Taking on the IMF John Horvath

Hungary accuses the IMF of meddling in its own affairs but what's the alternative?

What seemed like a routine dispute appears to be gaining momentum, at least in the realms of the corporate mass media. After a break in negotiations between the Hungarian government on the one hand and the EU and IMF on the other, rhetorical battles have ensued between supporters of both sides (Das Ende der Ruhe am Nordpol). Hungary accuses the IMF of meddling in its own affairs while the IMF and the EU have expressed their concern and dissatisfaction with the way in which the country's fiscal policies are being developed. For the moment, both sides appear to be entrenched within their respective positions.

In many ways, one can sympathise with the position taken by Hungary. The IMF is renowned for its restrictive and unrelated "free market reform" programs which have buried countries deep into crippling cycles of debt. Known as "structural adjustment", these programs usually include several basic components geared toward reducing inflation, promoting exports, meeting debt-payment schedules, and decreasing budget deficits. They generally entail severe reductions in government spending and employment, high interest rates, currency devaluation, low real wages, sale of government enterprises, reduced tariffs, and liberalization of foreign investment regulations. As a result, countries have become increasingly wary of the IMF and have been looking for alternatives.1

On the other hand, the present Hungarian government (as with previous administrations) doesn't appear to be forthcoming about its true intentions. Similarly, the way in which its present confrontation with the IMF has been framed is not only too simplistic but a little disingenuous as well. Hungary claims that there is general agreement among the parties on the fundamental issues, but wherein they differ are the details. In particular, the Hungarian government wants to impose a temporary bank tax (two to three years) on financial institutions whereas the EU and the IMF are against this preferring a set of austerity measures instead. As far as the government is concerned, it feels that people have had enough austerity over the past few years and that it has no other choice but to implement a bank tax. It goes without saying that an end to austerity measures was a key part of the current government's election campaign this past spring.

Despite a much anticipated backlash, the "market aftershock" resulting from the break in negotiations wasn't as severe as had been anticipated. Still, many are nervous. When news that both Moody's and Standard & Poor's issued negative ratings shortly after the disrupted negotiations between Hungary and the IMF, the domestic mass media immediately began scrutinizing the financial markets. Although the stock market fell slightly and the currency also took a small dip, these movements have been nothing extraordinary. Indeed, bond prices and yields have remained steady, the stock market has been trading at roughly the same range since the beginning of the year, and although the currency is at its lowest point in a little over 12 months, it's still nowhere near the negative records it had reached in the beginning of 2009.

This is not to say that there isn't anything to worry about. Although the Hungarian currency is not as low as it once was against major currencies such as the US Dollar or the Euro, it nevertheless is hovering at the bottom of the scale when it comes to the Swiss Franc. Since the personal debts of most Hungarians are indexed to the Swiss Franc, the poor performance of the Hungarian currency in this regard has made a bad situation considerably worse. Presently, about 1 million loans are considered bad in a country of 10 million.

It comes as no surprise, therefore, that currency fluctuations are on the minds of many nowadays. The government is quite aware of this and is also mindful that a wrong move or utterance can severely affect the Hungarian currency. Such was the case a month ago when remarks by two leading government officials, in where they compared Hungary's present economic state to that of Greece, sent the currency plummeting. For this reason, on several occasions since the breakdown in negotiations with the IMF and the EU the Prime Minister went out of his way to stress that Hungary would stick to its agreed budget deficit target.

Ironically, despite the problem of household debt the economic situation in Hungary appears to be actually not as bad it would seem, especially when compared to many other countries within the EU. This in part explains why the anticipated backlash resulting from the break in negotiations with the IMF wasn't so severe. Of all the 27 member states within the EU, Hungary ranks number 14 in terms of having the highest budget deficit, at around 4%; Ireland leads the pack with 14.3% while Sweden has the lowest at 0.5%. Indeed, only four EU member states have budget deficits below the 3% threshold. A similar picture also exists in terms of national debt. Meanwhile only one Euro-zone country – Luxembourg – has fulfilled all the conditions required by the Growth and Stability Pact.

Given this and the fact that the IMF doesn't have a reputable image, the Hungarian government has been on a propaganda offensive, using the media to its own advantage. With the lingering effects of the financial crisis of 2008 coupled with the enigma of household debt and high unemployment, there is a discernible anti-bank atmosphere within the country. Thus, the notion that the IMF wants to simply impose austerity measures whereas all the government wants to do is make those who have money (i.e., the banks) to pay their fair share is an effective argument indeed.

The government is in general agreement with the fundamentals dictated by the IMF and the EU

Yet not everything the IMF says or does is rejected by the government or outside observers. Along with supporters of the IMF, they feel that structural adjustment programs have largely succeeded in helping to shrink government budget deficits, eliminate hyperinflation, and maintain debt-payment schedules. This adherence to "fiscal discipline" is acknowledged by the current Hungarian government as evidenced by the fact that the Prime Minister has repeatedly insisted on keeping to the country's deficit target. In fact, as the government had already pointed out, they are in general agreement with the fundamentals dictated by the IMF and the EU; wherein they differ are the details.

It is here where the government's true intentions come into question. The Prime Minister reiterated on several occasions that his government intends to stick to the contract they have with the IMF which is set to expire in October, after which they don't intend to have anything to do with institution.2 Meanwhile, they will continue to pursue a responsible fiscal policy which will not only keep to the deficit target set for this year, but will further make efforts to bring it down toward the 3% threshold as stipulated by the Growth and Stability Pact.

There are several fallacies associated with this position. First and foremost, there is no need to stick to the deficit target if Hungary doesn't want to. This target is of interest to both the IMF and the EU for separate reasons: for the IMF it's a condition of their structural adjustment program and core to their philosophy of fiscal discipline; for the EU it's a prerequisite for adopting the Euro. Since Hungary doesn't intend to draw on the remainder of its loan in October and that the current government is adamant that it doesn't want anything to do with the IMF afterward, then the condition is not binding since it's no longer relevant. Likewise, since Hungary isn't part of the Euro-zone, and since there is no target date for adopting the common currency, then the requirements of the Growth and Stability Pact don't necessarily apply.3

A similar fallacy exists with the government's view regarding its contract with the IMF. Contrary the Prime Minister's own words that in October its contract with the IMF comes to an end and that afterward it will have nothing to do with the organisation, this is not the case. What ends in October is merely the last instalment of the loan Hungary had negotiated in 2008 (which. it doesn't intend to draw on anyway). After this, the contract isn't finished: Hungary still has to pay back the loan. Only when the loan has been paid back can it be said to have been finished. Thus, to say that Hungary will have nothing to do with the IMF after October is misleading.

In many ways, this is where the disagreement between the IMF and Hungary lies. According to the IMF representative in Hungary, they have no problem with the bank tax, albeit they don't feel that it's the best option available and that it's too high. Even so, the IMF was willing to accept the bank tax in its present state for the current year; what they were worried about was the next two years.4 This is because next year's budget already has an additional expenditure since Hungary will have to start paying back its loan. Hence, if everything remains constant and the calculations used by the government to maintain its budget deficit in 2010 with the bank tax included is correct, then the budget deficits for 2011 and 2012 are expected to rise since nothing appears to offset this extra expenditure.

While accusations against the IMF that it's infringing on the Hungary's sovereignty may be justified given the organisations sordid past history, this is not really the issue. The Hungarian government claims that the country can finance itself from the markets alone therefore the IMF won't be needed. Yet it's quite clear that the government has no clear idea of how it's going to reverse the country's finances. This was made plain in a recent interview when the Prime Minister explained that he is "trying things out".5 Thus, unless "the market" can be convinced that there is a clear plan Hungary will ultimately end up re-evaluating its current position. As one observer wryly noted, this little "Cold war" which the government declared against "western capitalism" will then come to an end.

Although it's still a little too soon to tell how everything will play out in the end, Hungary's ability to convince the markets that it has a viable plan for the future so far doesn't seem to be working. The country already has had some problems selling its treasury bills and only did so in full volume after increasing its risk margin. As some economists have noted (among them several supporters of the government) the conflict with IMF and EU is undermining trust in Hungary's willingness to fulfill its obligations. This could be clearly seen in the negative downgrades issues by Standard & Poor's and Moody's recently.

There is no such thing as "left-wing" and "right-wing" in modern day politics, only the "business-wing"

Hence, if the government's attitude won't change even after local elections in the autumn, then Hungary's credit rating will most likely be lowered further which, in turn, will increase the costs of refinancing the country's debt. For this reason most observers feel that the government is acting rather foolishly in giving up the safety net of IMF at this point in time. Nevertheless the Prime Minister is adamant that he can rely on the market to finance Hungary's debt. This why he has been at pains to stress his commitment to fiscal discipline in terms of keeping to the deficit target of 3.8% because this is what the market want to hear.

Yet this isn't the same that was promised to voters just a few months ago during the elections. Indeed, it appears that the current government has backtracked somewhat on its earlier promises. During the election, it was noted that the present deficit target of 3.8% wasn't "carved in stone" and that the actual figure was much higher. Subsequently, this figure would be reviewed and adjusted accordingly. Since then, apart from a few minor adjustments, the vast overhaul and re-evaluation of Hungary's deficit target failed to materialize. Instead, the bank tax was seen as a quick and easy way to plug holes in the budget. In other words, the deficit target of 3.8% appears to have been carved in stone after all.

It's this obsession with fiscal discipline which shows that the present government has more in common with the IMF than most people think. In fact, the difference between both sides is akin to the differences between left and right in modern day politics. In effect, there is no such thing as "left-wing" and "right-wing" in modern day politics, only the "business-wing": the so-called "left" represents the business-left and the so-called "right" expresses the views of the business right. In the US this can be clearly seen in the two-party dictatorship dominated by the Republicans and Democrats. In Europe, this dichotomy is symbolized by the political ideologies of Thatcherism (the business right) on the one hand and Blairism (business left) on the other. In Hungary, this dichotomy is quite apt: members of the current government have made no secret of their admiration for Thatcherism and Reaganomics while the leader of the previous Socialist government, Ferenc Gyurcsany, was proud to be dubbed as "the Tony Blair" of Hungarian politics.

Thus, despite the tough talk coming out of Budapest, the undercurrent driving the positions of the current government and the IMF are actually one and the same. At its core is the precept of economic liberalism which holds that an unregulated free market and private sector are the engines for unrestricted growth, the benefits of which will trickle down from the owners of capital to the entire population. Within a modern context this entails outward-looking development models that stress the importance of complete integration into the dominant global structures of trade, finance, and production. This process of global economic integration is better known as globalization.

This process of globalization began to develop apace in the 1980s when the leading economies of the west began to use their aid and trade policies to restructure the economic policies of other nations. In the US this was accomplished by conditioning aid agreements on acceptance of a package of economic reforms and adherence to the prescriptions of the World Bank and IMF. In the Europe, it was done through the process of EU integration in where Brussels insisted on changes to the economic policies of other nations so as to facilitate increased trade and investment under the pretext of a single market.

Along these lines, the main difference between the neoliberal left and the conservative right is that while the former is content with moving countries away from self-directed models of national development that focus on the domestic market (i.e., an internationalist approach), the latter is more nationalist minded, hence the desire for independence from outside institutions such as the IMF. This is the position that Hungary adopted in 1998 when it broke away from IMF influence; it's also the same objective which now drives the current government.

Although Hungary appears to adopt a more independent model of national development, the precept of economic liberalism nevertheless remains intact - only this time within a European context. This means the focus has shifted to the implementation of programs of social investment now that the dirty work of neoliberal structural adjustment has been completed, a process also known as neo-structuralism. Similarly, with important state institutions dismantled as a result the government can now afford to concern itself with good governance in terms of reforms in tax, budgetary and judicial system transparency. Meanwhile, the ability to exercise complete control over national economic development has been undermined

With Hungary's integration into global trading, finance, and production systems more or less complete, it obviously adheres to the basics tenets of economic liberalism regardless of whether it comes into conflict with the underlying political philosophy of the government in power. This why the current Prime Minister is adamant that the country will maintain fiscal discipline even though it may fail to establish a base for sustainable, balanced economic development.

The cold war against the IMF is clearly for show

The idea that the Prime Minister will have nothing to do with the IMF but will continue to negotiate with the EU is a little nonsensical. Hungary can't decouple the EU from the IMF since both share the exact same objectives and philosophy. Moreover, the Hungarian government likewise shares these same views and had implemented policies to this effect. As with IMF structural adjustment programs, these policies have bankrupted local industries, increased dependency on food imports, gutted social services, and fostered a widening gap between rich and poor.

Although the current government blames the previous one for the past eight years and for leaving the country in the mess it's now in, it was the same people who are in power today who had laid the foundation for joining the EU, this despite their protest that there is "life outside the European Union." Furthermore, while some point to the fact that at the time the Hungarian economy had achieved nominal GDP growth, this growth was limited to a few sectors and based on the exploitation of a cheap labour market instead of a more well-rounded and sustainable growth in production.

It's quite clear that the current government is intent on pursuing the same type of policies as it had in the past. Temporary job programs and other relief measures are being introduced so as to provide temporary relief until the benefits of neoliberal reform start trickling down. This was the view of the Economics Minister who had rationalised the introduction of tax cuts by claiming that the shortfall in government revenues to be expected as a result would be offset by economic growth; that is, if the economy grows in the first place. Similarly, to mitigate the harsh social impact that economic restructuring and austerity measures has had on rural areas the same minister looks to double the number of people involved in tourism as an alternative to more traditional rural activities, such as small-scale farming.

The end result of all this is predictable: local elites will benefit from tax breaks and production incentives while the domestic economy will continue to be sluggish, along with the jobs that support the lower and middle classes. Tightened credit requirements and higher interest rates will make it virtually impossible for small farmers and businesses to invest. Meanwhile, the underlying structural reasons for poverty and unemployment are left unaddressed.

If the current Hungarian government is really serious in breaking free from the constraints of the IMF, it first has to be more honest with the people who had put it into power. This means foregoing attempts at decoupling the EU from the IMF and thus getting rid of double standards. A bank tax is actually not needed; what is needed is more meaningful reform, such as the introduction of the Tobin tax which would end some investor-gouging practices and could even help ease the deficit. In conjunction with this, increased capital controls need to be implemented which would limit the ability of foreign funds to enter and flee a country easily. This is of central importance, because concern about a currency attack is why countries such as Hungary can't undertake proper stimulation measures.

Unless such courses of action are implemented and the government is more honest with the people over whom they govern, there will not be much of a difference between the present, the past, and the future. Indeed, the more things appear to change the more they will actually stay the same. Subsequently, the golden rule will continue to apply: namely, he who has the gold will make the rules. (John Horvath)