When international best practice does not work efficiently

The eruption of what most people call global financial crisis in 2008 triggered off major changes both in particular economic policy courses and in the com-monly held views about the definition of good economic policy and good gov-ernment. The crisis is generally called global but, in fact, it was a set of advanced (core) countries and their dependencies that suffered the most during the tur-moil. The global core powers (the United States, the EU, and Japan) were the first to resort to crisis mitigating measures. The measures included the age-old Keynesian advice on how to soften and counterbalance economic downturn, but some governments applied non-conventional policy solutions as well.

Keynes and Keynesianism on stabilization

It was John Maynard Keynes, a British economist and renowned public figure, who rejected the then mainstream in the 1930s, and gave a new direction to economic thought. The „Classics” had claimed be-fore him that the forces of supply and demand of the market economy would lead eventually to equilibrium in product markets through free movement of prices. They had also posited that incidents of high unem-ployment can be cured by wage cuts. Keynes refuted these thoughts in his influential book The General Theory of Employment, Interest and Money published in 1936, soon after the devastating Great Depression.

He attributed the slump to the collapse of overall demand, especially of private investment; his policy prescription was the exact opposite of the previous mainstream. Keynes and his followers argued that, as ag-gregate demand is unstable and frequently inadequate, a market econ-omy would often underperform. Slumps, with high unemployment, can be mitigated by active policy measures: in the downturn phase of the business cycle, the central bank should reduce its policy rates in order to encourage investment activities, and fiscal policy should be expan-sionary to support output by maintaining adequate aggregate demand.

Keynesian economists advocate an active role for government during recessions – and some even after recessions.

Keynes’s thought quickly became standard economics after the Sec-ond World War. Massive government expenditures helped war-stricken economies recover fast. It looked that Keynesianism worked. Keyne-sian views soon dominated the economics profession. Politicians were eager to embrace the new mainstream, and to spend generously on investments, welfare, and other popular causes.

Side effects, however, appeared soon: increasing government debt or higher tax burden. The money that the government spends must

come from somewhere: from borrowing or from other actors. If stimu-lus plans are funded by issuing more government debt, growing public sector debt absorbs savings that might otherwise go to private invest-ment. Critics of Keynes claimed that public spending could not lead to sustained recovery, because its stimulating effect would be offset by the need to finance the deficit. Rational investors and business players would anticipate higher taxes under a high spending policy regime, and would as a consequence invest less than the authorities had thought.

Keynesianism lost its appeal in the 1970s since it had no cure for the new problem of the period: the twin challenge of high inflation and low output. When monetary and fiscal authorities wanted to mitigate the recession by pumping more money into the economy, inflation acceler-ated intolerably; if, instead, they followed a stricter fiscal policy stance, recession became even deeper. The worst, as Britain experienced in the 1970s, is the stop-go politics: an expansionary policy period fol-lowed by austerity to restore external balance, but again growing un-employment forced government to apply expansionary measures.

After the fall from grace of Keynesianism, more efforts were paid to understand the production process of the economy (supply side eco-nomics), and policy makers turned their attention to ways of increasing the flexibility and structural adjustment capability of the economy. Mon-etarism also emerged as another powerful stream of a thought claim-ing that keepclaim-ing the value of money (currency) stable is the best that economic policy can do to the economy.

The advent of the financial crisis in 2008 led to a resurgence in Key-nesian and neo-Keynesian thought. This is not surprising: in times of deep output contraction it does not seem to be good politics just to wait until the market forces somehow solve the problem – on the long run. Keynes famously said that “on the long run we are all in the grave”.

In politics, months may feel like the long run.

The less advanced but influential big countries of the so-called BRICS group (Brazil, Russia, India, China, South Africa) initially seemed to be rather un-affected by the ‘global’ downturn. Their policy reactions, at first, were also restrained, although China, for instance, did immediately apply Keynesian demand-enhancing measures in order to underpin its traditionally high growth rate. Other emerging markets that had previously suffered hardships because of their excessively fast and thus unbalanced economic growth (South Korea, Thailand, Mexico), had learnt the lessons in the hard way, thus they decided to take a conservative, cautious policy course during the crisis. Their govern-ments and central banks piled up high international reserves and were care-ful to keep macroeconomic balances under control as an insurance against

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sudden shocks. They certainly did not imitate the activist crisis management mode of the advanced countries.

Yet, all economies are interdependent to various degrees today. This means that every single nation experienced a new situation after 2008. All over the globe, economic policy making took a new direction after the collapse of lead-ing US investment bank Lehman Brothers. Consequently, best practice in pol-icy making had to be redefined.

The crisis erupted in the core, but took its heaviest toll in the periphery. Let us take again the case of Hungary, an open economy, being part of the Euro-pean Union, albeit on its periphery.

Hungary case: Take 2

Hungarian output suffered a deeper decline in 2008–2009 than the European average. The Hungarian state, in fact, avoided sovereign de-fault only by turning to the International Monetary Fund and the Europe-an Union for finEurope-ancial support. Support was soon grEurope-anted, but the gov-ernment (a Socialist and Liberal coalition) had to accept, of course, the strings attached to a stand-by loan. The loan conditions were serious, as always, but not excessively hard: the authorities had to promise to keep budget under control, strengthen banking supervision, take steps to make labour market more flexible. Still, these were hard times for the region, and particularly for Hungary with its huge public sector debt and external country debt accumulated during a short period between 2001 and 2007. For lack of any fiscal room, the Hungarian government was simply not in a position in 2009 to support aggregate demand through further government spending in good Keynesian manner, unlike some other CEE states that happened to be in better financial situation and free from IMF tutelage. Consequently, the Hungarian recession turned out to be particularly serious; yet the government just could not apply countercyclical measures to mitigate the contraction. Thus in the years of 2008–2010, Hungarian economic policy making went, willy-nilly, against the Keynesian demand-management course.

With these antecedents, the political forces that came to power in Hungary in year 2010, with Viktor Orbán as Prime Minister, defined em-phatically their policy course as a full rejection of previous practices.

They even applied to themselves, and thus knowingly accepted, the term ’unorthodox’, however hard it is to define the meaning of Euro-pean orthodoxy, since those very years exemplified the wide variety of policy reactions to crisis among European nations. Moreover, policies had not been homogeneous even in the previous period. The Hungar-ian policy course took gradually interventionist directions, provoking clashes with EU institutions. The government concluded that the West

(and particularly the EU) would be stuck in the slow lane, and it is thus advantageous for the country to turn to the more dynamic (at least, it looked like at that time) East: hence the ‘Opening to the East’ initiative to do more business with Russia, China, Turkey. Such policy turn has its price: massive government centralization, removal of checks and balances, and anti-Western and autocratic rhetoric - these tenets of its policy put the Hungarian government to serious criticism from EU insti-tutions and certain member states within the European Union.