Democracy, Institutional Change, and Stabilisation Policy in Hungary

Abstract

CONVENTIONAL WISDOM HOLDS that new democracies encounter special difficulties undertaking macroeconomic stabilisation. Democratisation generates a surge of popular participation that thwarts attempts by newly elected governments to enact policies inflicting high costs on politically vital constituencies. Budget cuts, monetary contraction and price liberalisation antagonise consumers and public sector employees; wage constraints erode the real income of blue-collar workers; currency devaluations threaten non-tradable goods producers; trade liberalisation imperils import substituting industries. These effects give rise to 'distributional coalitions' seeking to mitigate the socioeconomic fallout of austerity programmes. Such coalitions enjoy important advantages over the supporters of stabilisation policy. The costs of economic austerity are immediate, certain and concentrated; the benefits long-term, uncertain and diffuse. The 'losers' are therefore better organised and more vocal than the 'winners'. Facing such an alignment of societal forces, fledgling democracies are unable to resist pressure to water down stabilisation programmes. Trade unions and other previously repressed groups seize upon the opportunities of democratisation to press their claims on new leaders, who respond with budgetary concessions and generous wage settlements that raise inflationary expectations and make stabilisation even more difficult than before the political transition.2 Societal opposition helped to defeat stabilisation programmes launched by several of Latin America's new democracies in the 1980s, despite efforts by government leaders to soften their distributional impact via 'heterodox' experiments (e.g., Peru's Garcia Plan, Brazil's Cruzado Plan, Argentina's Austral Plan).3 Political obstacles to stabilisation are presumably even greater in Eastern Europe, where the social costs of economic transformation are exceptionally high.4 Advocates of 'shock therapy' strategies in the East argued that post-communist leaders would be unable to sustain policies imposing heavy burdens on the population. Successor governments could best circumvent populist resistance by concentrating the costs of economic stabilisation in the briefest possible interval.5 The electoral triumphs of former communists in Lithuania, Poland, Hungary, Bulgaria and other countries appeared to validate these pessimistic appraisals, demonstrating broad discontent with incumbent governments that enacted unpopular economic programmes in the early 1990s. This article challenges the conventional wisdom regarding the perils of stabilisation