The Political Economy of Dual Transformations: Market Reform and Democratization in Hungary

5. Stabilization Policy in the Postcommunist Period

CHAPTER 5 Stabilization Policy in the Postcommunist Period The former communist countries of Eastern Europe pursued a variety of economic stabilization strategies.! In Germany, unification paved the way for the region's only true "big bang." By assuming the external debt of the GDR and absorbing its fiscal, monetary, and price systems, the Bonn government executed what amounted to an instantaneous stabilization. Poland's Balcerowicz Plan featured a radical price reform, a large currency devaluation, a harsh monetary squeeze, and strict wage controls. Subsequently, the Polish authorities negotiated a reduction of the country 's hard currency debt. The Czech Republic, Bulgaria, and Romania implemented less draconian versions of "shock therapy." Postcommunist Hungary represents a different pattern. The standard categorization of "gradualist" and "big bang" strategies of transition does not adequately capture its distinctive trajectory. In the sphere of foreign trade and exchange, Hungary moved along broadly similar lines as Poland and the Czech Republic, enacting sharp tariff cuts, liberalizing imports, and moving cautiously toward currency convertibility. And like those countries, Hungary sustained a policy of fiscal and monetary discipline during most of the post-1989 period. But in other respects it diverged from the rest of the region. Following the strategy of its predecessor, the Antall government combined import liberalization with real currency apprecia1 . For surveys of the stabilization programs undertaken in postcommunist Eastern Europe, see Michael Bruno, "Stabilization and Reform in Eastern Europe: A Preliminary Assessment," IMF Staff Papers 39, no. 4 (December 1992): 745-53; Laszlo Csaba, "First Lessons in the Transformation of the Economic Systems in Central Europe," Acta Oeconomica 43, nos. 3-4 (1991): 231-50; Alan Gelb and Cheryl Gray, The Transformation of Economies in Central and Eastern Europe: Issues, Progress, and Prospects (Washington: World Bank, 1991), 12-17; Andras Kaves, Central and East European Economies in Transition (Boulder: Westview, 1992), 17-36; Kaves and Paul Marer, "Foreign Economic Liberalization in Eastern Europe and in Market Economies," in Kaves and Marer, eds., Foreign Economic Liberalization: Transformations in Socialist and Market Economies (Boulder: Westview , 1991), 15-33; L. Halpern, "Hyperinflation, Credibility, and Expectations: Stabilization Theories and East European Stabilization Programs," Acta Oeconomica 43, no. 102 (1991): 103-8; "Developments in Selected Non-OECD Countries: Central and Eastern Europe and the Newly Independent States of the Former USSR," OECD Economic Outlook, December 1992, 123-29. 165 166 The Political Economy of Dual Transformations tion-a policy mix at odds with the orthodox stabilization remedy prescribed by the IMF and embraced by other East European countries. And it eschewed Polish-style debt relief, continuing the Communist Party's unblemished record of debt service. Economists who have examined these cases focus on the theoretical foundations and programmatic elements of market reforms2 or the debate concerning the proper pace and sequence of economic transition.3 Other scholars emphasize the starting positions of the postcommunist countries.4 What made Germany's big bang possible was a preexisting capitalist state capable of absorbing the GDR's socioeconomic and political systems and generating the massive financial flows needed to rebuild the East's industry and infrastructure. The Czech Republic's comparatively favorable macroeconomic situation made a "minibang" strategy feasible, while the hyperinflation besetting Poland at the time of the transition militated toward shock therapy. Similarly, Hungary's specific circumstances clearly influenced its economic policy course during the early postcommunist years. In particular, the reforms previously undertaken by the Communist Party alleviated price distortions and domestic shortages, obviating Polish-type stabilization. But while the starting positions of the East European countries doubtlessly shaped their postcommunist trajectories, they do not fully explain the various patterns ofeconomic transformation in the region. For example, it is not obvious that Hungary's economic circumstances preordained a moderate transition strategy. Indeed, its external debt situation was in some respects the most precarious in Eastern Europe. As table 5.1 2. Andrew Berg, "Does Macroeconomic Reform Cause Structural Adjustment? Lessons From Poland," Journal of Comparative Economics 18, no. 3 (June 1994): 376-409; Eduardo Borensztein, Dimitri Demekas, and Jonathan Ostry, "An Empirical Analysis of the Output Declines in Three Eastern European Countries," IMF Staff Papers 40, no. I (March 1993): 1-31; Guillermo Calvo and Fabrizio Coricelli, "Output Collapse in Eastern Europe: The Role of Credit," IMF Staff Papers 40, no. I (March 1993): 32-52. 3. I. Abel and J. Bonin, "Two Approaches to the Transformation in Eastern Europe: The 'Big Bank' versus 'Slow but Steady,'" Acta Oeconomica 43, nos. 3-4 (1991): 213-29; Josef Brada, "The Transformation...