1997) maintains that the development of poverty went through two stages. It grew fast until1994 (in 1990 it doubled) and in the period from 1995 to 1996 its pace slowed down and there was even a decline. According to her, in 1996, 47 per cent of the population were below the social minimum (in 1995 the figure was 58.2 per cent) against 14.8 in 1989, and 4.5 per cent were below the existential minimum (in 1994 it was 6.5 per cent).

Poverty did not spread at the same rate in all socioeconomic groups. According to Beskid and Deniszczuk (1995, p. 39) poverty (expressed in terms of the social minimum) among workers making a living from other sources than earnings6 increased 7.9 times in 1994 compared with 1989; among workers making a living from agriculture7 it grew 4.7 times; among workers 3.5 times, among peasants 3 times; and among pensioners and disabled people 1.7 times.

166 The Social Costs

In 1996 the share of manual workers' households in the total number of households below the social minimum was 40 per cent; that of non-manual workers' households was 10.1 per cent. Pensioners' and disabled peoples' households accounted for 18.6 per cent; peasants' households for 10.5 per cent; households of workers making a living from agriculture for 10.5 per cent; households of people making a living from sources other than earnings, 7.1 per cent; and self­employed people, 4.7 per cent.

In 1996 two-member households without children made up 4.9 per cent in the total number of poor households (calculated on the basis of the social minimum), whereas four-member households made up 19.4 per cent.

Similarly depressing are the figures Beskid (1997) gives for the unemployed. Eighty per cent of unemployed people had incomes below the social minimum in 1996 and 19.6 per cent of their incomes were below the existential minimum (see Table 10.2).

Table 10.2 Distribution of poverty

Poland 1996" Poland 1996" Hungary 1994"

1 2 1 2 1 Blue collar workers 58.6 40.0 4.6 33.0 24.8d White collar workers 28.8 10.1 0.6 2.3 Old age pensionersc 37.1 18.6 3.9 20.9 15.9 Peasants 55.7 10.5 6.2 12.3 39.5 Business persons 32.8 4.7 0.8 1.2 32.6C Intelligentsia 10.6 Unemployed 79.7 4.7 19.6 12.1 55.5

Two member households 20.0 4.9 1.2 3.0 Four member households 47.5 19.4 2.6 11.3

Notes: 1 Refers to the rate of poverty. 2 Refers to the share of households of indi­

vidual socioeconomic groups in the total number of households below the poverty line. Based on social minimum.

b Based on existential minimum. In Poland recipients of disability pensions are included. Refers only to skilled blue collar workers. Refers to self-employed tradesmen and shopkeepers.

Sources: Beskid (1997) and Andorka and Specter (1996).

b

b

b

b

b

Poverty 167

Some researchers believe that the social minimum is overestimated, that it is set too high in terms of incomes. In 1989 it was 43.8 per cent of average income and in 1991 it increased to 57.8 per cent. When, in 1991, the basis for the calculation changed to average monthly disposal income, the social minimum increased to 67.6 per cent and in 1994 (preliminary figure) it was 64 per cent (Beskid and Deniszczuk, 1995, p. 58).8 The increase in the social minimum as a percentage of average incomes is understandable, considering that there was a significant decline in real incomes in the period in question. Szulc (1995) gives several arguments to back up his statement about the overestimation of the social minimum. He mentions the well-known phenomenon that the average incomes of the population are much higher than the official statistics state because of the underground economy. He also assumes that expenditures are higher. Furthermore, he argues that the transformation brought about an increase in the quantity of durable goods, an improvement in the quality of housing and consumer goods, and also removed queues in front of stores. All this should, according to him, reduce the value of the social minimum by several points. According to him the poverty rate was only 30 per cent in 1993.

There is not much literature about poverty in the CR, perhaps because it is not a very serious problem there. In the CR the social minimum was sanctioned by law and changes in its level are made by the government. Since several social benefits are linked to it, as has already been mentioned, the government has been very careful when it comes to its change. It lets the social minimum lag not only behind increases in incomes but also behind the cost of living index. In 1989 the per capita social minimum for a four-member family with two dependent children made up 46.9 per cent of per capita net incomes, and in 1996 (preliminary estimate) 37.7 per cent (Hirsl, 1997). This relative decline in the social minimum has two consequences. One is that social benefits (such as family allowances) grew much more slowly than average incomes. In 1995 the value of family allowances was only 64.9 per cent of the 1989 level. In 1996 a further decline came about as a result of the change in the valorization rate (see Table 9.2). The second consequence has been that the number of people below the social minimum declined. According to Hirsl (1997a), the number of families with dependent children below the v official social minimum declined between 1992 and 1996 from 5.2 per cent to 2.4 per cent.9

Needless to say, this decline is only ostensible.10

According to the Central Statistical Office in Hungary (1997) in 1996 the poverty rate was 25 to 30 per cent. The basis for this result is

168 The Social Costs

a social minimum amounting to 48.8 per cent of net income. The poverty rate mentioned is much higher than Ferge et al. (1995, p. 111) found. The latter used as a poverty line 50 per cent of the median of the equivalent income and found that in 1994 in Hungary the poverty line was 4 per cent, in Poland 16 per cent, and in the CR 3 per cent. By increasing the poverty line to 67 per cent, they obtained 16 per cent for Hungary (for Poland 24 per cent and the CR 14 per cent). They do not quote figures for the pre-transition period. Andorka and Specter (1996) estimate the number of poverty-stricken people before the collapse of socialism at less than 10 per cent and maintain that the transformation tripled this number, and they thus indirectly back up the estimates of the Hungarian Statistical Office's study (1997) (see Table 10.1).

Looking at the amount of basic foodstuffs included in the normative basket of consumption one must say that it is quite modest compared to the average consumption of foods in Hungary. For example in 1995 (I do not have figures for 1996) the annual per capita consumption of meat, meat products and fish was 65.8 kg, whereas in the normative basket meat consumption is represented by 42 kg for the first adult of the family, only 31.5 kg for the second adult and for children even less. In addition, as already mentioned, the value of the foodstuffs is multi­plied by 2.3 in order to obtain the total value of the poverty line.The private consumption structure for 1995 shows that total expenditures were 2.45 larger than the expenditures on food and drinks.

The researchers of the Statistical Office's study examined the role of children in the spread of poverty in households with two econ­omically active persons. If we assign to households with no child the figure 1, then the chance of slipping under the poverty line for the same households with one child should be multiplied by 1.3, with two children by 1.9 and with three and more to 2.6.

Andorka and Specter (1996) examined poverty in Hungary from various angles. Here mention is made only of the spread of poverty among the Romas, 11 the unemployed, pensioners and of the role of education as a poverty factor. In 1994 86.7 per cent of Romas had a standard of living below the social minimum compared to 28.4 per cent for the rest of the population. At the same time 55.5 per cent of the unemployed had a standard of living below the social minimum. In 1995 11.8 per cent of old age pensioners were in the lowest income quintile (of working old pensioners, only 4.6 per cent), whereas 30.6 per cent of recipients of disability pensions and 48.6 per cent of widows' pensions were in this quintile. At the same time, people with

Poverty 169

incomplete elementary education (0-7 years) were represented in the lowest quintile of incomes by 36.4 per cent, compared with those with high school education, 9.4 per cent and those with university educa­tion, 1.7 per cent.

CONCLUDING REMARKS

As has been shown, there is no agreement among researchers about the extent of poverty expansion, but none denies that the transforma­tion contributed to poverty, especially in Poland and Hungary. The transformation has not only engendered unemployment, but has thrown a great proportion of the unemployed into the ranks of the poor. The poverty-stricken unemployed are not only excluded from economic activities through no fault of their own, but they must also endure shortages. In addition, such people are often unjustifiably stig­matized by a part of society.

The transformation has also spread poverty into the ranks of peas­ants, particularly in Poland, by liberalization of trade and reduction of subsidies. A certain proportion of old age pensioners have also slid into poverty because of reduced pensions and the reduced chances to work. Many recipients of disability and widows' pensions have also been affected; the latter, among other reasons, because of the depreci­ation of their savings.

Households with more children already suffered under the old system. Their suffering has been increased by a decline in social transfers.

There is no doubt that under the communist regime a great proportion of Gypsies was poverty stricken. There are no data about this. The transition dramatically increased poverty among Gypsies because they are more affected by unemployment than the rest of the population.

The question can be raised: can poverty be eliminated or at least pushed back to the level under the communist regime? The World Bank's study (1996a, p. 9) in its proof version is quite optimistic. It maintains that it 'depends on whether governments restructure social safety nets to meet the demands of a market system and, even more important, pursue market-oriented policies that foster economic growth', whether 'losers' of the transition will be pushed into poverty. However, the World Bank in the final version of its study is no longer so optimistic that growth is a complete solution for all who are

170 The Social Costs

affected by poverty. It reads 'for some people, such as those with out­dated skills, the elderly, or children in large families, growth is not a complete solution. For such people explicit remedial programs are needed' (p. 67).

Milanovic (1998, p. 85) also argues in favour of economic growth and against redistributive measures. For him poverty is shallow; it is concentrated close to the poverty line and therefore it can be reduced by growth. Rutkowski (1996) takes a similar position as to economic growth, but suggests a different reason. In his view the poverty increase during the transformation mainly has to do with macroeco­nomic shocks and not with growing inequality in income distribution. He tries to back up his statement by arguing that there was not a decline in the wages of the lowest-paid workers.

The World Bank is correct that economic growth alone cannot solve the problem of poverty reduction. If it were true that 'market oriented policies' and growth are the key to the elimination of poverty, or at least to a considerable reduction, why has poverty not been stamped out in the USA and Canada? It is generally known that both countries are developed market economies and still they are not free of poverty. In addition, the argument of poverty shallowness is certainly in tune with reality when it refers to the CR, but I have doubts whether it is valid for Poland and Hungary. In Poland, accord­ing to the data given above, 4.5 per cent of the population in 1996 had incomes below the existential minimum, which is 30 per cent lower than the social minimum.

In my opinion, in order to reduce poverty significantly, it is neces­sary to reduce unemployment considerably, especially long-term umemployment, by an active employment policy, and to increase social assistance, mainly to families with more children. These two tasks are not easily implemented in a capitalist system, since they require redistributing income in order to finance increased social pro­grammes. One of the goals of transformation has been to redistribute income in favour of business. It does not seem probable that business will agree with a reversal in income distribution; it will resist by arguing that the countries cannot afford increases in social outlays. And in this respect, it will have the support of the international financial institutions.

Conclusions

No doubt, all three countries managed to lay the foundations for a market economy. Economic activities in the subject countries are increasingly under the pressure of market forces, and economic actors are responding increasingly as in advanced capitalist countries. The legal infrastructure has not yet been completed -this is true especially in the CR - but with its completion the working of the system will probably improve.

As has been shown, the neo-liberal transformation strategy, the sta­bilization and liberalization provisions had dramatic consequences in the first years of transformation: economic and social as well as polit­ical. In the economic field, they were more far-reaching than was expected. Inflation shot up, output shrank considerably, real wages and incomes declined, and unemployment, not known in the old system, began to grow fast. To cope with inflation, which deprived savers of a great proportion of their savings, high interest rates were applied, which made the situation, at least transitionally, worse. In Poland, where the population welcomed the transition with open arms, the austerity policy had a chilly effect and turned a great pro­portion of the population against the government. The shock therapy was seen as a disregard for the interests of the people and a betrayal of their confidence.

The architects of the transformation have rejected the Chinese model out of hand with different explanations. The Chinese have managed increasingly to impose market forces on their economy so the economy is more and more under the pressure of the market mechanism. True, they have not yet achieved the degree of marketiza­tion in existence in the subject countries, but the Chinese systemic changes have been accompanied by economic growth and increases in the standard of living.

It seems that the IMF is trying to make East Asian countries, which are going through an economic crisis, adopt the same strategy it pushed through in the European post-socialist countries. This time the IMF strategy has come under fire from many American politicians and economists. It appears that the IMF strategy was an object of crit­icism by some members of G-7. The IMF is criticized, among other reasons, for its restrictive monetary policy, mainly for the policy of high interest rates.

171

172 Conclusions

For a long time mainstream economic literature regarded the neo­liberal strategy as the only possible and correct one. Even if there was criticism it did not question the fundamentals of the strategy. However, for some time now the criticism has been growing and has been directed against fundamental principles. Perhaps the Asian crisis has brought about this change in focus. In this study I confine myself only to some examples of criticism. In his lectures at the World Institute for Development of Economic Research, Stiglitz (1998), the chief economist of the World Bank, questioned the fun­damentals of what he calls the Washington Consensus. 1 He indirectly blames the strategy for the output decline and for the rise in unem­ployment. Furthermore, he criticizes the insufficient attention to competition and the rejection of the activist role of the government. He praises China for its policy. He writes: 'The magnitude and success of China's economy over the past two decades also represents a puzzle for standard theory. Chinese policy makers not only eschewed a strategy of outright privatization, they also failed to incor­porate numerous other elements of the Washington consensus.' In an interview Kolodko (1998) also criticizes the strategy and stresses that economic liberalism has become almost irrelevant. Cornea and Popov (1998) analyse in some details the shortcomings of the neo­liberal strategy.

Poland has already managed to renew production and consumption (not real wages) to the 1989level. The CR is already at the 1989level as to consumption, including real wages, but is still lagging behind with regard to output. Hungary is behind in all the variables men­tioned. The achievements in consumption in Poland and in the CR are not shared by all the citizens; the fruits of the reversal are distrib­uted quite unevenly.

Presently, all three countries grapple with foreign trade problems. One of the reasons for this is that the transformation strategy has focused on macroeconomic policies, and the microsphere has been neglected. The architects of the transformation have overestimated the power of the market mechanism; they believed that once condi­tions for the working of the market forces were created by applying proper macroeconomic policies, the microsphere would adjust auto­matically. The belief in the omnipotence of the market discouraged politicians from making provisions for promoting foreign trade. This refers primarily to the CR. The subject countries also hoped that if they fully opened their markets, the West would reciprocate. This did not turn out as expected.

Conclusions 173

The governments of all three countries committed themselves to a fast privatization of large state enterprises. Many politicians believed and tried to make people believe that once privatization of large enterprises was implemented, the economy would work efficiently. Some even believed that the privatization act itself, the transfer of property titles, would release forces which would turn around the working of the economy. Therefore many were willing to disregard rational criteria for sales of state enterprises. They viewed state enter­prises almost as a disease of which it is desirable to be rid as soon as possible. The IMF supported, both indirectly and directly, such approaches to state enterprises.

This nai:ve and costly approach to state enterprises has resulted on the one hand from the underestimation of the role of government, from the simplistic belief that whatever the government is involved it must necessarily work inefficiently; and on the other hand, from the disregard of preconditions for the successful working of private enterprises.

This attitude to the government has been a reaction to the old system, in which the state controlled and regulated all facets of soci­etal life, according to the dictates of the leadership of the Communist Party. This all-embracing control necessarily generated opposition. In the fight for economic reforms in the old system, the reformers clashed with the government, which defended the status quo or resisted going as far as the reformers wanted. Needless to say, such fights led many reformers to the conclusion that the government was a hindrance to economic progress. Many drew the same conclusion that Ronald Reagan, the US President, propagated: 'The government is not the solution; it is the problem.' These anti-government sentiments were strengthened by the reformers' experience as citizens.

Since many of the reformers of the socialist era became the archi­tects of transformation strategy, it is no wonder that the strategy was influenced by the old negative attitude to government. In addition, many of the reformers of the socialist era were influenced by Western economic thought. In the 1980s many Polish and Hungarian social sci­entists increasingly had a chance to spend some time at Western uni­versities. Unlike in the 1950s and 1960s, when Western universities reflected the optimistic views of political and economic elites about the possibilities of full employment and even of the possible useful­ness of planning, in the 1980s the ideological environment changed substantially. The laissez-faire thinking of Hayek and Friedman gained ground at the expense of Keynesianism. In some economic

174 Conclusions

departments it became the prevalent theory and ideology. The change reflected the changes in the economy (Amsden eta!., 1994, pp. 162-3).

These anti-government sentiments came fully to the forefront when the question of industrial policy was on the agenda. In theoretical dis­cussions the neo-liberals have rejected the idea of industrial policy; however, they have been practising it, though in a haphazard way.

I have already mentioned in Chapter 6 that the precondition for the good working of private enterprises is primarily effective manage­ment. This view is shared, as mentioned above, by many economists, recently by Kolodko and Nuti (1997). They write: 'The importance of corporate governance - as opposed to the sheer transfer of property titles - is now being recognized even by the early supporters and prac­titioners of mass privatization, such as Frydman and Rapaczynski ... '.

It takes time to establish an effective management system adequate for the co-ordinating mechanism. Advanced capitalist countries have a long tradition in corporate governance and still some corporations fail because of poor management and therefore it would be no surprise if in post-socialist countries for many years to come many private enter­prises would fail to establish effective management. In addition, it should not be forgotten that governments of the subject countries did not do much to establish a strong market-orientated pool of man­agers. Perhaps this was one of the reasons that Estrin could argue in his 1996 paper (see Kolodko and Nuti, 1997) that there are no signs that privatized enterprises in the subject countries work better than enterprises which are still in state ownership. In connection with this statement one should not forget that the most profitable enterprises have been sold or given away.

The drive for rapid privatization is to a great extent to blame for the selling of many state enterprises at prices below their market value. Of course, the inexperience of domestic officials responsible for the sales also played a role, as did corruption in some cases.

Privatization of large enterprises has not been carried out in the same way in individual countries. There have mainly been two differ­ences: the extent of sales to foreigners and the free distribution of assets. Sales to foreigners played the most important role in Hungary, whereas free distribution of assets did so in the CR.

In the CR voucher privatization was intended as a bandage on the wounds caused by the transformation and as an attempt to buy the support of the public for the government policy by using the public's own assets. It was presented to the public on the one hand as a com­pensation for low wages under the old system, and on the other hand

Conclusions 175

as an instrument of people's capitalism, in Thatcher's tradition (Klaus is a great admirer of Thatcher) and a lesson in entrepreneurship. Needless to say, the latter presentation turned out be almost baseless propaganda. True, a majority of the Czech population became owners of shares in enterprises or shares in investment funds and a great pro­portion of the shareholders made gains. But what is this compared to the hundreds of millions of crowns made legally and illegally by insid­ers of the investment funds? Voucher privatization turned out to be not people's capitalism, but robbers' capitalism. The authorities did a great disservice to modern capitalism by portraying what was going on in the markets with voucher shares as a school of entrepreneurship.

In my opinion, the idea of massive free distribution of assets was not a smart move, for reasons already mentioned in Chapter 6. But the architects of voucher privatization committed an inexcusable blunder by embarking on voucher privatization without first putting in place a net of laws which would effectively protect the whole process of privatization against abuses, thievery and fraud. Neither the desire to accelerate the process of privatization nor the naive idea that market forces and competition would take care of everything can justify the failure to introduce a legal framework for voucher privat­ization. This blunder opened the way to various kinds of theft and cor­ruption. A great proportion of the stolen money found its way abroad. One must agree with Schwartz (1997), who writes 'rapid privatization was not the mass distribution of national wealth but the private appro­priation of national wealth'.

The transformation has replaced the old authoritarian regime -marked by lack of human rights - with a democratic regime. It has restored economic freedoms which the old regime removed. It also eliminated shortages, a phenomenon which greatly frustrated people. At the same time the transformation has imposed hardships of various kinds on the majority of the population.

Unemployment is one of the hardships which did not exist under the old regime. True, many enterprises under the old system employed more people than would have been needed for effective management. People were not bothered by overemployment and they appreciated job security. They knew that if for some reason they lost their job (say because of reorganization), their enterprise would help them find a new one. In addition, it was easy to find jobs, since labour shortages existed, especially in the CR.

In the transitional economies unemployment is accepted as some­thing unavoidable, as a price to be paid for the transfer to a capitalist

176 Conclusions

economy, all the more because advanced capitalists countries are exposed to unemployment too. Therefore fighting unemployment has not been a primary goal, especially in the first years of transition. When economic policies are considered, unemployment is not given proper consideration. This is also reflected in the allocation of funds for government programmes; when funds are distributed, fighting unemployment is not at the top of the priority list. In some neo-liberal circles there is a reluctance to spend funds on programmes aimed at reducing unemployment, primarily on public works. They believe that public works are not helpful. This may be true, if the programmes are not well prepared. To make public works useful, it is necessary to select for them programmes which serve a public purpose. In addi­tion, they need the commitment of local authorities, in whose jurisdic­tion the public works are, to the fight against unemployment, which is not always the case.

Whether to fight unemployment or not should not be assessed from an economic viewpoint only. In my opinion, every citizen must have the right to a job. Without it, he or she is deprived of a great propor­tion of his or her democratic rights. An unemployed person is not a fully-fledged citizen. Usually the economic and political elites are against employment as a right. It would be interesting to see whether they would still maintain their views, if they themselves experienced unemployment for a long time.

Although in recent years the unemployment rate has declined in Poland and Hungary, it is still high. Of great concern is the fact that the percentage of long-term jobless in the total number of unem­ployed is quite high in both countries. In the CR the unemployment rate, which was low until1996 (ranging around 3.5 per cent), is slowly increasing and it can be assumed that long-term unemployment will increase too.

Aside from the psychological effects of long-term unemployment (anxiety and despair, which very often have a negative effect on family life, and a loss of social status), there are serious material conse­quences. Unemployment benefits are low. In the first years of trans­formation the benefits were quite generous, but as soon as unemployment shot up, and more people became dependent on unemployment benefits, they were radically reduced, mainly in the CR. In addition, the conditions for collecting benefits have become stricter. Once the claim to benefits is exhausted, means-tested social assistance is available, which is much smaller. Due to the low benefits many unemployed people are thrown into the ranks of paupers.

Conclusions 177

Low unemployment benefits have on the one hand to reduce gov­ernment outlays and on the other to discourage people from abusing unemployment benefits. No doubt, there are some who are voluntarily unemployed, who work in the underground economy and collect unemployment benefits. But this should not be an excuse for punishing the involuntarily unemployed, as if they were responsible for unemployment. After all, the new system is responsible for unemployment.

In the old system, shortage of housing was one of the problems which frustrated many people. It was expected that the new system would bring about a fast change in the situation. This expectation turned out to be an illusion; the situation in housing has become even worse. True, people with deep pockets can find adequate housing. But the vast majority of the population seeking homes has tremendous difficulty in finding adequate housing, since construction of new dwellings is only a fraction of what it used to be under the old system.

The transition has dealt a blow not only to the homeless, but also to dwelling owners and apartment renters. Both have been burdened by large increases in utility prices and the latter additionally by huge increases in rents. Increases in utility prices and rents will continue, as they have not yet reached market levels.

There have been considerable changes in the differentiation of incomes and consumption. Some groups improved their material situ­ation at the expense of other groups. There was a need for some widening of wage differentials, primarily in the CR, in order to create stronger incentives for hard and quality work. Jobs which required university education and high skills were not properly rewarded in the socialist system, unless they involved a managerial position or senior position in the ,administration. Physicians, engineers, but mainly lawyers and other professionals with university education, were poorly paid.

Available statistics show that inequities in incomes are growing. Yet, it should be borne in mind that the statistics do not accurately reflect reality. They do not include the huge earnings from the under­ground economy. It can be assumed that these earnings are distrib­uted much less evenly than reported earnings.

According to Andorka and Speder (1996), Hungary, which in the old system had income inequities of the level of Scandinavian coun­tries, has already achieved the level of Western Europe due to the transformation. Taking this statement as a basis, one can argue that Poland, which has a less equal distribution of income than Hungary,

178 Conclusions

has probably already exceeded the West European level of inequities. In the CR, which in the old system was the most egalitarian, widening of wage differentials is proceeding at a fast pace. If the trend contin­ues, the CR will soon catch up with Hungary.

The beneficiaries of the new distribution of income are people who are in senior managerial positions in large firms (In Poland the salaries of top managers are 60 times higher than average wages, Kowalik, 1998), people involved in foreign trade and finances, and of course, successful entrepreneurs. The position of many professionals has not changed much. Among the losers are families with more children, peasants, and pensioners in Hungary and the CR.

The transformation has brought about a weakening of social pro­grammes. The inflation generated by the transformation depreciated social transfers; the compensation which was given was usually not large enough to renew the real original value of the social transfers. In addition, whenever the countries were faced with a budgetary crisis, the first victims were usually social transfers. When an economic and budgetary crisis befell Hungary, social programmes were hit first. When the CR was faced with an economic crunch and extensive flooding, social programmes suffered.

The usual explanation for the decline in real social transfers is that the countries cannot afford the extent of transfers which existed under the socialist system or that the social transfers in the pre-transitional system were beyond the affordability of the countries. The subject countries could have afforded higher social transfers on pre­transitional programmes if it were not for unemployment. In addi­tion, affordability has much to do with the priorities set in economic policies. There is no doubt that the socialist system was more com­mitted to social programmes than the present system. This can also be seen from what is going on with the overhaul of the pension and health care systems.

The subject countries are under pressure, mainly from the World Bank, to overhaul the pension system, to reduce considerably the role of the old system (Pillar I) and to establish two additional private pension systems, one of them fully funded and mandatory (Pillar II) and the last voluntary (Pillar III). In 1998 Hungary introduced a reformed pension system, much according to the suggestions of the World Bank. The Polish reformed pension system is to go into effect in 1999. The CR reformed the Pillar I and introduced Pillar III.

Even after the changes the first pillar remains dominant, which is surely not to the liking of the World Bank and many neo-liberals.

Conclusions 179

However, the three countries have realized the economic and political risks connected with a transition to a system in which the second pillar would have the dominant role. After all, making pensions dependent on the fluctuating stock market is a risky undertaking; it may endanger the livelihood of people when they are no longer able to work. Even in the USA, where nowadays a debate is going on about the reform of the public pension system, the main source of income for millions of American retirees, and for a great proportion of pensioners an important supplement to their income, few participants in the debate suggest privatizing it and exposing it to the stock market. Recently a respectable American bipartisan group of politicians and business people came up with a proposal to allow only 16 per cent of the con­tributions to the pension plan to be used for individual savings accounts (The Economist, 23-29 May 1998). In this connection, one must raise the question, why is the World Bank pushing solutions, that even the USA is not willing to follow?

The adherents of privatization of the pension system have usually used Chile's 'success' with the private pension system as an encourage­ment to other countries to follow suit. They alluded to the high returns on investment in the stock market. This was true before 1995, but since then stock prices have declined considerably and the value of pensions has dropped. The admirers of the Chilean system should read what The Economist (18-24 April 1998), a great defender of private enterprise, has to say about it, and they will see that it is not a rosy and attractive situation. In addition, they should remember what happened to the Japanese and Hong Kong stock markets.

The second and third pillars are to be run by private multiple funds. It remains to been seen whether the expected advantages from com­petition will offset the higher administration costs per participant because of the existence of multiple funds.

One of the main purposes of the introduction of the second pillar is to make the population save and promote the stock market. This goal can be achieved even if the second pillar is administered by one non­profit institution. After all, a non-profit institution can also hire knowledgeable and energetic managers and make them interested in efficient management of the pension system. In addition it has two advantages compared with the privately-run pillar. First, as already mentioned, it has much smaller costs per participant; second it can even out to a desirable degree the differences in returns on invested contributions. After all, not every manager has the same knowledge of the market, the experience, the energy, the same connections and the

180 Conclusions

same 'luck' and therefore the differences in returns can be quite high. Differences can also arise as a result of different times of retirement and varying opportunities for investment.

From what has been said the question can be raised: if a non-profit organization can perform the same functions as a privately run pension system based on profit, is Pillar II really needed? In my opinion, a modified Pillar I can fulfil all the demographically, socially and economically desirable and justified changes. This has two addi­tional advantages to those already mentioned. First, the costs of intro­duction of Pillar II, which will be quite high, will be saved. Second, in a reformed Pillar I it is not difficult to ensure that there are no inter­generational differences in pensions what is almost impossible and not desirable to achieve in a mixed system, as Augusztinovics and Martos (1995) show. Needless to say, political stability and social peace require elimination of great intergenerational pension differences. True, the private sector will not get a new profit making source, which is a strong motivation for the introduction of Pillar II. The interest of the private sector should not be the primary concern when the best solution for the pension reform is being sought.

The subject countries inherited a health care system which, though underfunded and marked by low quality of services, still guaranteed access to almost all health services without charge. During the transformation the situation has become worse in all respects, with the exception of medical technology. The reforms implemented in the subject countries mean a further worsening of the access to health ser­vices. Some services are deinsured, others are only available upon a certain contribution and for some it is necessary to go to the private sector. On balance, the situation is still tolerable. However, the outlook for the future is not very good. As a result of the develop­ments in health care, a two-tier system is evolving: one for the pros­perous part of the population and one for the rest of the population.

The transformation strategy has expanded poverty by creating new factors of poverty, the most important being unemployment- particu­larly long-term- and by bringing about a reduction of social transfers, such as family allowances and pensions. The low unemployment benefits and even lower means-tested social assistance have pushed many unemployed people into the ranks of the poor. The reduction of family allowances is felt strongly in households with several children and many of them have fallen below the poverty line. Reduced job opportunities after retirement have worsened the material situation of pensioners who used to improve their incomes by working. As a

Conclusions 181

result, many of them have slid into the ranks of the poor. Many peas­ants, due to the considerable decline of their incomes, have expanded the ranks of the poor.

Poverty has not expanded to the same extent in all three subject countries. In the CR poverty has increased the least. In Poland, where poverty was already high under the old system, it doubled during the transformation, and in Hungary it even tripled. Andorka and Speder (1996) maintain that at the top of the Hungarian pyramid of incomes there is a prosperous, increasingly rich 10 per cent of society and the bottom 40-50 per cent of society is falling deeper into poverty. What was said about Hungary is perhaps even more true about Poland.

The expansion of poverty does not put the transition in a favourable light. It shows that the 'trickle-down' theory has not yet worked for the subject countries and these are the most developed in Eastern Europe, with the exception of Slovenia. The burden of transformation has been distributed very unevenly: the majority of the population must bear the brunt of the burden. The current distribution of income does not bode well for the future. Even the assumption by some that the present poverty is shallow, meaning that some improvements in social transfers and a reduction in unemployment can considerably mitigate poverty, is not a great solace. The richest capitalist country, the USA, has not managed to eradicate poverty and does not try in earnest to solve the problem of hunger and homelessness; why should one assume that transforming countries with per capita incomes amounting to a third or less of those of the USA will be able reduce poverty radically? After all, capitalism is governed by certain princi­ples which produce unemployment, poverty, etc.

It is often argued that the capitalist system takes away many of the certainties which existed in the old system, but replaces them with a path to prosperity. For the time being, only small groups in the subject countries have managed to achieve prosperity.

Notes

1 The Strategy of Transformation to a Market Economy

1. The neo-liberal ideology is a laissez-faire ideology, which is based on the ideas that the state's role in the economy should be- to put it suc­cinctly - limited to the role of a nightwatchman, that the market is almost omnipotent and social welfare should be replaced by creating conditions for the rule of equal opportunity. (For more on this, see Chapter 9).

2. Bruno (1993, p. 204) maintains that the IMF did not initiate the trans­formation programmes, that this was done by the post-socialist coun­tries themselves and that it only gave its blessing.

3. The approach to foreign advisers was not the same in all three coun­tries. Although the CSR followed the advice of the IMF, it did not invite Sachs. Klaus, who was the chief architect of the transformation, maintained in an interview with Blejer and Coricelli (1995) that the foreign advisers are of no use because of the uniqueness of the reform process in individual countries.

4. In Poland the reform was designed by Balcerowicz, Dgbrowski and their colleagues and in Czechoslovakia by Klaus and his colleagues. All of them are academic economists.

5. They call this model, which I call Chinese, bureaucratic and authoritar­ian and have in mind a broader model, which includes Asian countries.

6. This is a short summary of my paper on China, published in 1996 and 1997.

7. It is interesting that Ernst, Alexeev and Marer (1996) believe that one of the reasons why former European socialist countries could not apply the Chinese model was the sudden collapse of the Communist political system (p. 290).

3 Transition to a Market Economy in Poland

1. Calvo and Coricelli (1992a) advance lower figures for interest rates for the second half of 1990.

2. In order to ease growing unemployment, the government allowed early retirement and many people took advantage of it.

3. The disagreements with the IMF culminated in its suspension of its agreement with Poland when the budget deficit exceeded the agreed­upon target. In April 1992, when J. Olszewski, the prime minister, was in Washington, he asked George Bush to make the IMF negotiators return to Warsaw (see New York Times, 7 May 1992, p. A7).

4. The budget policy was criticized by many economists. Some expressed doubts about the rationality of persisting with the 5 per cent of GDP deficit under conditions of deep recession. According to them, an

182

Notes 183

increase in the deficit need not necessarily increase inflation, providing investment tax credits or tax breaks for the creation of new jobs con­tributed to the revival of the economy and to the increase of the tax base. (See also Sachs, 1994, on budget and inflation, p. 61).

5. The tax on wage growth amounted to 17.3 per cent of all taxes (the turnover tax is disregarded here) in 1990 and in 1991 it increased to 30.2 per cent. The dramatic increase in this percentage was due to the increased number of enterprises which made wage payments beyond the set limits as a result of the easing of the tax and increased workers' pressure for wage increases.

6. The fast increase in imports was reflected in its increase in terms of share in GDP. In the period 1990-3 imports increased from 14.9 per cent to 20.9 per cent, whereas exports declined from 16.5 per cent to 13.7 per cent (Jakobik, 1996).

7. According to K. Kalicki (1991), the interest rate on deposits in zlotys in 1990 was in the range of 70 per cent, whereas on dollar deposits it was in the range of 50 per cent.

8. The Alliance received only 20.4 per cent of the popular vote and the Peasant Party 15.4 per cent, but because of a 5 per cent threshold and the split of Solidarity forces and right-wing parties, the Alliance got 37 per cent of the parliamentary seats and the Peasant Party 28.7 per cent (Biazyca and Rapacki, 1996).

9. The first three to four years of transformation were hectic, and marked by turmoils. Most of Polish society, which welcomed the collapse of socialism with enthusiasm and hope in the future, was deeply disap­pointed and succumbed to pessimism bordering on despair. It believed the propaganda that the decline in output and the standard of living would be moderate and short-lived. It felt betrayed when it saw that the recession was much worse than expected. As a result, Poland was also plunged into a political crisis. Within three and half years Poland had four governments with roots in Solidarity.

10. The Package 2000 is a fairly ambitious medium-term programme for the years 1996-2000.

11. The inflow of currency, as long as it has been earmarked for direct investment, has been welcomed. A great chunk of foreign currency had its origin in unregistered foreign trade. Remittances of workers working abroad and receipts from foreign tourists also played an important role.

12. In October 1994, after it was reduced by 3 per cent, it was still 20 per cent for demand deposits and 10 per cent for time deposits.

13. In 1995 the tariffs on imports of sugar were 40 per cent, on fruit 20-50 per cent, on pork 60 per cent and on milk 40-80 per cent.

14. It is important to stress that the Polish budget is not structured accord­ing to the Maastricht Agreement formula (Wernik, 1996).

15. According to an agreement with Paris Club countries, Poland was granted a 50 per cent reduction of its indebtedness to governments in two stages, provided it continued its reforms. The debt was to be reduced by 30 per cent in the first stage, up to the end of 1994, and in the second stage by 20 per cent. In 1994 Poland concluded an

184 Notes

agreement with its commercial bank creditors, according to which credit relief was promised (Trzeciakowski, 1993, p. 47; Slay, 1994, p. 468).

16. In the period 1990-5 foreign investment in Poland amounted to US$7 billion, of which US$2.5 billion was invested in 1995 (Kolodko, 1996).

4 Czech Transition to a Market Economy

1. In 1990 the government had already increased consumer prices consid­erably. In 1991 for some foodstuffs, such as flour and its byproducts, meat, milk, energy, transportation, and so on, maximum prices were set (HN, 3 January 1991) with the intention of freeing them in the course of time.

2. Hrncir (1992, p. 323) maintains that reservations can be raised regard­ing the thesis that monetary policy was too restrictive. He bases his reservations primarily on the fact that interest rates were negative.

3. In the heated debate about convertibility, the question was whether it should be put into effect as an integral part of the January 1991 package or whether it should complete the transformation process (see Tosovsky, 1990; Turek, 1992). But V. Klaus, the finance minister of the day; had managed to impose his will on the government. He was prob­ably supported in his effort by the IMF.

4. Czechoslovakia did not go as far as Poland in liberalizing foreign trade. In order to curb imports, a 20 per cent surcharge, later reduced to 15 per cent, calculated in terms of duty value, was imposed on consumer goods. Exports of some goods were linked to licences (HN, 2 January 1991).

5. The average customs tariff in 1991 was 5 per cent when the tariff in the EC was 5.9 per cent. Later the tariff was increased by 1 per cent on average, but for some items it was doubled (for agricultural products and foodstuffs it was increased from 5.3 per cent to 10.7) (see Finance a Liver, 1992, no. 2, pp. 59-60).

6. Fn.Ym here on I shall discuss only the CR, which became an indepen­dent country from January 1993.

7. According to Jilek (1992), 75 per cent of all enterprises had insolvency problems and according to Kalinova (1992), insolvency was to blame for many of the enterprises' inability to increase wages to the allowed limit.

8. The first signs of recovery had already appeared in 1992, but the split of Czechoslovakia into two countries produced disruptions which nega­tively affected output (IMF Swvey, 24 January 1994; Hajek, 1995, p. 17).

9. Foreign tourism had a significant share in the rise of the demand for services. The city of Prague, with its gothic and baroque architecture and old-world charm, attracted more tourists than any other city in Eastern Europe, all the more because of its undervalued currency.

10. It should be mentioned that the interest rate, partially due to the decline of the inflation rate, was in this case more or less stable.

Notes 185

11. The differences in prices reflect the large difference between the official exchange rate (OER) of the crown and the exchange rate in terms of purchasing-power parity (PPP). In 1993 the value of the crown calcu­lated in terms of PPP was 2.80 times larger than in terms of OER. In Poland the figure was 2.04 for the zloty and in Hungary 1.58 for the forint ( Cesk6 republika v cislech, 1995, p. 6).

12. In 1994; this difference vwas 11 billion crowns (2.8 per cent of all receipts) and in 1995 7 billion). For 1996, a surplus of 2.5 billion was planned, since the pension contribution was reduced from 27.2 per cent to 26 per cent of gross wages. To offset the loss, the government increased the tax for active employment policy, at a time when unem­ployment had slightly decreased and was at a low level.

13. All the above-mentioned figures about the growth of imports and exports were calculated on the basis of current prices.

14. The figures for 1989 refer to Czechoslovakia. 15. In an article which is intended to defend his policies, V. Klaus (1997)

criticizes the National Bank very sharply for its monetary measures undertaken in 1995. He contends that the government was not consulted. The question is why he did not criticize the National Bank earlier.

16. Government measures were preceded by a passionate debate about the reasons and the remedies for the economic crunch. Some economists suggested boosting exports by carrying out a devaluation of the crown. The government was reluctant to take this route for fear that it would affect prices and wages negatively (see Dlouhy, the minister of industry and trade, in an interview [1996]). Most economists who dealt with the current account deficit problem were against devaluation. Some stressed as a cure better co-ordination of fiscal with monetary policy, meaning greater restrictions on government expenditures as a anti­inflationary tool. Klacek and Kouba (1995) suggested in addition a more flexible exchange rate policy.

17. First it was decided to cut government expenditure by 25.5 billion crowns, which represents 5.2 per cent of total 1996 expenditure. Later the sum was increased.

18. This point of criticism is also included in the valuation of the Czech economy by the committee of the EU in connection with the Czech application for admission to the EU.

19. No doubt, the old regime is responsible for the large gap in the level of technology between the Czech economy and that of developed capital­ist countries, to mention its most important economic 'sin'. But it is also important to remember here, what has already been mentioned, that Czech communists left their economy in much better shape than their two neighbours did theirs. The economy did not suffer from large imbalances, inflation was low and foreign debt was relatively low. The transformation in the CR started under more favourable conditions than those in the other two countries.

20. He was even criticized for this attitude by his coalition partner, the Christian Democrats.

21. He apparently believed that the CR needs rich people and he did not care how they come about.

186 Notes

5 Transition to a Market Economy in Hungary

1. Bauer (1992, p. 288) mentions that during the 25 years of reform in Hungary price relativities have been adjusted to a Western structure; that in 1991 Hungarian relative prices differed from Western prices to the extent that those between any two Western countries did.

2. In 1991 the money supply increased by 26-8 per cent, whereas GDP in current prices went up by only 13-17 per cent (Reports ... , 1992, p. 15).

3. It is worth while mentioning that at the same time the contribution of the population to revenues, which was 248.9 billion forints in 1990, increased to 403.0 billion forints in 1992.

4. One could argue that restitution can also be blamed for the difficulties in the economy. It is generally accepted that compensation was quite generous, certainly compared to the possibility of the economy. It is estimated to amount to 250 billion forints (see Horn's speech, N, 27 September 1994 ).

5. In December 1989 Hungarian gross foreign debt amounted to US$2000 per capita. It was 70 per cent higher than the Polish debt and three times higher than the Czechoslovak (B. Kadar, 1997).

6. Some economists maintain that the Hungarian government made some inquiries about debt relief in Japan, where a great chunk of the debt comes from, and the answer was negative.

7. It is important to stress that many Hungarian economists evaluate the bankruptcy law less critically.

8. The sales contracts were designed sloppily partly because the sellers had little experience and partly because they wanted to be nice to the buyers. An economist who researched the sales told me that Salamander, an Austrian shoe chain which bought the biggest retail shoe business in Budapest, committed itself to a large investment in Hungary. Since the investment was not specified, Salamander honoured its promise to a great extent by importing shoes from its outlets in Austria, including shoes which it could not sell at home.

9. Some economists suspect that one of the reasons for the large imports is that they serve as an instrument for illegal capital exports.

10. The following story, told me by one of the highest functionaries of the Socialist Party, can serve as an example of the prime minister's inexperi­ence. He was supposed to travel to an important meeting in a foreign country. Before his departure, he learned that 20 people in a small firm were striking. The news bothered him to such an extent that he asked for advice as to whether he should go or postpone his trip.

11. Sec New York Times, 5 June 1994. The paper does not, however, mention that Horn, in his function as foreign minister in M. Nemeth's government, was - together with the prime minister - instrumental in letting East German tourists to go to Austria, an event which con­tributed to the start of the collapse of the socialist system.

12. The surcharge was not applied to imports of energy and investment goods, and was gradually reduced. In the beginning of 1997 it was 4 per cent (E, 1997, no. 8, p. 7).

13. Matolcsy (1996b) elaborated on this idea in an article.

Notes 187

14. For more see Chapter 6, on privatization. 15. The government's policy of curbing consumption is criticized by many

economists. The government had, however, a powerful backer in the person of Kornai (1994b ), who argued that real wages and the expendi­tures on social programmes were too high. He did not make sugges­tions as to how much real wages should be reduced; he only showed that in Poland and Czechoslovakia real wages declined much more than in Hungary. In my opinion the lower decline in real wages was an advantage which made it possible to proceed with the transformation in Hungary without any major political and social tensions. It is doubtful whether the Hungarians would have calmly accepted such a huge cut in real wages as happened in Poland in 1990 and Czechoslovakia in 1991.

16. A reliable economist told me that in 1993 700 000 private businesses reported, on the average, earnings below the minimum income level.

6 Privatization

1. Nationalization, carried out by the old regime, was also aimed, among other things, at depriving the former owners of their property and thus of political power.

2. In an interview Szelenyi (1993) reported that according to his research 80 per cent of the Hungarian managerial elite were in top managerial functions under the communist regime, whereas only 5 per cent of the elite are former small entrepreneurs from the communist period. Apparently Szelenyi's wishes have not materialized.

3. Statements about the need for an owning middle class can also be found in the literature of the other two countries under review.

4. Jarosz (1996, p. 6) mentions that workers complained that they brought down the old system and now they were being treated worse than under the old system. Now workers are no longer important, only the middle class is important.

5. It is known that privatization has been accompanied by corruption and small-scale privatization has not been an exception.

6. It was known in Hungary under the name 'Programme of Share Purchases by Small Investors' and was supposed to be a kind of mass privatization. According to the plan, every citizen over the age of 18 could use interest-free credit to buy shares to the value of 100 000 forints (at that time this meant approximately $ 1100) in enterprises earmarked for privatization. The credit was to be repaid within five years, and if the investor could not repay, he or she was obliged to return the shares. At the same time, the authorities introduced leases and buy-out schemes.The latter enabled managers and workers to buy shares in the enterprises they worked in at preferential conditions. They had to make a down payment of 20 per cent (F, 1993, no. 15; N, 29 November 1993; Adam, 1994c; Ernst et al., 1996, p. 182).

7. Originally only 10 per cent of the shares were supposed to be distrib­uted among employees. The left-leaning government changed that to 15 per cent with the provision that small peasants should get a portion

188 Notes

of it. A portion of the shares left to the Treasury was supposed to be used, on the one hand, for compensation to state employees and pen­sioners and, on the other, as a contribution to the social insurance funds (Mujzel, 1992; Blaszczyk and Dqbrowski, 1994; Polish Government, 1996). In 1989, the last communist government, under pressure from Solidarity, linked wages to the budgetary sphere and pensions to increases in wages in the material sphere. Due to the huge budget deficit and pressure from the IMF, the government in 1992 rejected this indexation, which created a lot of tension and later led to strikes. In order to obey the ruling of the Supreme Court, which declared the indexation law valid, state employees and pensioners were to get com­pensation in the form of shares from mass privatization.

8. According to a survey carried out by two authors (Pietrewicz and Hebda, 1996, p. 42), employee partnerships achieve better results than the private sector in terms of profits.

9. Vecernik (1996, p. 116) writes about the principal of equal treatment in priv~tization: 'people quickly abandoned beliefs about equal shares, equal opportunities to acquire wealth and equal access to financial markets'.

10. The best-known Czech fraud applied by some big shareholders is what the Czechs call 'tunnelling', which is not contrary to the existing lax law. The method is simple: the owners of controlling share packages of an enterprise create a new enterprise, to which they transfer the shares of the old enterprise; the old enterprise continues to exist as a shell.

The Economist (6-12 December 1997) also criticized the conditions in the CR for the 'appalling corruption and lack of openness in busi­ness'. It is important to stress in this connection that the CR did not have a tradition of corruption.

11. According to Sulc (1996a, p. 132), restructuring was also hampered by the provision, which prohibited managers to make any property transac­tion above a certain sum until privatization was carried out. The provi­sion was intended to prevent managers from stealing state assets, as happened in Hungary with the spontaneous privatization.

12. It would be no surprise if Klaus, who lectured not only his subordinates but also foreign dignitaries about the proper method of privatization, under pressure of the economic crunch and criticism of his policies, in his sleepless nights regretted that hundreds of enterprises, and many profitable ones, were distributed without charge. How well could the proceeds from privatization now be used!

13. As a result of its policy of privatization Hungary managed to reduce its foreign debt by $10 billion in the last three and a half years (Horn, in an interview with Hungarian radio, quoted by the Hungarian Press agency on the Internet).

7 Unemployment

1. I have already explained my views about the causes of the dramatic decline in output in Chapter 2. Here let it be mentioned that the trans-

Notes 189

formation strategy itself (the applied restrictive monetary, fiscal and income policies) in the first place, combined with the collapse of trade with CMEA countries, brought down output.

2. In Czechoslovakia, the severance pay was two months wages, unless the collective agreement set a higher severance pay. In Poland it was one to three months and in Hungary one to five months, depending on the number of years of service.

3. The fact that the CR is geographically wedged in the area of the German economic powerhouse gives it an edge vis-a-vis its neighbours, mainly in tourism and also with regard to transportation.

4. The comparisons are quite difficult because the three countries do not use the same methodology for computing the structure of the labour force. In all three countries the term 'economically active population' includes, according to Western methodology, the 'employed' (or working population: in Czech- pracujfci; in Polish- pracuj<;tce; and in Hungarian - aktiv kereso) as well as the unemployed (who are registered as unem­ployed). 'Working population' includes employees working for a salary or wage (including working retirees) as well as the self-employed (including employers). In Hungary 'working population' also includes women on maternity leave, which is not the case in the CR.

5. When viewing these figures one should not forget that the figures for individual countries do not refer entirely to the same annual period (see notes in Table 7.1 ).

6. Kabaj (1994, p. 162) maintains that in 1994 retirees, along with disabil­ity pensioners and the unemployed, made up 76 per cent of the working population; in 1989 the figure was only 39 per cent.

7. The tens of thousands of prostitutes the transformation produced should not be forgotten.

8. Commander and Tolstopiatenko (1997, p. 339) forward different benefit figures, but do not mention whether the percentage is of net or gross earnings.

9. The unemployment benefits are so low for three reasons: first, a great proportion, or maybe even a majority of the unemployed belong to lower income groups. Second, there is a ceiling for benefits based on minimum wage and this is quite low. In 1995, the ceiling amounted to 40.3 per cent of the average gross wage. Finally, the structure of the benefits is not very favourable; in the first three months of unemploy­ment the benefit is 60 per cent of the net wage of the previous three months and in the second three months it declines to 50 per cent.

10. These and the Czech figures are from the reliable sources of the Statistical Offices in Budapest and Prague. According to the official Hungarian statistical yearbook for 1996 (p. 86) the average unemploy­ment benefit for 1992 was 56.6 per cent of net earnings, declining to 46.4 per cent in 1996.

11. The minimum benefit was set at 8600 forints per month, which meant 31.6 per cent of average earnings; and the maximum at 18 000, which was 66.2 per cent.

12. In Poland in 1995 17 per cent of the unemployed had been jobless for more than two years.

190 Notes

13. In the first half of 1996, taxes covered 90 per cent; the rest was covered from other funds, as well by the government (Munkapiac, 1996, no. 8, p. 3).

14. It is difficult to say whether Poland and Hungary spend the maximum possible funds on employment programmes, considering their financial conditions. It is known that the CR did not use all the funds available for active employment policy (Fassman, 1996). Needless to say, an increase in the available funds for active employment policy reduces not only the number of the unemployed, but also the amount of funds needed for passive employment policy, if all other conditions remain the same.

15. It does not seem that the three countries have used all the possible methods for reduction of unemployment. For example, there seem to be quite good possibilities for a reduction of unemployment by an expansion of housing construction. As will be shown in Chapter 8, the housing situation in all three countries has worsened during the trans­formation; the number of new residential buildings has dramatically declined. It can be assumed that people looking for apartments would be willing to contribute to the financing of such a venture if they were sure that they would end up with a home.

8 The Standard of Living

1. In an interview Balcerowicz (Blejer and Coricelli, 1995) maintained that 'a part of the decline in output did not lead to a decline in general welfare'; that consumption of basic foodstuff did not drop, despite a 20 per cent drop in sales. He believes that the reason for this phenome­non was the 'reduction in the waste of foodstuffs due to sharply increased prices and the elimination of shortages ... ' (p. 112). In my opinion this strange phenomenon was due to hoarding in 1989 in the expectation of higher prices and also because people first limit their consumption of less necessary goods.

2. Sachs (1993b, 'Reply to Jan Adam') also argued that 'there is absolutely no evidence of any sharp drop in real consumption after price liberal­ization'. He tried to back up his statement by maintaining that con­sumption of meat and fruit and ownership of durable goods increased. The Polish Statistical Office, which certainly was not interested in black­ening the Polish economy, estimated the decline in consumption at 14 per cent (Adam, 1993a; see also Kabaj and Kowalik, 1995).

3. The Czech real income figures listed in Table 8.1 refer to employees with children; employees without children fared better, but not enough to change the whole picture.

4. A great proportion of the listed number of tourists in the CR have been border crossers from Austria and Germany, very often for the purpose of purchasing foodstuffs which are much cheaper in the CR than in Austria and Germany.

5. Compare with n. 2. 6. For example in Hungary in 1989 credit amounted on the average to

31 per cent of the dwellings cost, whereas in 1994 it was only 14 per cent.

Notes 191

7. In Poland, in 1989, it was possible to buy 1.5 m2 dwelling space for a net average wage, whereas in 1995 this bought only 0.6-0.7m2 (see GN, 1996, no. 10, p. 57).

8. In the CR the owners of private apartment houses have been deeply dissatisfied with such a solution and would like to see an increase of 400 to 500 per cent. A US research group which studied the problem of rents indirectly sided with owners. It argued that at the existing levels of incomes in the CR only 18 per cent of the tenants could not afford to pay a rent which is equal to 20 per cent of incomes. Those who cannot afford to pay a market rent should receive a housing allowance (Telgarsky et al., 1993).The government ignored the recommendations of the US group for political reasons.

9. It is not clear how the two economists arrived at such low losses in pur­chasing power; how, from an inflation rate of 585 per cent in 1990 and deposit rate of 30.5 per cent, they got a loss in real interest rate of 34 per cent.

10. In the CR the authorities worked out wage tariffs for industrial branches; enterprises are encouraged to follow them and many do so.

11. Miners enjoyed other advantages too. In the CSR they had the highest pensions and could retire after fewer years of sevice than other employ­ees.

12. Czechoslovak statistical yearbooks only published figures for total trade including foreign trade.

13. Looking at Table 8.6a, at first glance one is inclined to express doubts about their veracity. However, knowing the work of Beskid, the doubts evaporate.

9 Social Policy

1. For a long time discrimination against children of 'enemies' of the socialist system was applied. Many of them were not admitted to univer­sities because of their class origin.

2. Kornai (1997) argues that Hungary particularly had a social system which is proper for a country with a much higher level of economic development.

3. The term 'family allowance' is not used in all the subject ·countries for the same programme. Here we understand an allowance for the cost of raising children.

4. It is also important to mention that the outlook for the CR in the years 1995 to 2004-6 is positive; there will be an improvement in the depend­ency ratio and a negative change is to come in the year 2013 (Semmel, 1995).

5. In 1995 the total premium was 27.2 per cent. It is worth while reminding the reader that the CR collected much more in contributions than was needed for this purpose (seep. 46).

6. Many academics supported the World Bank's effort. For example, J. Sachs published a series of articles in which he encouraged subject countries to engage in reforms of the pension system.

192 Notes

7. According to the 1995 pension law, pensions must increase once prices increase by 5 per cent. In connection with the huge damages caused by floods in 1997, a change in indexation was carried out (CTK, News Summary, 17 October 1997).

8. The minimal contribution must be at least 100 crowns monthly in order to obtain government support. Contributions higher than 500 crowns monthly are eligible for government support of the same rate as 500 crowns.

9. The government selected 60 large, well-performing companies which can easily be sold and 100 enterprises in worse condition. It is estimated that for the purpose of financing pension reform approximately 82 billion zlotys will be available (Interview with Hausner, Commissioner for Pension Reform, 1997).

10. The approval of the new pension system was preceded by long and hot debates behind the scenes. The government had to make several con­cessions in order to gain the the trade unions' consent (for more on this, see Ferge, 1997).

11. Palacios and Rocha (1998) maintain that participants in Pillar II will be entitled to annuities amounting to no less than 25 per cent of the value of the retirement pension in Pillar I.

12. In the 1950s, the Czech authorities tried to counter the growing tipping by prosecuting health providers who accepted bribes, but they later abandoned the idea. The Hungarian authorities legalized the tipping, provided it was done after the services were rendered.

13. In 1995, the average wages of employees of insurance companies were 26 per cent higher than average wages for the whole economy. Traditionally, average wages of health care workers were considerably below the national average.

14. This is information I received from one of the deputies of the minister of health during my 1996 stay in Prague.

15. Tymowska, a Polish expert on health care, estimates that if all expendi­tures on health care are considered, they amount to 7.4 per cent of GDP.

16. There were suggestions for giving a compensation for the contributions in the form of a wage increase, but this idea was dropped.

17. In 1995 there were 41 physicians per 10 000 inhabitants, higher than the European average (Ministry of Welfare, 1997; SE, 1997, p. 151).

18. In 1996, after substantial reduction in the number of beds, there were still 90 beds per 10 000 inhabitants.

19. This situation was frequently abused by some doctors who performed their private activity during working hours in the state job and used state equipment and sometimes state materials (for dental work).

10 Poverty

1. Hirsl used as a basis for his study the existential minimum for non­working pensioners, constructed by a Bratislava institute.

2. Vecernik (1996, p. 93) explains this phenomenon in the following way: 'By impoverishing the population as a whole in absolute terms, the com-

Notes 193

munist regime succeeded in camouflaging individual poverty in relative terms'. In the next paragraph he points out: 'Due to the continuing pre­war social democratic traditions, equalization policy and the economy's relatively good performance, the Czechoslovak populace succeeded in maintaining a decent standard of living ... '.

3. The words 'can afford' are intended to make clear that in identifying the poor accumulated wealth should be taken into account. Some people may have very low current incomes or spend little, but due to their accumulated assets, they can afford a higher standard of living than the minimum. Such people should not be called poor. However, for practical reasons, this aspect is mostly disregarded in the calcula­tions of poverty.

4. For example, in Poland the basket of goods and services which is the basis for calculating the social minimum was determined in 1981 and adjusted in 1995.

5. Milanovic (1998, p. 61) and the World Bank's study (1996a, p. 69) frequently use the term ' poverty head count index' instead of poverty rate and also 'poverty deficit', which shows how much income is needed in order to get above the poverty line.

6. This group of people include the unemployed and persons with irregular incomes.

7. This group includes people with dual occupation; they perform agricultural work as well as factorial.

8. Beskid and Deniszczuk (1995) also show figures about how the social minimum relates to average monthly income based on household accounts and these are much higher than those quoted in the text. In 1989 the social minimum amounted to 57.8 per cent of the per capita income from households accounts, in 1991 it was 88.8 and in 1994 94.4 per cent. The difference probably has to do with the fact that households underestimate their incomes considerably.

9. In January 1996, compared with January 1995, family allowances grew even more slowly than the social minimum (Cervenkova and Kotynkova, 1995). v

10. Vytlacil and Kucharova (1994) report in their paper that in 1992 there were Hl9 000 houselrolds below the social minimum of that time, which is 2.8 per cent of all households. 75 per cent of these households were families with two dependent children.

11. To my knowledge this is the first study which sheds light on Romas and poverty.

Conclusions

1. The neo-liberal strategy is also known under the name 'Washington Consensus' because the strategy was in fact hammered out in consulta­tions among the World Bank, the IMF and the USA strategy.

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Index

Note: Some common items are not indexed at all and some selectively (CR = Czech Republic, d = definition, H = Hungary, P = Poland)

Adam, J., 25, 42, 112, 126, 187, 190 Aghion, P., 82 Agricultur-e (raJ), 43, 55-6, 59, 65, 95

policy, 56 protection, 31, 45 subsidies, 36, 56

Alexeeev, M., 35, 55, 60, 90, 182, 187 Alliance of Free Democrats, 59 Amsden, A. H., 4, 14, 174 Andorka, R., 122-3, 162, 165-6, 168,

177 Andreff, W., 80 Angelis, I., 17,40-1 Antal, L., 59 Antall, J., 58-9 Atkinson, A. B., 155 Augusztinovics, M., 180 Austerity programme, 60, 64, 66

Baczyflski, J., 25 Balassa, A., 61 Balcerowicz, L., 30, 32, 34, 147-8,

153, 182 his programme, 22

'Bank socialism', 49 Bankruptcy legislation, 56-7, 65,

80-1, 186 Baran, A., 146 Barotanyi, Z., 141, 143 Barr, N., 164 Bartlett, D. L., 55 Bastyr, I., 122 Bastyr; I. et al., 163 Bauver,"T., 186 Bekesi, L., 59-62 Belka, M. et al., 90 Beskid, L., 121, 160, 163, 165-7, 191,

193 Bhaduri, A., 14

Bflkova, D., 121 Blaszczyk, B., 76, 188 Blazyca, G., 29, 183 Blejer, M.I., 182, 190 Bokros, L., 61 Bornstein, M., 73, 78 Brada, J., 14 Brejnik, R., 39 Brezhnev doctrine, 13 Bruno, M., 182 Budget, state, 17, 24,32-3,39, 46,

53,60,182 deficit, 18, 24, 28, 32-3, 35, 53-4,

60-1, 64, 66; and inflation, 61 surplus, 24, 39

Bush, G., 182

Calvo, G. A., 23, 116, 182 Camdessus, M., 62 Carlin, W., 82 Cermak, L., 145 Cervenkova, A., 40, 115, 193 Chandler, A. D., 71 Chilosi, A., 89 Chinese model, 7-10, 171, 182

agriculture reform, 8; township and village enterprises, 8

and economic crisis in Asia, 9 reform of state enterprises, 7-8 its transition to market economy,

7, 8, 10; different from neo-liberal, 7

Chlumsky, J., 81 Chmiel, H., 26 Chojna-Duch, E., 33 Chroscicki, T., 16, 20, 27, 33 Cichocka, E., 148 Ciganek, M., 164 Civic Forum, 37

206

Index 207

CMEA, 4, 14, 17, 21,26-7,57 Commander, S., 91, 95, 100, 189

Communist Party, 28, 37, 59 Competition, 48, 51, 81, 88, 127, 149,

179 Consumption, private see Standard

of living Coricelli, F., 23, 116, 182, 190 Cornea, G. A, 172 Credit, 23, 38, 53, 62

limits, 6, 23, 38, Criminal activities, 48, 124-5, 188

corruption, 51, 58, 175, 187-8 Csaba, L., 61 Csabai, K., 63 Csermely, A, 57 Currency

convertibility, 6-7, 27, 52, 54, 184 devaluation, 6, 27, 42, 57, 61, 63 exchange rate, 26-7, 40, 185 revaluation, 31, 57 speculative foreign, 30-1, 43-4,

144, 183 Current account, 26, 28, 33, 41, 47-8,

60-1,63-5,185 Customs tariffs, 26-7,31,33, 183-4 Czesany, S., 42 Czirjak, I., 61

Dgbrowski, M., 23, 76, 182, 188 Debts, foreign, 18, 22, 32, 38, 42, 55,

60,62, 75,183-5 de Melo, M., 35 Democracy and

blue-collar workers, 70, 187 private ownership, 69-70

Democratic Forum, 58 Democratic Left Alliance, 28, 74 Deniszcsuk, L., 162-3, 165, 167, 193 Diamond, P., 153 Divila, E., 56 Dlouhy, V., 47, 185 Dornbush, R., 115 Durst, J., 113 Dziewulski, K., 26

Economic growth, 18-21, 28-30, 35-6,42-3,62-3

and stabilization, 60-1

Economic recession, 14-18,23,35, 48-50,52,59-63,178,183

Education, factor of poverty, 160, 168 unemployment, 95-7

Ehrlich, E., 56, 106 Employment

active policy of, 100-2, 176; expenditure on, 100, 190; its effectiveness, 101-3; its focus, 101

and drop in GDP, 89-90 changes in the structure of, 92-5,

189; reasons for, 92, 94 Labour Fund, 100, 137 underground, 94 see also Unemployment

Ernst, M., 35, 55, 60, 76, 90, 182, 187 European (economic) community, 4,

27,30,34-5,44, 163,185

Fassman, M., 47, 49, 100, 190 Ferge, Zs., 162, 192 Ferge, Zs. et al., 122-4, 140, 143, 160,

165, 168 Fiala, P., 145 Fidesz (Citizen Party), 67 Fiscal policy, 24-5, 32-3, 39, 46, 53-4 Fischer, S., 65, 115 Fiszer, J., 25 Foreign trade, 21, 26-8, 33-5, 40-1,

46-8,63-4,172 exports promotion, 17, 34, 47,51 gap between imports growth and

exports growth, 21, 27, 46-8, 57,60

liberalization of, 6, 17, 26-7, 54, 58, 120, 184

structure of, 21, 34, 41, 47 France,4 Freedom Union Party, 30 Frey, M., 99-101 Friedlander, J., 121 Friedman, M., 3, 173 Frydman, R., 80, 174 Fulin, Ch., 9

Gacs, J., 51 Gal, R. r., 143

208

Gelb, A, 35, 115 Germany, 35 Golebiowski, J., 29 Golinowska, S., 128, 130, 133 Gomulka, S., 5, 17,27 G6ra, M., 101, 133, 137, 139, 153 Gotz-Kozierkiewicz, D., 24-5 Gowan, P., 4, 14 Gray, Ch., 57 Great Britain, 4 Gypsies (Romas), 99, 168-9

Hajek, M., 43, 184 Harsanyi, L., 149 Hashi, I., 80 Hausner, J., 192 Havel, V., 50 Hayek, F., 3, 173 Health care reform, 143-52, 180

in CR, 144-6 its goals, 144 in H, 149-51 insurance contributions, 144, 147,

150 outlays on, 145-6, 149 medications, 145, 148, 152 in P, 146-9 present situation, 145-7, 149-50 role of the private sector, 145,

148-9, 151 under socialism, 143-4

Hebda, S., 76, 188 Herczog, L., 54 Hirsl, M., 106-7, 130, 132, 156,

158-9, 167, 192 Horalek, M., 48, 90, 94, 97 Horcicova, M., 39 Horn~ Gy., 58-9, 188 Horthy regime, 59 Housing, 112-15

allowance, 115, 191

Index

Ideology collectivism, 126 individualism, 126-7 laissez-faire, 4, 36, 51, 127, 173, 182 neo-liberal, 3, 18, 127, 182 (see

also neo-liberalism) socialist, 97

Income differentiation, 117-24, 177 beneficiaries of present, 178 generally, 122-4 intersectoral, 118-22; financial

sector, 118-19 of socioeconomic groups, 120-2 two new factors in, 117-18 under socialism, 117

Income (wage) policy and control, 6, 14,25-6,40,54,104

freeze, 25 Industrial policy, 17, 29, 36, 41, 49,

51,62,174 Inflation, 6, 9, 14, 18, 22-3, 26, 28,

31-2,38,44-6,48,53,61,64, 115-17, 178, 185

Infrastructure, legal, 7, 22, 81, 83-4, 171, 175

Interestrate,6,23-4,30,38,44,53, 182

International Monetary Fund, 3-4, 24-5,37,60,65, 171,173,182-3

Investment, 6, 28, 42-3, 53, 59 foreign, 9, 42-3, 55, 75-6, 184,

186

Jackman, R., 90, 92 Jakobik, W., 34, 183 Jantsa, M., 51 Jarosz, M., 79, 187 Jefferson, G. H., 8 Jiang, Z., 8 Jilek, J., 116, 184 J6zefiak, C., 30

construction of dwellings, 112-14, J uszczyftski, M., 97, 100, 105, 132 190

rents, 108, 114-15, 191 shortages, 112, 177 utility rates, 108, 114, 177

Hrncir, M., 38, 184 Hu, z.;9 Hubner, D., 30

Kabaj, M., 101-3, 113, 189-90 Kadar, B., 186 Kadar, J., 59 Kalal, K., 57 Kalicki, K., 183 Kalinova, L., 184

Index 209

Kamenfckova, V., 39, 46 Kapuscinski, P., 31

Karpinska-Mizielinska, W., 81 Kenway, P., 81 Keserii, J., 56 Khan, S. K., 9 Klacek, J., 41, 185 Klak, J., 46 Klaus, V., 38, 48-50, 92, 129, 134,

146, 175, 182, 184-5, 188 Kochanowicz, J., 4, 14 Kohoutek, M., 116 Kolodko, G. W., 16-17,20,24-5,29,

78, 172, 174, 184 Koltay, J., 90 Komarek, V., 17 Kornai, J., 5, 17, 60-2, 70, 87-8, 103,

187, 191 Kotynkova, M., 122, 193 Kouba, K., 49, 185 Kbves, A., 38, 51, 56,61-2,65 Kowalik. T., 4, 22, 178, 190 Kowalska, M., 24 Kozak-Lisiecka, T., 31 Krajewska, A., 32 Krencik, W., 25 Kucharova, Z., 165, 193 Kunert,v J., 76, 83 Kupa programme, 52 Kysilka, P., 80, 82

Labour productivity, 25, 28, 31, 42-3, 45,89,91

and wages, 31, 43, 45-6 Ladanyi, J., 5 Lanyi, K., 57 Laski, K., 14 Lavigne, M., 68 Levcik, F., 14 Lewicka, E., 137 Lipton, D., 5 Liu, J., 8 Lubinski, M., 20, 33-4 Ludanyi, A., 16, 20

Machacek, J., 46 Maj, H.;24-5 Marer,P.,35,55,60, 182,187 Marshall Plan, 4

Martos, B., 180 Matolcsy, G., 62, 65, 186 Mazowiecki, T., 34 Medgyessi, P., 63 Mejstrfk, M., 77 Mertlfk, P., 80 Meszaros, Gy., 56 Micklewright, J., 155 Milanovic, B., 122-3, 156, 162,

164-5, 170,193 Misiak, M., 24 Mizsei, K., 57 Mladek, J., 17, 41,51 Monetary policy, 6, 14, 23-4, 30-1,

38-9,43-4,53,184 money supply, 6, 30, 44, 53 open market operations, 30 reserve ratio, 30, 44, 48 see also Credit limits; Interest rate

Money reform, 115 Monopolization, 6, 14, 80 Moravova, J., 121 Mozejko, E., 27 Mujzel, J., 80, 188 Muller, K., 140 Murakbzy, L., 53 Murrell, P., 5

Neo-liberal (ism), 3, 18, 37, 49, 65, 127, 164, 171, 182

strategy, 3, 171-2; criticism of, 172 Nemeth, M., 186 Nesporova, A., 90, 100-1 Nes\'era, V., 42 Novtltny, V., 45 Nuti, D. M., 16, 30,78-9,88, 174

Oblath, G., 55, 57, 62 OECD, 14, 40, 47, 101 Olszewski, J., 182 Orosz, E., 149-51 Ownership

changes in structure, 21 democracy and private, 70 economic efficiency and private,

70-1 discrimination against state, 24, 26 pr~ate, 13,21,52,70

Owsiak, S., 32

Index 209

Kamenfckova, V., 39, 46 Kapuscinski, P., 31

Karpinska-Mizielinska, W., 81 Kenway, P., 81 Keserii, J., 56 Khan, S. K., 9 Klacek, J., 41, 185 Klak, J., 46 Klaus, V., 38, 48-50, 92, 129, 134,

146, 175, 182, 184-5, 188 Kochanowicz, J., 4, 14 Kohoutek, M., 116 Kolodko, G. W., 16-17,20,24-5,29,

78, 172, 174, 184 Koltay, J., 90 Komarek, V., 17 Kornai, J., 5, 17, 60-2, 70, 87-8, 103,

187, 191 Kotynkova, M., 122, 193 Kouba, K., 49, 185 Kbves, A., 38, 51, 56,61-2,65 Kowalik. T., 4, 22, 178, 190 Kowalska, M., 24 Kozak-Lisiecka, T., 31 Krajewska, A., 32 Krencik, W., 25 Kucharova, Z., 165, 193 Kunert,v J., 76, 83 Kupa programme, 52 Kysilka, P., 80, 82

Labour productivity, 25, 28, 31, 42-3, 45,89,91

and wages, 31, 43, 45-6 Ladanyi, J., 5 Lanyi, K., 57 Laski, K., 14 Lavigne, M., 68 Levcik, F., 14 Lewicka, E., 137 Lipton, D., 5 Liu, J., 8 Lubinski, M., 20, 33-4 Ludanyi, A., 16, 20

Machacek, J., 46 Maj, H.;24-5 Marer,P.,35,55,60, 182,187 Marshall Plan, 4

Martos, B., 180 Matolcsy, G., 62, 65, 186 Mazowiecki, T., 34 Medgyessi, P., 63 Mejstrfk, M., 77 Mertlfk, P., 80 Meszaros, Gy., 56 Micklewright, J., 155 Milanovic, B., 122-3, 156, 162,

164-5, 170,193 Misiak, M., 24 Mizsei, K., 57 Mladek, J., 17, 41,51 Monetary policy, 6, 14, 23-4, 30-1,

38-9,43-4,53,184 money supply, 6, 30, 44, 53 open market operations, 30 reserve ratio, 30, 44, 48 see also Credit limits; Interest rate

Money reform, 115 Monopolization, 6, 14, 80 Moravova, J., 121 Mozejko, E., 27 Mujzel, J., 80, 188 Muller, K., 140 Murakbzy, L., 53 Murrell, P., 5

Neo-liberal (ism), 3, 18, 37, 49, 65, 127, 164, 171, 182

strategy, 3, 171-2; criticism of, 172 Nemeth, M., 186 Nesporova, A., 90, 100-1 Nes\'era, V., 42 Novtltny, V., 45 Nuti, D. M., 16, 30,78-9,88, 174

Oblath, G., 55, 57, 62 OECD, 14, 40, 47, 101 Olszewski, J., 182 Orosz, E., 149-51 Ownership

changes in structure, 21 democracy and private, 70 economic efficiency and private,

70-1 discrimination against state, 24, 26 pr~ate, 13,21,52,70

Owsiak, S., 32

210 Index

Palacios, R., 132, 143, 192 Party of Rural Smallholders, 67 Pauna, C., 90, 92 Peasant Party, 28, 45, 56 Pension reforms, 131-41, 178

costs of transition to Pillar II, 192 in CR, 135 in H, 139-43 one v. multiple funds, 153, 179 outlays on, 131-2 pension contributions, 131-33,

138, 140 Pillar I, II, III, 133-4 (d) in P, 136-9 reasons for, 131; World Bank

reasoning and its proposal, 133-4

retirement age, 135, 137, 140 retirement benefits from Pillar I,

135, 138, 140-1; solidarity elements, 135, 137, 140-1

retirement benefits from Pillar II and Pillar III, 136, 139, 142-3

state run v. privately run, 179 Pension system under socialism,

134-5 Perczyftski, M., 34 Perkins, D., 8 Petschnig, M. Z., 56, 61 Pick, M., 47,49 Pietrewicz, J., 76, Plowiec, U., 33-4 Pokorny, J., 136 Popov, V., 172 Popper, L., 54 Poverty, 155 (d), 170, 181, 192-3

in CR, 167 and economic growth, 169-70 expansion factors: decline in real

incomes, 156-7; widening of inequalities, 158

in H, 167-8 in P, 165-6 line: its determination, 161 (d);

existential minimum, 163 (d); social minimum, 162-4 (d), 166-8, 193

linked to: education, see Education; large families,

158-9; restrictions on pensioner employment, 157, 160; social origin, 160-1; unemployment, 157, 159-60

its possible elimination, 169-70 rate, 164-9 under socialism, 158-9; child,

158-9 Prib, J., 135 Prtce (s)

agricultural, 45, foodstuff, 31, 45, 110, 184 international relative, 45, 186 liberalization, 6, 14, 17 services, 91, 108

Privatization, 6-7, 17, 22,68 (d), 173-4, 187-8

and economic efficiency, 173 its evaluation, 79 its goals, 69-71 large-scale, 68, 72-83, 174; capital

route, 73-6; through liquidation, 76; voucher (mass privatization), 77-80, 84, 174-5, 188; and its criticism, 79-84

receipts from, 75 restitution, 56, 185-6 small-scale, 72 spontaneous, 58, 188 and state revenue, 82

Public against Violence Party, 37

Qian, Y., 9

Radi, A, 61 Rapacki, R., 29, 183 Rapaczyftski, A., 80, 174 Rawski, T. G., 8 Rayment, P. B. W., 4 Reagan, R., 173 Reti, T., 43 Revesz, G., 56, 106 Rocha, R., 132, 143, 192 Rongxia, L., 9 Rosati, R., 30, 116 Round Table negotiations in Poland,

4 Rubas, L., 145

212 Index

Transformation in Hungary first years' performance, 55-59 1994-6 crisis, 59-64; Bokros's

programme, 61-3, 65, 130; reasons for, 59-60

Transformation in Poland first years' performance, 23-8 growth stage, 28-35

Transformation strategy, 3-7, 13, 50, 104, 171, 180

gradualist strategy, 13-14,64-5 role of IMF, 3-4 role of neo-liberalism, 6 shocktherapy,4, 7,13,22,37-8,65 three possible models, 5

Transformation in subject countries common and contrasting features,

13-21; economic policies, see Monetary; Fiscal; Income (wage); first years of transformation, 13-14, 18,172

period of economic growth, 18, 21 (see also Economic growth)

'Trickle-down' theory, 181 Trzeciakowski, W., 184 Turek, 0., 184 Tymowska, K., 149, 192 Tymowska, K. et al., 149

Uldrichova, V., 90, 100-1 Unemployment, 14, 18, 50, 60,

175-6, 188-90 and economic growth, 89-91 and real wages, 89 benefits,24,54,92, 95,97-9,102,

176-7, 181, 189; conditions for obtaining, 98-9

causes of, 87-9

characteristic features of, 95 consequences of, 97, 102-3, 176 low unemployment in CR, 91-2 long-term, 98-9, 176 methods for fighting of, see

Employment social assistance to unemployed,

95,99 Uplawa, S., 24, 32 USA,4

Valentinyi, A., 53 Varga, Gy., 56 Vaskova, D., 39 Vec-ernik, J., 121, 123, 130, 159, 188,

v192 'Velvet revolution', 37 v ertes, A., 57 Vintrova, R., 17, 42-3, 45, 49 Vorisek, V., 135 Vosk<l, E., 75 Vytlacil, J., 165, 193

Wa,J'~sa, L., 27, 29, 147 Weigl., J., 41-2 Weitzman, M. L., 8 Wernik, A., 32-3, 183 Western advisers, 4-5, 182 Wlodarczyk, C., 147 Woo, W. T., 65 World Bank, 3-4,37, 122-3, 169-70,

191

Xu, Ch., 8

Yugoslavia, 57

Zsubori, E., 57