Caught in the revolving door of change

Conventional wisdom has it that if a Hungarian gets into a revolving door behind you, the chances are he'll come out ahead. This is not the case with the country's economy.

In 1989, Hungary, with its unique blend of "goulash Communism", was undoubtedly the front-runner of the Central and East European pack and Western investors were falling over themselves to set up shop here.

Nowadays, the Czech Republic and even Slovenia are often said to have shot into the lead, while Hungary, back in the grip of former Communists, lurches from one economic crisis to another and stalls in the vital process of privatisation.

When the Austrian foreign minister Wolfgang Schussel said earlier this month that the region's three leading contenders for early European Union membership were the Czech Republic, Slovenia and Poland, there was widespread consternation.

After so many years of being top dogs in the region - in the latter years of the Communist era, Hungary was known as the "happiest barracks in the bloc" - many Hungarians refuse to believe they could have been overtaken and dispute the validity of the statistics used to back up such claims.

The Czech Republic last year enjoyed a four per cent growth of GDP, compared with two per cent in Hungary, and managed to keep unemployment and inflation down to six per cent and 14 per cent against 11 per cent and 22 per cent in Hungary. But the counter-argument is that the Czechs have so far avoided the painful restructuring of companies and the passage of modern bankruptcy laws long since undertaken by the Hungarians.

Hungarians also like to point out that although foreign investment may have slowed down, the $8bn the country has attracted to date represents half the amount invested in the entire region since 1989 and is by far the highest per capita anywhere.

But there are many who acknowledge that not enough has been made of the advantages the country possessed six years ago. With an economy that had been semi-liberalised since the early 1970s, strong trading links with the West in place, and a well-educated and creative workforce, progress towards economic reform could certainly have been faster.

In part the relative sluggishness was caused by Hungary's first post- Communist government, headed by the right-of-centre Hungarian Democratic Forum (MDF), which devoted much of its time addressing questions of national identity rather than productivity.

In part it was due to the legacy of a $20bn foreign debt - now at $30bn - from the Communist era. The burden crippled attempts to bring the budget deficit, which was up to seven per cent of GDP last year, into line with IMF recommendations.

Progress was also hampered by a reluctance to initiate the massive cuts in social welfare payments needed to bring government spending down.

When the MDF was ousted from power last year in an election which saw the former Communist Hungarian Socialist Party (MSZP) romp to victory, many feared things would go from bad to worse: more, not less government spending: more barriers to privatisation.

At the beginning of this year, the pessimists appeared to have got it right. Having fired his privatisation minister, the prime minister, Gyula Horn, blocked the sale of a group of state-owned hotels to an American concern - on the grounds that the price was not high enough.

Shortly afterwards, at the end of January, Laszlo Bekesi, the staunchly pro-free market finance minister, resigned, citing disagreement with Mr Horn on the pace and scale of economic reform and Hungary's privatisation programme.

Investor confidence plummeted. To add insult to injury, Hungary suddenly found itself being likened to Mexico: a country that could be heading for insolvency and political instability.

The parallels with Mexico were never fair. Although both countries have high foreign debts, more than 90 per cent of Hungary's debt is long term and its foreign reserves of US$7bn are high compared with those of Mexico.

Politically, despite tensions within the ruling coalition and the MSZP itself, Hungary remains essentially stable.

The atmosphere of near- panic encouraged Mr Horn to take decisive action. Less than two weeks after Mr Bekesi's resignation, he appointed Lajos Bokros, a known pro- reformer, the new finance minister. At the same time Gyorgy Suranyi, another pro-reformer, was invited to fill the vacant position of President of the Central Bank.

Both appointments drew sighs of relief from Western business circles in Budapest. In March, moreover, the commitment to economic reform was underlined when Mr Bokros unveiled a package of measures which included swingeing public spending cuts, a phased devaluation of the Hungarian Forint and a crackdown on the grey economy. While unpopular with Hungarians on low incomes and with pensioners, the Bokros "austerity package" has been widely acclaimed as the first serious attempt to reform the country's budget structure and bring down its deficit.

"We are only now embarking on the really hard core of change," concedes Gyorgyi Kocsis, economics editor of the weekly HVG magazine, referring to the package. "It is a great shame that these measures were not enacted five years ago."

Since March the Hungarian government has also passed important privatisation legislation and announced its plans for the sale later this year of considerable stakes in the country's public utilities. It is still prone to the odd scandal - Mr Bokros himself has come under fire over a $133,000 golden handshake paid to him from his previous employers at the state-owned Budapest Bank. But the fundamental direction of policy is clear.

The irony that these vital steps towards capitalism are being taken by a party which calls itself socialist, and which is the direct heir to the former ruling Communist party, is one that is not lost on most Hungarians.

But then Hungarians have always been good at adapting. Even the old Communists have shown that when it comes to revolving doors, they, too, can pull off a trick or two. They may go in facing one way, but they are quite capable of coming out facing another.

Adrian Bridge