Economic Development

The aim of this section is to look into the relationship between the changes in the level of economic development and the pattern of spending on HE in Hungary. Since the dramatic fall in the growth during 1990-91, the economy continued to exhibit slow and unimpressive performance; by 1994, for example, Hungary’s budget deficit had reached 10 percent of GDP, while national debt amounted to 30 billion USD by the beginning of the subsequent year. Tables 4.7 and 4.8 that present several economic indicators indicate that the economy started its slow but steady recovery from the mid 1990s.

Table 4.7: GDP per capita (constant 2000 USD) and Employment Ratio (number of employed as percentage of population aged 15-59) in Hungary, 1989-2005

Source: TransMONEE 2007 features: data and analysis on the lives of children in CEE/CIS and Baltic States. Based on World Development Indicators database, 2007. Employement Ratio Data since 1995 based on labor force survey.

Table 4.8: Economic Indicators, Hungary 1989-2000

Source: A Decade of Transition: the MONEE Project, CEE/CES/Baltics, UNICEF Innocenti Research Centre, 2001. ^a Based on EBRD, 2000. ^b EBRD, 2000. 1999: estimate. 2000: projection.

c Based on EBRD, 2000. ^d Based on EBRD, 2000. 1999: estimate. 2000: projection.

Notwithstanding the economic slowdown characteristic of first half of the 1990s, spending on education as the share of gross domestic product was actually growing during this time period. In fact, the slash in appropriations for education sector came

GDP per

capita Employment ratio

1989 4,307 83.0

1990 4,166 82.9

1995 3,713 57.2

1996 3,768 56.6

1997 3,948 56.5

1998 4,150 57.4

1999 4,334 59.2

2000 4,606 59.8

2001 4,817 60.1

2002 5,015 60.4

2003 5,200 61.4

2004 5,454 61.2

2005 5,691 61.3

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Real

GDP Growth

a

100.0 96.5 85.0 82.4 81.9 84.3 85.5 86.6 90.6 95.1 99.3 105.

3 Annual

change in GDP (%)^b

0.7 -3.5 -11.9 -3.1 -0.6 2.9 1.5 1.3 4.6 4.5 4.9 6.0

Real

Wages ^c 100.0 94.3 87.7 86.5 83.1 89.1 78.2 74.3 77.1 79.6 81.0 --- Annual

inflation

rate ^d 28.9 35.0 23.0 22.5 18.8 28.2 23.6 18.3 14.3 10.1 9.5 ---

only in 1995, but began to increase again from 1998 (Table 4.9). Mapping the trajectory of the public spending on HE, Table 4.10 displays the same pattern of governmental expenditure. Namely, the state support to HE throughout the initial phase of transformation was increasing in real terms, while it stayed roughly the same as the share of GDP but started its fall from that point on, so that by 1996 it approached 0.82 percent (Polónyi 2002). The years since 1998 saw some increase in the spending on HE; in 2000, for example, the government spend 1.1 percent and in 2001 – 1.3 percent of GDP on HE, which corresponds to the OECD country average (OECD Education Database).

Table 4.9: Public Expenditure on Education in Hungary (percent of GDP), 1989-1999

Source: A Decade of Transition: the MONEE Project, CEE/CES/Baltics, UNICEF Innocenti Research Centre

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 5.7 5.8 6.3 6.6 6.5 6.4 5.5 4.9 4.3 4.8 5.1

Table 4.10: State Funding for HE, in Proportion to Total Central Budgetary Sources and GDP, Hungary, 1991-1994

1991 1992 1993 1994

Total HE expenditure from the state

budget (billion HUF) 56.2 62.2 73.5 91.5

Total HE support from the state budget (billion HUF)

32.1 38.4 45.7 57.7 Total state budgetary expenditures

(billion HUF) 856.2 988.7 1264.1 1453.5

GDP (billion HUF)

2491.7 2935.1 3537.8 4330.0

Total expenditures to HE, in proportion

to state budgetary expenditures 6.56% 6.295% 5.81% 6.30%

Total state support to HE, in proportion

to total state budgetary expenditure 3.75% 3.88% 3.62% 3.97%

HE expenditures, as a percentage of GDP 2.26% 2.12% 2.08% 2.11%

Total support to HE, as a percentage of

GDP 1.29% 1.31% 1.29% 1.33%

Source: The Ministry of Education, 2002.

Here it should be remembered that although governmental spending on HE as the proportion of its gross domestic product has declined only slightly while in real terms it has even rose, the early 1990s has witnessed significant growth of enrollments in the state-funded sector. In examining the HE cost patterns, it is therefore important that the proportion of national wealth allocated to the sector be interpreted in the light of how these funds translate into the amount spent on per-unit. Before the regime change, not only did Hungary have one of the lowest enrollment rates in Europe but it also had the highest per-student cost to compare to all European countries. Although spending varied a great deal across institutions, on average, the Hungarian government spent 86 percent of its per capita GDP per HE student in 1993. The

average figure for OECD countries for the same year totaled 45 percent, while for Germany it was as little as 30 percent (the World Bank 1998). Mixed success though it had, the implementation of the first phase of reform policies had brought about a certain reduction in student expenditure so that for 1996, the figure for a total per-student spending amounted to 64.1 percent, which is still a good deal higher than the OECD average.

One immediate question that arises here is whether the reduction in per-student spending is indicative of an enhanced operating efficiency or less positively, it reflects deteriorating quality of the educational services provided. A part of the answer to this question lies in the institutional funding mechanism employed, since the way the funds are made available to institutions has considerable bearing, by providing incentives or disincentives, on economic efficiency. Whatever the reality, the relevant point is that the relationship between spending on HE and the level of economic development runs against our conjectured link between the two variables.

Despite the sharp economic downturn, governmental expenditure on HE continued to grow, thus enabling public enrollment increase by almost twofold, whereas resources available to the HE sector started to decline against the backdrop of the economic recovery, which gave rise to policies of cost-recovery and to these aimed at enhancing economic efficiency of institutions. This apparent incongruity is explained by several reasons. First, it should be taken into account that the funding independent from governmental appropriations in the form of the WB loan was available to the Hungarian HE sector from the very start, which facilitated carrying out the sectoral restructuring on the one hand and widening access to HE by increasing public sector enrollments on the other.

The other reason is related to political, rather than economic circumstances, serving as the powerful intervening factor. Following the 1994 electoral victory, the new Socialist government (MSzP) under the premiership of Gyula Horn decided to fundamentally alter the course of incremental economic reforms, favored by the Hungarian Democratic Forum (MDF) government, and launch a harsh stabilization program.⁴³ To cut expenditures on public services was among one of the fist steps that Lajos Bokros, the newly appointed finance minister, took in his determination to hold the budget deficit back. As spending on HE fell along with several public sector services in which reduced government appropriations was most strongly felt, the system was left with decreased public funds by some 20 percent. If in 1994, for example, the public expenditure on HE constituted 1.1 percent of GDP, in the following year the figure fell to 0.95 and in 1996 - to 0.82 percent (Polónyi 2002).

Reducing the number of employees, cutting salaries of the faculty, introducing tuition fees for all students and permitting state institutions to allow self-financed students - all were the consequences of the Bokros austerity policy. HE authorities managed to delay a second round of slashes anticipated for 1996 provided that achieving more efficient use of public resources through adaptation of both institution and sector-wide reforms could be assured. Under the pressure of the Bokros plan, inevitability of far-reaching reforms became unmistakably evident to the HE leadership. This is why the initiative for the second reform project came not from the government but from the Hungarian Rectors Conference and the Conference of College Directors.⁴⁴

43 Although it had secured the parliamentary majority, the MSzP decided to form a coalition with the Alliance of Free Democrats (SzDSz).

44 Indeed, besides the willingness, solid financial and legal bases were required for fulfilling ambitious plans. That is when the government of Hungary requested another 150 million USD loan from the World Bank to support its USD 250 million reform program (the World Bank 1998). This is to say that, a driving force behind the Hungarian government’s request for the World Bank’s financial

No matter what has caused the reduction in public spending for HE, this instance highlights inter-relationship that exists between the level of funding available to the sector and policies put in place. Having confronted with unprecedented decline in the resources, the turning point in the course of developments did come about in 1995 when policy pronouncements towards streamlining the sector and cost-sharing practices were made. Even if events fueled by the slash in financial support was an immediate reaction to the sudden and unforeseen shock rather than a genuine effort for more efficient use of resources, as some interviewed policymakers have claimed, the relevant point still remains.⁴⁵ That is, first notable steps towards cost-sharing practices, which include introducing tuition for all students and allowing institutions to admit self-financed students alongside those funded by the state, were taken precisely this time and presumably under the pressure of the Bokros austerity package.