[...]Is Hungary Set To Become The New Iceland? | afoe | A Fistful of Euros | European Opinion[...]…

About the export and import: if you look at data what is the value added to export you can understand why IM and EX are moving so much together – most of the import is input for export (find data in IDR 2009).

Since at least the a decade the potential growth rate is overestimated, i rember at times of fidesz gov. back in 90s everyone was speaking about 4 percent, Tibor Erdős was then telling also 2 percent. To belive that hungary’s potential growth rate is higher is not wise – not just because of ageing population, the education of working age population is also pretty bad, there is a significant portion of the working age population wich has no useful education – for these people no jobs can be created.

about the possible structural reforms: if it was impossible to do some deeper wise decisions in these gloomy days, i can’t belive something will happen if global happyness will come back.

now the joining of euro zone should be first priority because deliberated capital flows, huge dept, small country, big current account deficit is not a cool combination to stay alone and fear also the exchange rate volatility.

“And it is not the best to calculate an avergae 1.8 per cent economic growth between 2000 and 2010 for Hungary and to derive from this a bad growth outlook for the next decade.”

Look, I thought quite carefully about this. Of course we are in the midst of a huge crisis. But this is why I take ten year moving averages, since to some extent this irons out these ups and down.

What I mean is that as well as the crisis you need to take the excesses which preceded it (everywhere) into account. Prior to 2007, Hungary had an artificially high growth rate, boosted by current account and fiscal deficits. So to some extent the sharp contraction is logical (on the steady state way of looking at things), and it is what it is (on the path dependent approach). In either case it exists, and the ten year average gives us an idea of just how fast Hungary was capable of growing.

Also, look at the long term chart. Before the 1990s there was a clear decline. Of course you can argue this was artificially low (due to state planned economy etc), and I would agree weith you. But what we have between 1990 and 2010 is a lot of “noise” in the data, a huge down and a surge up. I doubt we can extrapolate anything meaningful from that. So I look at other ageing societies, and I find a similar pattern of losing momentum (Germany, Japan).

The tragedy is (from my perspective) that the CEE is currently going through a huge metamorphosis (nice Kafkerian expression this), from having consumer driven to export driven economies. The driving force behind this transition is rising population median ages, yet almost no one in Eastern Europe seems to notice (or care).

“it is fiscal deficit that makes debt unsustainable and Hungary performs in the next few years one of the best in Europe and in the world”

I think you are not taking sufficient account of the danger of self perpetuating (via deflation) contractions. Obviously you are right in the evident sense that if you don’t run growth plus low enough deficits/primary surpluses, you can’t reduce debt to GDP. But if you apply a very rigid fiscal objective, tight monetary policy and provoke ongoing deflation, then with falling nominal GDP values the tendency is towards higher debt to GDP levels.

This is the key point.

Thanks for taking the time to make the lengthy comment. Basically, we are in the very grey and muddy area of “methodolocial issues”.

In part, the answer one gives to the sort of questions you are asking depends on whether or not you think economies are path dependent entities. This is important, since it conditions whether or not you believe there is some variant or other of steady state growth to which to which economies tend to revert in the long run. Your argument, at least in some loose informal sense, seems to depend on such a view. If not, it is hard to see the relevance of reference to the US and the UK in comparative terms, since what are we comparing, apples and pears, or two entities which are inherently comparable? In the latter case, economies would not seem to be path dependent.

Since beyond the fact that they are all economies there are such vast differences between the UK and the US economies between themselves, and between the two of them and Hungary that I find it hard to see where we are.

I have serious difficulties with any view that ignores path dependence. I think economies to depend with some degree of sensitivity on their previous time path, and in this sense I find what is happening to the current value of the forint rather disturbing, as it may condition the evolution of several other key variables for some time to come. The presence of all those CHF loan’s is another item – indeed I see the resolution of this issue as the key to progress, since if Hungary is to be an export driven economy then you need a parity well below 270 to the euro, unless of course you go for drastic wage deflation, although I see recent evidence of this in the earnings data.

Frankly I find the whole idea of convergence to a theoretical steady state to be completely metaphysical, like the Holy Trinity (you know, god is three, and god is one) you either believe in it or you don’t.

So since I am a great admirer of one well known Hungarian thinker – Imre Lakatos – and his version of Popper’s falsification process, I would simply ask you: what would it take for you to change your view that the longer term growth potential of the Hungarian economy is as you believe it to be – other than by waiting till 2020 and checking of course, since by that time the horse will be well gone and bolted (at least if I am right, and economies are path dependent entitities). In my opinion this is the only way we can get a serious rational debate started.

In the second place I don’t accept that Solow’s original “plausible assumption” that population change was egogenous to economic growth is as plausible as it seemed to him to be, once you start scratching around below the surface and dig into some facts.

I haven’t published on this yet, but you can find a blog post to the topic here.

Now just because the neo-classical version of growth theory seems to be not without problems doesn’t mean we have to thow all the procedures of neo classical economics straight out of the window. The marginal idea seems to me to be a good one, which is why I am not sure how you have become so convinced that drawing marginal labour into the labour force is going to revolutionise Hungarian economic growth.

Don’t get me wrong, I am more or less in sure the measures the Bajnai administration is introducing to reduce the tax wedge are positive, its just that having studied this process in some depth (in relation to ageing population) in Germany, I’m not sure you are going to get the bang per forint you are expecting.

Also, while bringing prematurely retired workers back into employment (and off the state payments system) is surely beneficial, it is only one half of the short term solution being offered for ageing and declining workforces (the long term answer is of course to attack those ultra low fertility levels).

The other half of the policy reponse is to promote immigration – as outlined in the World Bank report “From Red To Grey” – and I find the almost complete absence of any plan to stem the rate of invesrion in the population pyramid in the whole rescue programme pretty pre-occupying. If the root of your unsustainability is the drop in population, and its relative ageing, then it would see, to be convincing, that this topic at least needs to be addressed.

The bottom line is that the whole current programme of IMF CEE rescue’s worries me, and I suspect we are going to see a presence from the fund in the region for a long long time to come.

A debt path for a country depends on expectations of how much support (and hence spending) will be required to make a turnaround, so I feel a comparison of the UK to Hungary is unfair as our economy is far less exposed than yours, not to mention our credit rating puts us far behind you in a race to a sovereign debt crisis.

Whether GDP growth is projected at 2% or 3% is irrelevant, I think both are unrealistic unless radical measures to support the economy are taken by 2012 and quite possibly, Euro Membership which I would wager is perhaps something you are betting on – if that is the case, please enlighten us.

The crux of the matter is clearly the stability of the currency – the MNB is evidently acutely aware of the exposure of the economy (and the government) to foreign currency debt and hence, the ability to service that debt is crucial to preventing a free-fall in both GDP and the Forint.

Sadly, the government lacks any sort of credibility to assist the MNB in keeping the currency supported in the face of interest rate cuts and I would not be at all surprised if a shadow-economy transacting in Euros has sprung up, stemming from a lack of faith in the Forint. The result net effect is that the MNB has indeed essentially lost control of monetary policy

Additionally, the commercial banks themselves are very much part of the problem and steps should already have been taken to address this, especially with regard to their treatment of FX borrowers and otherwise – the public sector needs to learn that the private sector will happily hold a cap out and hoarde liquidty till the cows come home unless threatened with measures that bite at the heels of executive management.

The ideal solution would be to allow Hungary an early entry into the Euro – this would lift a huge weight from the shoulders of many, however, the odds of that are as likely as Jobbik convincing the population that they’re not Nazis.

So, in the absence of any such relief, the only hope for Hungary is for it to try and maintain exports and hopefully make itself more competitive for industry to consider the country as a viable manufacturing base.

The population will very likely continue to languish until there are either improvements in the standard of living, or perhaps cutbacks in education spending that kills off sex education.

If (When) Fidesz win the elections, I can foresee a reversal of Bajnai’s programme (to what extent I can’t be sure) and some maneuvering to begin a process of spending that will aim to support the economy – the success of which will largely depend on their ability to convince the rest of the world that the country can indeed make a stable recovery and hence maintain the stability of the currency.

It is entirely possible in my eyes that in order to satisfy political goals Fidesz may simply restrict capital movement in order to provide support, though this would be rather extreme to say the least and repercussions with regard to joining the Euro also make such a move unlikely, but nonetheless, possible.

That said, with a foreign currency borrowing of just under 50% of gross debt, maenuverability is extremely tight – the ultimate saviour will be taming the banks, and then, foreign investment; be it direct private input or more from the IMF, though in the latter case, more flexible terms will be crucial to a proper sustained recovery.

http://akkadmin.ivyportal.com//kepek/upload/2009/Hungarian_debt_ratio_may_decline_after_2009_english.pdf

In addition, I would like to add that it is not the economic growth that determines life and death about debt paths, though it is an important factor. And it is not the best to calculate an avergae 1.8 per cent economic growth between 2000 and 2010 for Hungary and to derive from this a bad growth outlook for the next decade. In 2008-2010 we are just experiencing a huge world recession not seen long-long ago and there hardly were structural reforms in Hungary in this decade… Economic growth, however, was around 3-4 per cent before authority measures in 2006-2007. In Hungary everyone would argue that this decade was pretty good for us… Just take a look at Slovakia, for example, where Dzurinda-reforms made the economy grow like hell until the crisis.

All in all, debt path is not unsustainable even with 1 per cent growth in the next decade. One should take a look at the USA or UK since it is fiscal deficit that makes debt unsustainable and Hungary performs in the next few years one of the best in Europe and in the world. That is what counts and what should be monitored and enforced. Now IMF terms and conditions helps to carry out a responsible fiscal policy in the following years and this positive fact should be underlined, I think.
Lajos Deli

And it isn’t only Hungary who have a problem, Renaissance Economics, in a research report out today, make the very valid point that the 14 percent rebound in the ruble against the dollar since January is once more eroding the competitiveness of non-energy businesses in Russia and risks pushing the country directly back into a “boom-bust cycle,”. Roland Nash, chief strategist at Renaissance Capital says:

“The danger for Russia is a stronger ruble, not a weaker one,” Nash said in an interview from Moscow today. “A weaker ruble definitely helps the non-oil economy and a stronger ruble definitely hurts them.”

The other key point about this would be the way the high interest rates on offer to maintain ruble liquidity attract carry trade plays from investors, which artificially sustain the ruble. My own feeling is that the high interest rates have encouraged ruble liquidity, and this is supporting the currency and stabilising the reserves. But, as Renaissance Capital point out, things can’t go on like this, since Russia’s economy will only keep contracting internally, especially as we get into next year, and they can’t keep pumping in fiscal stimulus. So, even though we won’t see violent contractions everywhere like we just saw in Q1, 2010 could well be a generally tougher year than 2009, since there will nothing like the same room for fiscal stimulus. Russia’s leaders are obviously gambling that oil prices will rebound, but if they don’t……….

“Otherwise, there is a factor that can cushion the transition in Hungary (in the medium term, as the dependency on export won’t really change) the low employment rate. It can signall the existence of some reserves in the system, even though its mobiliziation is not so easy as it is preceived by many, via the tax system.”

Oh I agree. I’m not saying nothing can be done, its just we need to be realistic about the difficulties, and we need a policy on an EU level to all help each other. I am sure participation rates can be raised in Hungary, and this is important, although I agree with your scepticism: it won’t be as easy as many seem to think.

And I am not pessimistic, as I have indicated before, about Hungary’s potential export prowess in the future. I would put Hungary second to the Czech Republic in this regard.

But first we need to break out of this dreadful contraction.