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Panel 1 – Trust and cronyism

Chair: Mária Csanádi (HAS CERS)

György Lengyel (CUB) – Laura Szabó (CUB)
Elites’ Trust in Institutions: The Hungarian Political Elite Compared
FULL PAPER (PDF) 

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ABSTRACT: After 2006 dissensus became predominant in the Hungarian elite concerning national issues. Empirical analyses however stressed that regarding the positive evaluation of the European integration there were no considerable differences. In international comparison the Hungarian political elite’s European attachment and trust were among the highest ones.
Based on elite surveys from 2007 and 2014 in nine EU-countries, the present paper seeks the answer to the question to what extent are these reflected in the findings of new research highlighting trust in institutions.
First it is recalled what characterized the Hungarian elite’s trust towards institutions in 2007, the year before the global crisis and the ensuing political transformation.
The next section compares the level of trust put by the Hungarian political, economic, administrative and media elite segments into institutions. It is to be seen to what extent these elite segments are unified or fragmented in terms of confidence in institutions. Our results reveal that the Hungarian elite segments do not differ significantly from each other regarding their trust in EU institutions, but they significantly differ as to their trust in national ones.
That is followed by a discussion of the political elite’s (national MP’s) trust in institutions in 2014 in an international perspective. The main determinants of political elite’s institutional trust are ideological self-positioning and party affiliation all over in Europe. However, in international comparison the Hungarian political elite became one of the most sceptical ones towards the EU. Recently it trusts less in EU-institutions than the Hungarian population.

Istvan Janos Tóth (HAS CERS) – Miklós Hajdu (CUB)
Cronyism in Hungary: Empirical analysis of public tenders 2010-2016
FULL PAPER (PDF)

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ABSTRACT: In this paper, we use the public procurement database built by CRCB, which contains data from more than 230,000 public tenders from 1997 to 2017. The analysis is based on data from 126,330 public procurement contracts from 2010 to 2016. The focus of the analysis is public tenders (without framework agreements) won by companies related to cronies and family members of Hungarian Prime Minister Viktor Orbán: Lőrincz Mészáros, István Garancsi, István Tiborcz and Lajos Simicska (we will refer to this group with the abbreviation MGTS). During the analysis, we make a statistical comparison of the corruption risks, intensity of competition and the strength of price competition among tenders won by crony companies and that among tenders won by other, ordinary Hungarian firms. We use indicators as a dummy variable of single bidder to measure corruption risks, index of intensity of competition and the relative price drop, RPRD to measure of strength of competition. Our results point out the existence of political favouritism in Hungarian public procurement during the period under examination. The corruption risk is significantly higher and the intensity of competition is significantly lower in tenders won by MGTS firms than other tenders won by ordinary Hungarian companies and the median RPRD values of tenders won by MGST firms are very close to the median value of tenders with the highest corruption risks and lowest intensity of competition.

József Péter Martin (Transparency International Hungary)
The Interplay between Cronyism and Economic Policy – the Case of Hungary

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ABSTRACT: The primary aim of this paper is to reveal some mechanisms how economic policy-making has helped state-driven resource allocation in Hungary since the change of government in 2010. The current governing party, Fidesz has built a new regime almost entirely instrumentalizing the public institutions and influencing the market and the public arena in favor of clients and cronies. The actual economic system can be described as state capitalism with a strong feature of cronyism. Having identified some sectors and areas of the manifestation of cronyism, we reveal a number of policy measures and its consequences to the economy giving a first estimation on the corruption rent in the sectors involved. In the first short theoretical part of the current study we describe the link among institutions, policies and perceptions underlying that not only institutions but also perceptions matter when assessing the economic performance. The facts are varied on the current state of Hungarian economy, and the perceptions are diverging not only according to the traditional party (government versus opposition) lines. Just one illustration of this ambiguity: the competitiveness of the country is nosediving, meanwhile the business confidence reaches historical highs. We explain how the players close to the government extract a growing share of society’s wealth for themselves and their associates. The collusion of officials and oligarchs provides both groups with undue benefits. This very collusion undermines both trust and business competition and might have negative impact on economic performance in the longer run.

Panel 2 – Public debt management
Chair: István Benczes (CUB)

Niclas Berggren (The Research Institute of Industrial Economics (IFN)) – Christian Bjørnskov (Aarhus University)
Regulation and government deb

Csaba László (CUB)
State debt in statistics and in reality: What is the impact of the seizure of the private pension fund system on the long-term financing of the state?
PRESENTATION (PDF)

Tamás Vasvári (University of Pécs)
Bail-out of Hungarian municipalities: short and long-term effects
FULL PAPER (PDF)
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ABSTRACT: Kornai (2014) described the development of municipal indebtedness in Hungary and analysed the process of bailout carried out between 2011 and 2014. It was the first, really successful attempt to provide scientific evidence on the existence of soft budget constraint (SBC) in the Hungarian municipal sector. Nowadays, there is still an ongoing debate on the necessity of the bailout; however, the discussion often lacks scientific or factual grounds. This study aims to continue János Kornai’s path and provides a scientific analysis and evaluation of the phenomenon. To start, the theoretical framework of SBC is introduced, for local governments in particular. Afterwards, the budget constraint on the Hungarian local governments is described briefly, followed by an assessment of the corresponding measures expected to offset the negative messages of the completed bailout. The study concludes that the centralisation measures taken and efforts made towards hardening the budget constraint resulted in the consolidation of municipal budgets; however, it was accompanied by a serious limitation of local autonomy, investments and borrowing. In spite of all these, the perception of SBC among municipal decision-makers is still alive and well.
Panel 3 – Civil society, populism
Chair: Andrea Szalavetz (HAS CERS)

Zoltán Ádám (CUB)
Institutional roots of authoritarian populism: The problem of over-centralization with reference to post-1990 Hungary
FULL PAPER (PDF)
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ABSTRACT: This paper follows János Kornai in differentiating between democracy, autocracy and dictatorship, and conceptualizes authoritarian populism as a form of autocracy in an institutional economics context. Based on the theory of transaction cost economics, the paper argues that authoritarian populism reduces political transaction costs by vertically organizing political exchange, replacing the horizontal exchange characteristic of liberal democracy. Electoral demand for such a shift rises at times of crises and a mismatch between formal and informal political institutions. This is what happened in Hungary towards the end of the 2000s, in a period of socially costly fiscal stabilization and the troubles of the global financial crisis. In response, voters gave strong mandates to govern both in 2010 and 2014 to Prime Minister Orbán, who transformed Hungary into a textbook case of authoritarian populism.

Attila Bartha (CUB)
Deviation Again? Understanding Populism in Central Eastern European Development of Capitalism and Democracy

Ilona Tomova (Bulgarian Academy of Sciences)
The Nationalistic Challenge to the Liberal Political orientation: The Rise of Anti-Gypsism and Islamophobia in Bulgaria

Panel 4 – History of economic thoughts
Chair: Péter Gedeon (CUB)

Péter Mihályi (CUB)
The theories of János Kornai and a less known Hungarian economist, Ferenc Jánossy on unbalanced economic growth FULL PAPER (PDF)

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ABSTRACT: Although it may sound surprising today, the pace of economic growth in Hungary appeared to be too high in the 1960s. While the professional planners and policy makers were essentially contend with the (then) measured 5-6 point average growth of national income, the books of two outstanding theoretical economists, János KORNAI and Ferenc JÁNOSSY expressed doubts and attached disapproving labels to the measured rate of growth. In Kornai’s terminology the growth path of the Hungarian economy was labelled as “unbalanced”, while Jánossy spoke of “quasi development”. The present paper revisits the two books of the two men, Jánossy’s The End of the Economic Miracle (1966) and Kornai’ s Rush versus Harmonic Growth (1972). The paper shows that the two concepts of growth and the similar conclusions pertaining to the “too high” pace of the contemporary Hungarian growth rate rested on different theoretical bases. Jánossy was a Marxist, and the labour theory of value was his starting point. Kornai, by contrast, broke with Marxism well before he wrote the cited book. But there was a common moral point of the two authors: they both had the courage and the energy to think through scrupulously and comprehensively the experiences of the classical model of the planned economy.

Aladár Madarász (HAS CERS)
The pivot of which everything turns”
Entrepreneurship, capitalism and Schumpeter – fragments of a conceptual history

Panel 5 – Planned Economy II
Chair: Balázs Hámori (CUB)

Liudmyla Vozna (independent researcher)
Asymmetric Information and its Relation with the Type of Equilibrium in the Planned Economy
FULL PAPER (PDF) 

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ABSTRACT: In characterizing the planned economy, a number of researchers (e.g. Walter Eucken, János Kornai, Tamás Bauer) pointed to such features of this system, which we can analyse in the terms of asymmetric information. As examples it makes sense to consider the following features: the centralized distribution of resources and, as the result, the lack of choice (and information) among enterprises when they acquire resources; the chronic goods shortage when the buyer does not know where he/she can buy something; the macro level decision makers do not posses complete information about the micro level, so the heads of (state-owned) enterprises can hide (from the planners) the their real situation to attract new projects and state investments. The paper draws parallels between the market with asymmetric information in the model of George Akerlof and the centrally planned economy. The asymmetric arrangement of the demand and supply curves for characterizing such a market is supposed. So the paper elaborates the hypothesis about the asymmetric arrangement of the curves of aggregate demand and supply to characterize the deformed structure of the planned economy. In the paper, the market equilibrium is not treated as the point of intersection of the curves of demand and supply but it is related with the type of the prices distribution. Based on this assumption, the attempt to compare the hypothesis about the asymmetric slope of the S-D curves with the János Kornai’s theory of the soft budget constraint is made.

Novo Plakalovic (University of East Sarajevo)
János Kornai’s evaluation of the transitional path
FULL PAPER (PDF)

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ABSTRACT: Without János Kornai’s great work, it would be difficult to fully understand the reasons of the economic inefficiency and other weaknesses of socialist systems, and ultimately understand the real causes of their collapse. Kornai’s contributions can be found in several segments of the economic theory related to socialist systems. Some of those are still up to date when it comes to explaining phenomena characteristic for certain mature market economies (soft budget constrains, for example). Kornai’s observations were of great value to young and inexperienced economists of, back then, socialist countries, helping them to understand problems of their countries’ economies. Therefore, he was seen as a great source of inspiration. He was an eclectic economist who has learned from various schools of economic thought. Nowadays, Kornai’s work is still of great help to the economists of small, underdeveloped countries, who, within their own specific contexts face problems related to the process of globalization and of finding their own place it. In this paper, we are trying to focus on and review Kornai’s reflections and observations regarding to the achievements of former socialist economies and their progress on the transitional path. Kornai was a witness to dramatic events that accompanied the collapse of socialism from its very beginnings. Therefore, he is very much competent to evaluate the outcomes of the “Great Transformation”, the process in which many hopes and expectations were invested. As a brave, honest and ever-present scientist, Kornai strives to objectively present and critically evaluate the achievements of Eastern European transitional economies. He does not limit his analysis of transition solely to the economic sphere, but critically considers the overall changes in the society, politics and economy. This paper relies on his insights and observations while studying the countries of former Yugoslavia -Serbia and Bosnia & Herzegovina, in particular. It turns out that his assessments are absolutely relevant for those countries, the results of their transition being significantly lower than in other former socialist countries he analyzes, primarily because of the traumatic break-up of former Yugoslavia and continuous political instability that followed in its newly established states.

Orosz Ágnes (HAS CERS)
Hungary within the East Central European welfare state regime

Panel 6 – Society
Chair: Péter Mihályi (CUB)

Éva Berde (CUB) – László Tőkés (CUB)
 Shortage for the old and paradise (or hell) for the young?

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ABSTRACT: This study explores two long-term, co-existing and irreversible phenomena in the Hungarian context: the trend of population ageing and the appearance of sharing economy. Population ageing in Europe (including Hungary) is an obvious trend which began several decades ago. Due to the ageing tendencies, the welfare systems of the European countries are almost on the edge of collapse, so there are various attempts to continue to aid the wellbeing of the old generations. There are efforts to bring back the 60+ age group to the labor market, and trying to get rid of the tradition depending mainly on state pension. An average middle-aged Hungarian might think that “I work, pay my taxes (or even evade my taxes on occasion), I could even have savings, but I can definitely count on the state to look after me when I get old.” This is the traditional set-up, which – although indirectly – will be completely turned upside down by the new economic circumstances.
The sharing economy appeared in 1995 with the launch of eBay and Craigslist. Since then it has rapidly expanded, introducing the phenomena of employers outside employment, and businesses without physical stock and investment, such as Uber, Airbnb and their various rivals operating with similar principles. This Christensen style disruptive innovation, and the resulting type of economy does not include welfare elements for the elderly. Instead, based on the so called universal trust, anyone who pays can receive a service, and similarly anyone can offer a service who wants to. This on-demand business principle only applies to a smaller part of the economy, however it has a profound effect on other sectors. On the other side, fissured economy also exaggerated the disruption of old working regulations.
Working outside the legally protected employment structure makes workers more vulnerable, and shrinks the welfare states’ potential regarding the elderly. In this paper, we are looking at how this situation evolves further, and which direction the economy will possible take in Hungary.
This research has been supported by the European Union and Hungary and co-financed by the European Social Fund through the project EFOP-3.6.2-16-2017-00017, titled “Sustainable, intelligent and inclusive regional and city models”.

Slawomir Czech (University of Economics in Katowice) – Anna Zachorowska-Mazurkiewicz (Jagiellonian University)
Origins of institutions in the perspective of institutional economics: A case study of women and men in pensions systems

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ABSTRACT: This paper focuses on the question of the origins of institutions and theoretical conceptualization of this issue; the topic that is rather rarely considered by social scientists. We focus on economic institutions defined by two schools of economic thought – traditional institutional economics (TIE), and new institutional economics (NIE). It is often hard to pinpoint an exact moment and actual circumstances of institutions’ emergence. There is no institution that emerges in a social vacuum – there must have been some institutions before which did with high probability influence the process of the creation of the institution in mind. However, different conceptualizations of institutions used by TIE and NIE seem to explain the origins of institutions in a very distinct manner. We demonstrate this puzzle on an institution that is recognized as such by both schools: we show how the institution of pension fits into these two approaches. More precisely, we explore the case of Polish and Swedish pension systems with particular attention paid to the systemic differences between women and men therein. Generally speaking economic systems rest on institutions and individuals acting in these system behave according to appropriate rules. We believe that learning about the origins of institutions is therefore important for designing well-functioning economic systems. In the paper we first introduce the two perspectives on institutions, then we look closely on the chosen institution, trying to explain their origins according to these two approaches of TIE and NIE. As the latter present different perspective on the origins of institutions we try to recognize the limits and strong points of both approaches and assess their usability for policy-making.

Ilona Cserháti (CUB) – Imola Csóka (CUB) – Tibor Keresztély (CUB)
The recent role of government in mitigating socio-economic gaps

Panel 7 – Transition I
Chair: Dóra Piroska (CUB)

Dóra Győrffy (CUB)
What remains of the ideals of transition?
FULL PAPER (PDF)

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ABSTRACT: With a global sentiment of gloom about the eclipse of liberal democracy and the rise of populist and authoritarian movements, the ideals of transition seem to have faded. Populism appears to be on the rise everywhere. Central and Eastern Europe is a prime venue for such tendencies given the disappointments from the transition and a value system, in which survival values dominate over self-expression. At the same time the populist trend is far from homogenous in the region, and the main question of the paper is to explain the divergence within the region through qualitative case studies. Looking at the three countries, which needed international financial assistance during the global crisis (Hungary, Latvia and Romania), the paper tries to disentangle various explanations for the rise of populism. It argues that attitudes towards the state rooted in the divergent heritage of communism provide a better explanation than economic or value-based explanations to the question why populism and illiberal democracy rose in Hungary rather than in Latvia or Romania. The paper shows how the communist heritage shaped the response to the financial crisis, which in turn strengthened the links to the West in the case of Latvia and Romania and weakened them in the case of Hungary. The main conclusion of the paper is that the ideals of the transition are still highly relevant and provide an avenue for economic success, but their survival depends on a strong commitment to limited government and a continuous improvement in the quality of governance.

Áron Perényi (Swinburne University of Technology) – Alexis Esposto (Swinburne University of Technology) – Malcolm Abbott (Swinburne University of Technology) – Jill Bamforth (Swinburne University of Technology)
Path dependency of institutional reform from an economic transition perspective: The case of Argentina

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ABSTRACT: Institutional reform implemented to achieve increased competitiveness and economic prosperity is subject to much investigation and scholarly discussion. Economic reforms are often parallel to political changes in societies (Bunce, 2001). Kornai (2000) provides a framework to evaluate the progress of institutional changes, primarily based on the experiences of transition in Central Eastern Europe. Latin America and Central Eastern Europe are often contrasted in their economic transitions (Lieberman, 1994), suggesting the transferability of theory across the regions. Kornai (2006) highlights that the success of transition in Central Eastern Europe represents a unique combination of coinciding factors, including its speed, non-violent nature and relative success and stability in terms of outcomes. In contrast, a prolonged history of economic transition attempts marks the development of Latin American nations. This paper provides and application of transition theory (Kornai 2000, 2006) for the case of Argentina, based on historical events, longitudinal institutional indicators and current accounts of political stakeholders reflecting upon the perils of institutional change. The purpose of the article is to fill the gap in terms of economic transition theory providing an accurate framework to evaluate the development trajectory of Latin American nations. Based on the empirical evidence presented for the case of Argentina, it is argued that economic transition is a path dependent phenomenon, and transitions of Latin American nations can be better explained by considering the interaction of a development path perspective on the various dimensions of transition as defined by Kornai’s transition theory.

Michael Landesmann (WIIW) – Ivano Cardinale (Goldsmiths University of London)
Europe’s ‘other transition’: addressing Rodrik’s trilemma through evolving intermediate state structures

Panel 8 – Innovation and Finance
Chair: Ágnes Nagy (National Bank of Romania)

István Magas (CUB)
Financial adjustments to external shocks: Empirical evidence from some EU members and transition countries (1993-2014)
FULL PAPER (PDF)

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ABSTRACT: In this paper there were two types of international financial adjustment patterns identified: type-A, where highly independent monetary policy and low domestic currency stability was the preferred path;
and type-B, where monetary policy independence was given up and currency stability was acquired.
We argue that whichever type of external financial adjustment the preferred path may be, the ability
to resist major external shocks simultaneously depend on a handful of other macro prudential factors (e.g. fiscal and debt service performance), too. A country may not be euro-zone member and still do well in the shock resistance department, like the Czech Republic. For Hungary, euro-zone membership would sure bring better shock- resistance capabilities, yet, it would in no way offer solution to the existing deficits in its levels of international competitiveness and productivity.

Edina Berlinger (CUB) – Anita Lovas (CUB)
The effects of state subsidy on early stage innovation financing

Ágnes Nagy (Babeș-Bolyai University ) – Annamária Dézsi-Benyovszki (Babeș-Bolyai University) – Imre Székely (Babeș-Bolyai University)
Composite indicator of financial systemic stress

Panel 9 – Soft Budget Constraint I
Chair: Dóra Győrffy (CUB)

Imre Fertő (HAS CERS)-Štefan Bojnec (University of Primorska)-József Fogarasi (AKI)- Ants Hannes Viira (EMU)
Soft budget constraint and the reform of the Common Agricultural Policy: A comparative analysis
FULL PAPER (PDF)

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ABSTRACT: The article investigates farms’ investment behaviour and presence of soft budget constraint in the agriculture of three Central and Eastern European countries using individual farm accountancy panel data for the 2007-2015 period. Farm gross investment is positively associated with farm gross investment in the previous year, real sales’ growth, and public investment subsidies. Mixed results for debt square and cash flow variables imply different farms’ investment behaviour pertained to different structures in investment sources between the analyzed countries, and particularly insignificant cash flow coefficients imply soft budget constraints for Hungarian and Slovenian farms. Estimations confirm the heterogeneity in farms’ investment decisions. These differences in farm investment behaviour between sub-samples and the three countries confirmed the unequal sensitivity of farms’ investments to financial restrictions.

Klaus Nielsen (Birkbeck, University of London)
The prevalence of the soft budget constraint syndrome: Institutional preconditions

Péter Halmosi (University of Szeged)
The role of “soft budget” constraint in the financial crises of Detroit and Puerto Rico – Comparison

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ABSTRACT: Public debt accumulation – induced by constant borrowing – is one of the most significant problems affecting local governmental systems of developed countries. Although regulation models have reached their current form after a long-lasting development, financial crises regularly occur as a consequence of the local operation’s particular characteristics. An important reason for this is the socalled “soft-budget” constraint which changes intra-organisational relations and ruins the balance within the system of checks and balances. The aim of this paper is to study the similarities and differences between the bankruptcy of Detroit’s City Government in 2013 and the unexplained legal status of Puerto Rico dating back to 2015 by using the “soft-budget” constraint theory.

Panel 10 – Growth
Chair: Andrea Éltető (HAS CERS)

Yang Zhou (West Virginia University)
The “Checks and Balances” in the Socialist Regime: the Party Chief and Mayor Template

Gábor Kutasi (CUB)
Transition from command economy to macroeconomic populism: the Baltic case
FULL PAPER (PDF)

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ABSTRACT: According to Kornai’s research on transition economies, the paper analyze the path of post-Soviet Baltic economies. The focus is on whether these economies transited into a cycle of macroeconomic populism from command economy which can be uncovered in the current account imbalance and not in the text book macroeconomic indicators. The economic story of emerging Baltic countries seemed to be a success before 2007. The region has seemed to be very disciplined in fiscal and monetary sense since there independence, besides, produced a boosting economic growth and significant real convergence to the higher developed EU members. But these countries with balanced policies suffered sudden stop in 2007. If fiscal balance, debt sustainability and fixed exchange rate is secured, what else can undermine the growth potential? The hypothesis is that the process of income growth and quick catching-up of Baltic economies were established on external financing. Baltic countries can be complied to the political economy model of macroeconomic populism. Theory and methodology: The analysis is based on the transition economics by Kornai, the macroeconomics of the Feldstein-Horioka puzzle and the reverse Balassa-Samuelson effect. The paper examines terms of trade, NEER, REER, ULC, current account imbalance, inflation and savings to conclude on reasons sudden stop in the Baltic region. Through the Baltic example, the paper enlightens on a structural problem of the European transition economies. The assumption of the paper is that the Baltic current account imbalance is based on the appreciation of real effective exchange rate (REER). The study explains and proves correlation between the REER appreciation and the current account deficit in Baltic relevance.

Damian Tobin (SOAS University of London)
Currency Internationalisation and the Problem of Parallel Markets: A Historical Perspective on Hong Kong’s Renminbi market

Panel 11 – Transition II
Chair: András Simonovits (HAS CERS)

Tamás Mellár (University of Pécs)
Can economics be free from the neoclassical market doctrine? (Continuing the anti-equilibrium)
FULL PAPER (PDF)

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ABSTRACT: One of the decisive part of the works of Kornai János is the critique of General Equilibrium (GE). This criticism is also a critique of the neoclassical market concept, since the equilibrium theory is based on the abstract, idealized market operation. His book Anti-equilibrium published in 1971 has not provoked a stir in the seventies, however, new economic schools popping up in the eighties and nineties leveled increasingly strong criticism at the equilibrium doctrine of mainstream economics. The goal of this presentation is threefold: firstly, to show that Kornai’s criticism about market operation formulated by the neoclassical economics is still valid today. Secondly, to demonstrate what extent the subsequent criticism followed his methods (critical attitudes). Thirdly, to examine how his general economic system analysis can be found later in the non-mainstream economic theories.

Tamás László Balogh (CUB) – Attila Tasnádi (CUB)
Mixed duopolies with advance production

Balázs Felsmann (CUB – REKK) – András Mezősi (CUB – REKK) – László Szabó (CUB – REKK)
Market versus bureaucracy: Price regulation in the EU electricity retail sector
FULL PAPER (PDF)

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ABSTRACT: While several economists and European institutions support further liberalization of the energy retail sector, others oppose it on the grounds that end-user price control and the right of states to maintain a system of regulated prices results in more sustainable energy service at affordable prices for households. The roots of this dilemma can be traced to a longstanding economic debate on the primacy of coordination types in society. Although the general coordination form of the capitalist system is indisputably the market, there are several situations whereby other forms of coordination such as bureaucratic, ethical and aggressive (Kornai, 1983) still have a significant role. In this paper we review the regulatory framework of the European countries and examine the impacts of price setting forms on consumer price trends in the electricity sector. Our aim is to measure the impact of the regulatory regime on the main stakeholder groups such as energy consumers, economic actors and the society. We seek to answer whether the energy market actors are capable of effectively coordinating social interactions, or if not, should a central planner correct the anomalies and market failures. Available EU electricity sector statistical data is used to assess the impacts of the various price setting regulatory methods on the functioning of the market.

Panel 12 – Kornai’s market theory
Chair: Dániel Deák (CUB)

László Jankovics (European Commission)
Independent fiscal institutions: “new kids on the block” in economic policy

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ABSTRACT: Fiscal rules and independent fiscal institutions (IFIs) have recently emerged as complementary institutions to address the deficit bias and more generally the pro-cyclical policy stance. While fiscal rules were typically introduced first, a growing awareness of disappointing outcomes in terms of enforcement put the spotlight on the potential benefits of independent bodies. Also through their continuous monitoring of numerical rules, IFIs are expected to promote transparency and accountability, thereby reducing information asymmetries and raising the quality of fiscal policy debates. The significance of involving IFIs in the budgetary processes has been increasingly acknowledged both by the economic literature and policy-makers in the recent years, in particular in EU Member States. In his introductory remarks at the spring 2010 international conference “The role of independent fiscal institutions” organised by the first Fiscal Council of Hungary, Professor Kornai elaborated on the key tasks of IFIs. He emphasised the importance of limiting the mandate of IFIs in the sphere of positive economics, and refrain from assigning these bodies normative tasks or formal competences (such as veto rights), as the executions of these latter functions would necessarily involve value judgment, which should be left for elected politicians. In the area of positive economics, he identified three crucial tasks, which should stand at the core of the operation of IFIs: 1) Analysing the consistency of planned fiscal measures with the available fiscal space; 2) Policy costing; 3) Enhancing the transparency of public finances. This paper empirically analyses to what extent the existing IFIs in the EU match the advice of Professor Kornai about the key design features of such institutions. It will also discuss the operational role played by IFIs in national budgetary processes. The paper will conclude with a number of potential ideas for strengthening the role of IFIs to the benefit of sound fiscal policymaking.

László Zsolnai (CUB)
Ethics and Market: The Crowding Effect

Ádám Kerényi (HAS CERS)
János Kornai’s contribution to and beyond economics
FULL PAPER (PDF)

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ABSTRACT: This paper’s main goals are (1) to share Kornai’s thoughts and (2) better understand his contribution to and beyond mainstream economics.
Professor Kornai describes himself as someone who has one foot in the mainstream and the other stepping beyond it. In the first section I would like history how Kornai became an economist researcher. In the second part of the first section I try to list some of the main notions of Kornai’s character. In the second section I show the list of publications by focusing on his books. I also present in that section how many foreign languages those books have been translated into and some quantitative indices and objective indicators the total number of citations concerning Kornai’s publications. In hard quantitative sense Kornai is one of the most productive and also one of the most recognized economist scholar in the mainstream economics. In the third section I focus on Kornai’s concept of the soft budget constraint and its reception, future research avenues. In the last, fourth section I focus on softer layers of the Academic universe: beyond mainstream economics. I will present some examples how Kornai influenced social sciences beyond economics.

Panel 13 – Soft Budget Constraint II
Chair: Zoltán Ádám (CUB)

Katalin Botos (PPCU)
SBC in historical analysis

Ágnes Vidovics-Dancs (CUB) – János Száz (CUB)
The SBC syndrome as a put-call phenomenon

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ABSTRACT: The creation and elaboration of the concept of soft budget constraint (SBC) syndrome by János Kornai was a very important contribution to the general economic theory. In the decades following the first formulation of this idea, several phenomena in economics could be described by the SBC, especially in the field of institutional and behavioral economics. It is somewhat surprising that the concept did not really find its place in the disciplines of finance, although researchers from this field are very interested in analyzing processes that are apparently closely related to the SBC (e.g. lending, bankruptcy, the dilemma of bailing or not bailing out a big financial institution). In this paper, we describe some similarities of SBC and financial options, and we make a first attempt to use the methods of option pricing to describe and analyze a typical SBC phenomenon. The bail-out might be treated as an option providing insurance in case of financial trouble. However, when analyzing the problem in depth, some exciting questions arise. How can we manage the interesting feature of this option that the obligee does not undoubtedly own the option, he only expects to own it with a certain probability. Can we use the standard tools and methods to price an option which is not sure to exist? The paper tries to find the common features and also tries to exclude those points where the SBC and option pricing cannot be brought together.

Zsolt Havran (CUB) – Krisztina András (CUB)
Understanding Soft Budget Constraint in Western-European and Central-Eastern-European professional football

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ABSTRACT: The paper presents the implementations of János Kornai’s theory about Soft Budget Constraint (SBC) through the example of the special and popular topic of professional football. It shows the theory of Soft Budget and its application in professional sport. It illustrates the market and bureaucratic co-ordinating mechanisms and explains the specialities of the state and the market model of professional football through the transition of Central and Eastern European countries. The aim of the paper is to highlight the main differences of the operation of Western and Eastern European football and to present the application of the SBC theory in the two region. The research summarizes the main specialities of professional sport and football, the markets of professional football, the double objective and possible strategies of sport companies and return on investment in players. Professional football’s specialities in the post-socialist countries and current business results of CEE football were examined. With the method of data collection and processing, main transfer market results were investigated. The paper identify successful Central-Eastern-European championships and clubs which operate with business model or implemented the transfer strategy. This identification helps to evaluate the efficiency of Hungarian football in the regional environment and it helps to understand why SBC causes inefficiency.

Panel 14 – U-turn
Chair: Iván Major (HAS CERS)

Matthew Stenberg (University of California, Berkeley) – Laura Jákli (University of California,Berkeley)
Subnational Institutional Conversion and Democratic Decline in Eastern Europe
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ABSTRACT: Since 2010, Fidesz-KDNP has presided over a two-thirds majority in the Hungarian Parliament, implementing a series of institutional changes designed to solidify long-term political control. Some of these reforms—especially at the national level—have been well publicized and politically dramatic. Notably, however, Fidesz-KDNP has also substantially restructured subnational institutions originally created in the period of decommunization as a means of democratizing post-Socialist societies. The Fidesz coalition has subverted these subnational institutions and, in turn, altered them to help recentralize authority in the ruling regime. Using concepts from the contemporary literature on the historical development of welfare institutions and social policy, we examine how the Fidesz coalition has systematically used institutional conversion as a means of reducing the effectiveness of some local institutions while undermining the capacity for contestation in others. These institutional changes are not as politically visible as many of the constitutional, judicial, and media reforms pursued by Fidesz-KDNP, because the changes are small and do not immediately suggest the reduction of democratic capacity. However, in the aggregate, we argue that these types of changes undermine trust in local institutions by rendering them less effective and structurally weakening opposition parties. In short, we analyze how tweaks to subnational institutional design can undermine democratic practice. Our project fills a gap in current narratives about the mechanisms behind democratic backsliding in Eastern Europe.

Paul Hare (Heriot-Watt University)
State-building for the Market Economy in Eastern Europe
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ABSTRACT: Kornai’s earlier works like Overcentralization in Economic Administration and Economics of Shortage embody the idea that state institutions form a system with a strong tendency to reproduce itself, and hence to resist minor reforms. This is why at the end of socialism/communism, huge changes were needed in politics, economics, the law, etc., to build a new system oriented towards the market-type economy, which would again be stable and self-reinforcing (in other words, it was not supposed to slip back to communism). The interesting question now, given recent events in Hungary and Poland, is whether we have succeeded in building such a new system. More precisely, we thought we were promoting the development of new states/economies in Eastern Europe that conformed to the Copenhagen criteria for EU accession. Were we too hasty in thinking we had succeeded? Now, the new systems may not be slipping back to communism, and for the time being there is no sign that the basic norms of a market-type economy are being set aside, but there are concerns – and indeed some quite difficult conceptual issues – arising at the interface between politics, law and economics. Some of this falls under the heading ‘rule of law’, some concerns the nature and role of the state, and a third area is the interactions between parliament, the executive and perhaps even the forces of law and order (police, army, etc.). Unavoidably, there is also an interesting international dimension here, represented by the shift from the Warsaw Pact and Comecon to NATO and the EU. This paper explores these issues in the light of some of Kornai’s recent analysis of developments in Hungary, while also drawing on his very insightful earlier works.

Lajos Bokros (CEU)
Nothing is irreversible: The Wholesale Reversal of Structural Reforms in Hungary

Panel 15 – Centralisation
Chair: Ádám Kerényi (HAS CERS)

András Semjén (HAS CERS) – Marcell Le (ELTE)
The desired goals and actual short-term consequences of the centralisation of public education in Hungary
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ABSTRACT: There is an ongoing strong centralisation process in education administration, school governance and school finance in Hungary. The most important milestones in this process have been so far the enactment of Act  CXC of 2011 on National Public Education, Act CLXXXVIII of 2012 on taking over the control and funding of some education institutions from local governments by the state (central government) and the Government Decree 202/2012. (VII. 27.) on Klebelsberg Institution Maintenance Centre that founded the new centralised organisation responsible for school governance. Due to the problems in the working of this centralised mammoth organisation and the criticism provoked by these problems, later the new governance structure has undergone several changes. Since the beginning of 2017 (following some smaller structural reforms) school districts became bigger and slightly more autonomous while their number was reduced considerably. All of them are still supervised and directed by a single organisation now called simply Klebelsberg Centre.The objectives, motives and justification of this centralisation were not made completely clear to the public. Nevertheless, the text of the bill and the law dealing with the centralisation and research interviews with government officials and education policy leaders indicate that the main objective of this drastic reform was to reduce the unfair differences and inequalities in school finance and student outcomes. On the other hand, this centralisation can also be interpreted as just another example of the strengthening role of government in the provision of public services and public utilities and a broader general trend towards centralisation in Hungary.Our paper is the first outcome of a new NKFIH-17 research project aiming at the clarification of the goals and motives of this centralisation and its actual impacts on the inequality of school funding and student outcomes, combining qualitative and quantitative research methods and using available school finance and student performance data. Our preliminary results presented in the paper are based on our calculations using school level financial data and competence test results. We compare the situation in the last pre-centralisation year to the first post-centralisation years. We use Gini coefficients to measure the concentration of school funding and teacher incomes, and variance analysis of competence test results to measure the impact of the reform on student outcomes. Our results for “pure” general schools suggest that the reform was not successful in reaching its declared objectives as the concentration of school resources did not diminish, and in some cases even increased. The variances of competence test results show a similar pattern: they did not diminish significantly in general, and in some cases total variances and between-school variances even increased after the reform.

Dániel Deák (CUB)
Over-Centralisation in Hungarian Higher Education: Reasons and consequences
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ABSTRACT: While delivering an example for the problem of over-centralisation, the present paper is a case study. First, it puts the problem of over-centralisation of Hungarian higher education into the context of the operation of an illiberal state and creates a link with each other of the theoretical questions of autonomy, university and academic freedom. In this section, the paper is substantiated by references made to scholarly literature. Then, the major part of the paper concerns the current governance of the institutions of higher education in Hungary. In this respect, it relies on the effective law on higher education and relating legal regulations. A starting point for the analysis of the current Hungarian law on higher education is the criticism of the official thesis – even enshrined in the constitution -, according to which academic and non-academic competences can be separated from each other administratively. A particular emphasis is placed in the paper on the distinction between sectoral powers of public control and the maintenance by the state of institutions. The various barriers of academic freedom and institutional autonomy are also highlighted. They are: internal democracy deficit, discretionary allocation of academic contingencies, centralisation of training programmes, and arbitrary decisions of the government on granting privileges to certain institutions of higher education. Financial barriers to institutional autonomy are also discussed.

Éva Krenyácz (CUB)
Modify management thinking in health care: impact of centralization
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ABSTRACT: In health care systems, scarce resources and continuous rise of debts usually cause a stronger cost control and cost containment. In this context the Hungarian government tries to stabilize the sector with (re)continuous centralization and nationalization. This environment would require, in organizational level, a better management support systems and devices. The paper shows that centralized health care environment affects the decision support, and even modifies the attitude of managements. It focuses on characteristics of hospitals management; specifically the interpretations, tools and daily practice of the management and incorporation in decision-making were examined. Research question is what kind of tools do top managers use for decisions? With tools of qualitative research, I defined the management devices in hospitals and highlighted the influence of external factors. Therefore, top managers of hospitals, external experts/consultants and governmental managers were interviewed and decision supporters were asked in homogenous focus group in semi-structured interview situation. Additional questionnaires were used before the focus group discussion for better understanding of the research topic and the respondents’ views. The typed interview texts were coded in MAXQDA12 software. The result of the research shows that top managements of Hungarian healthcare organizations face unique challenges caused by performance volume limitation, debt accumulation, consolidation and centralization/nationalization. These elements have a significant impact on the internal systems of hospitals and on the interests of stakeholders. This environment would require a better use of management support devices however the result of this qualitative research shows the opposite. I identified three different management tools of which the most significant is the financial perspective: hospital top managers try to achieve economic stability with monitoring of liquidity and lobbying for bailout and to maintain the soft budget constraint.