119 social response to the economic hardships of transition and hence it resembles the Hungarian population’s exit strategy. Consequently, the lack of organised interest representation beyond the political system, the low level of party political affiliation and the continuation of individualistic survival strategies additionally supported the state’s internal autonomy. With the exception of sporadic and unorganised protests during the initial period of the development regime, dissent is silenced until the elections. As a result, with the exception of the 2006 elections, every previous government was voted out of office (Greskovits 1998: 87, 90). Hence, on the one hand, the strategy followed the prescriptions of the international financial community in arrangement with international lending constraints. The strategy also complemented indigenous elite views. On the other hand, in view of the political polarisation, TNC engagement in the privatisation process was seen as an instrument to curtail the opposing camp’s societal influences by filling the civil society void with affiliated clienteles. 3.3.2 Hungarian Regime Readjustments In total, Sass (2004: 76; Sass 2003: 50-51) identifies three periods associated with different approaches to Hungary’s attraction strategy. The analysed time frames convey the reaction of the state to the malfunctioning of the growth strategy. They coincide with the parliamentary terms. Despite the frequent change in government, the readjustments displayed considerable continuity, as the main pillar of the development regime, the predominance of FDI, was left untouched. Crisis Management (1990-1994) The first phase under review is concerned with the initial task of transition undertaken by the first democratically elected centre-right coalition government, led by József Antall. The Antall government’s term in office was defined by the daunting task of transition. The conservative coalition’s policies of transition attempted to square the circle of creating a market economy, building a conservative social base and ensuring popular consent to its transition course. 106 As a result, the Antall government embarked on a course known as “gradualist transition”. The government shunned from following the course of “shock therapy”, which propagated the introduction of harsh austerity measures and quick liberalisation of the economy. 106 The coalition comprised the conservative Hungarian Democratic Forum (MDF) and the Christian Democrats (KDNP) and the Independent Smallholders Party (FKGP) as junior partners (Andor 2000: 46). 120 In terms of FDI attraction, TNCs were not officially strategically used as the prime developmental agent. Initially, the am was to create development built upon national capitalist elites aligned to the incumbent conservative parties (Andor 2000: 76). Within this context, the attraction of inward investment only featured as an element to reduce the country’s indebtedness (Sass 2003: 50). Initially, privatisation was seen as a possibility to create actors aligned to the incumbent parties and, therefore, to deepen their embeddedness within society. With a few exceptions, such as the redistribution of agricultural land to smallholders and the restitution of church property, this policy aim soon failed.107 The transitional recession had eroded indigenous capital and the previous privatisation process had led to the control of the economy by hostile former-socialist elites. Hence, the attempt to reconstruct Hungarian capitalism by creating an affiliated national capitalist class was shelved due to a lack of potent indigenous actors, who could take on such an organic role within the development regime (Deppe/Tatur 2002: 189). TNCs, therefore, became pivotal in the attempt of the state to augment its internal autonomy and its capacity. On the one hand, they resembled a vehicle to disempower post-socialist entrepreneurial elites via their inclusion in the privatisation process. On the other hand, they constituted vital sources for non-debt-related capital inflows (Barnes 2003: 540; Kornai 2000a: 163-166). Furthermore, the initiation of a FDI-friendly development regime was also an expression for the low level of external autonomy. The transition process was heavily scrutinised by the international financial institutions (Andor 2000: 49). Hence, the attraction of FDI was seen to be an important signal that Hungary was adhering to “international standards” of a market economy (Grzymala-Busse/Jones Luong 2002: 536). The state’s external autonomy was further constrained by international economic events in form of the collapse of the CMEA and the downturn in economic growth in the Western Europe (Andor 2000: ibid). The detrimental exogenous economic influences contributed to the deterioration of the country’s economic situation, additionally crippling the state’s capacity. Essentially state capacity was constrained by the financial constraints imposed by the high level of indebtedness and the overstretched nature of the budget (Ádám 2004: 8). State revenues and prospects for economic recovery were additionally burdened by the deep transitional recession, which illustrated the exigencies of having to transform the economy from “a sellers to a buyers market” (Kornai 1993: 2). 108 Furthermore, the government was constrained in its restructuring options. An initial attempt to tackle the budgetary deficit via cuts in social expenditures such as fuel 107 Agricultural restitution had dramatic consequences. In 1992, agricultural output had declined by 25% (Andor 2000: 80). 108 By 1990, Hungary’s gross indebtedness had reached more than US$ 21 billion, leading to the highest gross debt per capita (US$ 2,057) in the region, with debt servicing consuming almost 63% of export incomes (Kornai 2000a: 136). Between 1990 and 1992, GDP decreased by almost 20% compared to its 1989 level. Industrial production fell by more than 9% between 1990 and 1993. Unemployment reached 14% in 1994. Inflation soared to 35% in 1992 and real wages fell by an average of 4% p.a. between 1990 and 1993 (WIIW 2004). 121 and energy subsidies had backfired due to popular dissent. Following an unorganised three day blockade of Budapest by taxi drivers in October 1990 (Andor 2000: 47), the Antall government feared an immediate loss of its popularity and backtracked on this proposal and discarded immediate macroeconomic stabilisation measures (Ádám 2004: 9). Instead, the ruling conservative coalition embarked on incremental restructuring also described as “gradualist etatism” (Deppe/Tatur 2002: 189). A process of moderate economic and social restructuring was implemented to minimise the social costs of transition (Deppe/Tatur 2002: ibid). Economically, these restructuring policies focused on the establishment of market economy institutions, microeconomic reform. They attempted to increase revenues without additionally burdening the public by reducing social expenditures (Bartlett 1996: 61). On the one hand, priority was given to the repayment of the country’s foreign debts in an aim to increase its international financial credibility. Inflation was fought with an overvalued exchange rate, lowering the costs of foreign debt servicing. Similarly, owing to the high level of import dependency of the economy, the subsequently lower prices for imports would have deflationary effects. Coupled with high interest rates, the aim was to decrease aggregate demand by averting inflationary pressures resulting from imports and increased money supply as well as remaining attractive for capital inflows (Kornai 2000a: 232-233; Adam 1995: 990). Moreover, the government’s deflation policies also aimed to reduce the increasing demand for credits and direct subsidies by ailing SOEs. In addition to the introduction of new regulations and procedures concerning accounting techniques and the development of the financial sector, the government implemented a very strict bankruptcy law in 1992 (Gray et al. 1996: 425).109 The effects were drastic and hitherto unseen in the region. Within 12 months, almost 45% of all organisations with limited liability and 13% of SOEs filed for bankruptcy procedures. As a result, unemployment grew from 8.2% in 1991 to 14% in 1992 and industrial production fell by 4.7% (Adam 1999: 57). The Antall government followed a three-pronged strategy with this measure. First, the instrument was designed to avoid further inflationary pressure through the continued financing of corporate debt via bank credits. Second, in view of privatisation, bankruptcy legislation was directed at enforcing financial discipline among banks and enterprises. The measures caused a shakeout of ailing firms and financial institutions, resulting in an amelioration of the stock of SOEs and credit portfolios of state-owned banks, earmarked for privatisation (Adam 1995: 992). Thirdly, the introduction of bankruptcy legislation was also aimed at reducing the power of former-socialist elites and therefore increasing the state’s internal autonomy (Adam 1995: 992). Similarly, the government centralised all aspects of the transition process under its direct control. Antall supported the notion of the total constitutional legitimacy of government, which implied that only the elected executive had the right to decide on socioeconomic issues. Essentially, this strategy was 109 An automatic trigger mechanism was put in place. The law forced enterprises to file for bankruptcy within eight days, if they had arrears of more than 90 days (Gray et al. 1996: 425) 122 used as compensation for the state’s lack of capacity by increasing the state’s internal autonomy (Ádám 2004: 9). Accordingly, the state reasserted its role within the vital issue of privatisation and initiated a centralised and government-led privatisation process. In effect, the state augmented its internal autonomy in the vital domain of privatisation. The central issue of transition, privatisation, was insulated from external influence by transferring the privatisation agency, the State Property Agency (ÁPV), from parliamentary to governmental control upon coming to power in 1990. Furthermore, the introduction of the “mandatory corporatisation” law in 1992 allowed the state direct control over all SOEs as well as over a large proportion of the previously spontaneously privatised SOEs with equity links to state-owned firms (Hanely et al. 2002: 153). Finally, a specialised asset management agency was established to control those SOEs deemed to be of strategic importance and earmarked for long-term stateownership (Hanley et al. 2002: 53). The decision to shun macroeconomic stabilisation measures by only increasing revenues led the government to base economic transition upon an implicit capitalimport strategy (Stephan 1999: 227). The lack in revenues to restructure ailing SOEs meant that the required funds had to be imported ideally via non-debt-related capital inflows generated through FDI, long term loans and exports (Stephan 1999: ibid). Moreover, despite initial apprehensions on the increased engagement of foreign firms in the Hungarian economy, the demise of indigenous entrepreneurial capital left only TNCs to fill the developmental void. Mere economic necessity led TNCs to become the prime agents not only to infuse modern technology, know-how and capital into the economy, but also to support the occidentalisation of the Hungarian economy and society through western integration (Mihályi 2001: 62). As a result, the avidly anti-communist government also continued the generous and liberal investment incentives granted under law XXIV/1988 enacted by the previous socialist regime to attract FDI (ÉltetQ 2000a: 50). Hence, the attraction instruments aimed to support the process of economic restructuring and to increase the country’s export competitiveness by attracting both market-seeking TNCs through the privatisation process as well as efficiency-seeking, export-oriented FDI into the economy. The Law on Non-Resident Investment (XXIV/1988) established Hungary as an outlier in terms of FDI attraction in the socialist camp (Sass 2004: 63). Law XXIV/1988 guarantied national treatment and the freedom to repatriate profits (OECD 2000: 31). It provided important tax concessions and grants to foreign investors. Beyond general provisions,110 the act also targeted specific industrial sectors and branches. Further tax allowances were granted in accordance with the size of the total investment and the area of engagement (ÉltetQ 2000a: 50). With the exception of certain strategic and sensitive sectors, foreign firms were given the right to establish foreign subsidiaries and to purchase Hungarian firms (OECD 2000: 31). 110 For a detailed account on the investment incentives stated in Law XXIV/1988, see ÉltetQ (2000a: Fn 42). 123 Furthermore, the policy of granting the status of Export Processing Zones (EPZs) to foreign investors was continued. The EPZs had originally been devised in 1982 in an attempt to lure advanced western technology and export-oriented FDI into Hungary (Szanyi 2001b: 3; Antalóczy/Sass 2001: 45).111 As a result of these incentives, Hungary had the largest per capita inflow of FDI into the region (Hanley et al. 2002: 151). Furthermore, prestigious SOEs were sold to investing TNCs via special deals. The aim was to attract reputed TNCs to Hungary, in order to create positive demonstration effects for further foreign investors and so inciting investment cascades (Sass 2003: 50). As a result between 1990 and 1992, 50% of the US$ 6 billion of FDI inflows went towards purchasing SOEs (Hanley et al. 2002: ibid). “Etatism” also characterised the conservative government’s relationship with societal actors. Although the conservative coalition introduced tripartite institutions in 1990 through the foundation of the Council for Interest Reconciliation (ÉT), the government regarded it as a mere forum for consultation and advice (Deppe/Tatur 2002: 267-268). Moreover, the government was supported in its view by the fragmented and weak nature of the social partners. The trade unions were weakened by rising unemployment and the lack of labour representation in the rapidly growing private sector. Especially the largest union movement (MSZOSZ), the successor of the previous socialist single trade union movement (SZOT), suffered from its vicinity to the previous regime. Finally, a total of six rival trade union umbrella organisations with highly conflictive relationships battled over the issue of their legitimacy to represent labour interests. They were faced by an equal plethora of various employer organisations (Makó/Simonyi 1997: 224). As Greskovits (1998: 175) shows, the government only chose to include the ÉT as a measure of last resort in order to diffuse public dissent. Nevertheless, it rarely based its actions on the results of a proactive social dialogue. Instead, government policies towards corporatism were pre-emptive following a divide et impera strategy, essentially designed to rubber stamp its policies (Deppe/Tatur 2002: 188). The Social Pact of 1992 aptly displayed these tactics, which was forged after massive protests had arisen after the announcement of VAT increases. Beyond the fact that the Social Pact legitimised the government’s policies, the pact also demonstrated the government’s capability to augment its autonomy by further insulating policymaking from external influences (Greskovits 1998: 170). The social pact contained distinct compensatory elements following the rules of political efficacy. They were aimed to pacify both unions and middle class voters, whose support the conservative government wished to attain. The plight of the marginalised lower income groups was ignored (Greskovits 1998: 165). Nevertheless, 111 In difference to the commonly used export processing zones, EPZs were not restricted to particular geographic areas. Instead, upon meeting requirements in size and exports and in addition to the investment incentives offered by Law XXIV/1988, foreign firms or Hungarian firms with foreign-owned equity were designated as ex-territorial areas and were exempt from customs duties on their imports of production related goods and their exports, from VAT and initial foreign exchange restrictions (Antalóczy/Sass 2001: ibid). 124 Hungarian economic performance further severely deteriorated. However, popular dissent against rising impoverishment and economic hardship did not reoccur. Greskovits (1998: 83) links this to the growing size of the informal economy, which grew substantially throughout the first four years of transition from 27% of GDP in 1990 to 31% in 1994, peaking at 35% during the transitional recession in 1992 (Lackó 1999: 21). Economic recovery in 1993 was plagued by the emergence of twin-deficits characterised by the deterioration of both the budget and the current account, leading to a rapid worsening of the balance of payments.112 Capacity was further crippled. The twin-deficits were proof that the initial Hungarian transition strategy was unsustainable (Stephan 1999: 234). The decision to liberalise imports and to pursue economic integration with the EU caused an influx of imports, which displaced indigenous firms from domestic markets.113 The return of domestic demand provoked a negative trade balance due to a surge in imports. This revealed the high level of import inelasticity of internal demand, as imports substituted the fall in domestic production resulting from the severe affects of the bankruptcy law (Stephan 1999: 230). However, at the same time the continuation of import restrictions to the SEM affected those branches in which Hungary possessed comparative trade advantages (Stephan 1999: 234). Furthermore, the continued downturn of economic growth in Hungary’s important trade partners resulted in a falling demand for Hungarian exports, decreasing export revenues (Adam 1999: 60). The budget balance turned negative despite the initial attempts at budget restructuring. The transitional recession had rendered the government strategy of softening the social cost by maintaining high levels of welfare transfers obsolete. However, within the context of falling revenues due to the recession, the large scale of firm bankruptcies and a strong increase in unemployment, the social welfare system had to be increasingly financed by state means. Furthermore, government consumption was increased in 1993 in the forefront of the 1994 election in a bid to stimulate internal demand and production in order to increase the ruling coalition’s electoral appeal and to appease dissent. Consequently, the rise in state spending had increased the strain on the budget balance in light of lower revenues (Stephan 1999: 232). In the midst of these economic calamities, the privatisation process slowed down considerably, which substantially decreased revenues. As result, the negative state budget increased, reaching 8.1% of GDP in 1994 (Stephan 1999: 238). The drop in 112 The trade balance turned negative in 1992 (- €38.7 mn), despite negative growth in imports and increased rapidly to € 2.8 bn in 1993 after imports increased by 13.6%. The current account deficit grew from 0.9% in 1992 of GDP to -9 of GDP in 1993. The budget deficit increased from -2.1 of GDP to over -4.2% in 1993 (WIIW 2004). 113 The Antall government began dismantling the remnants of the import-substitution regime by liberalising 90% of import restrictions in 1991 (Stephan 1999: 182). Hungary’s commitment to free trade was further underlined by a regional free trade agreement (CEFTA) between the CEE economies and the signing of the Europe Agreements in 1992, which were a prerequisite for Hungary’s EU membership in 2004 (Stephan 1999: 186-187; Dauderstädt 2004: 9). 125 privatisation revenues resulted from a decrease in TNC participation, due to the abolition of tax exemptions at the end of 1993 (ÉltetQ 2000a: 50). 114 In part, this measure was the result of the government’s attempt to increase its revenues in order to tackle the growing budget deficit. However, the measure also has to be seen within the context of the 1994 election. The ruling conservative coalition attempted to improve its re-election chances by nationalising the privatisation process (Andor 2000: 76). Accordingly, the government developed subsidy schemes (Equity Credit and compensation coupons) to increase the share of Hungarian investors (Deppe/Tatur 2002: 190). As a result by 1994, cash sales resembled only 30% of privatisation revenue of which foreign participation via FDI only made up 10%, the remainder was attained through subsidised equity sales to indigenous buyers (Hanley et al. 2002: 156). Consequently, the drop in FDI inflows was mainly responsible for the 50% fall in total foreign capital imports to Hungary in 1993. Together with the trade deficit, the drop in capital imports caused the current account deficit to reach almost US$ 3.5 billion (Stephan 1999: 226). Matters were made worse when the Central Bank (MNB) reacted to growing inflation under false assumptions. The rise in interest rates was directed at curbing private consumption, which was seen to be the main culprit for the increase in imports and inflation (Stephan 1999: 234-235). However, as Stephan (1999: 233) argues, inflation was fuelled by the aforementioned increase in government consumption and not private consumption.115 As a result, popular dissent was voiced this time at the ballot box. The conservative coalition’s arrogant almost autocratic style of governance and revisionist stance, whereby nostalgic pre-communist images of gentry-ruled Hungary under Horthy were glorified, had alienated a large proportion of the population (Adam 1999: 59; Andor 2000: 56). Hence, the dissenters brought the revamped Socialist Party (MSZP) into office with an absolute majority (Adam 1999: ibid). Hence, the first democratically elected government compensated for its lack in capacity by increasing its internal autonomy. However, the transitional recession further eroded the state’s capacity. This prompted rising popular dissent in the face of the harsh socioeconomic realities of transition, despite the government’s attempt to diffuse dissent through compensatory politics. Popular dissent, which had been pacified with the Social Pact of 1992, was voiced at the ballot box with the conservative government suffering a humiliating defeat. 114 Whilst between 1991 and 1993 27% of privatisation revenues stemmed from TNCs, this figure dropped to 9% in 1994 (Kalotay/Hunya 2000: 42) 115 Private household demand remained stagnant even though saving rates had additionally fallen and wages had risen 7.2% (Adam 1999: 60). 126 Strategic Reorientation and Stabilisation (1994-1998) The MSZP swept into power by successfully securing the votes of those members of society who were worst affected by transition. Members of the working class, the unemployed and pensioners were driven to the polls by their dissatisfaction over the previous course of transition. They resembled the most vulnerable groups in society and their vote in favour of the successor party to Kádár’s MSZMP expressed their nostalgia for the previous regime (Deppe/Tatur 2002: 200; Andor 2000: 56). However, the hopes for increased social equality were to be disappointed, as the newly elected government introduced a severe austerity package in an attempt to improve the state’s capacity. Hungary’s “gradualist” transition strategy was over. Furthermore, the MSZP-SZDSZ coalition openly advocated the role of TNCs as the development regime’s prime developmental agent. The open prioritisation of FDI inflows again reflected the low external autonomy of the state to formulate development policies. The government was faced with mounting pressure by the IMF and other leading international organisations to introduce widespread economic reforms to tackle the growing twin-deficit problem. Following the Mexican Peso Crisis in 1994, the IMF together with the EBRD openly named Hungary as the next economy to crash. Both institutions refused further standby loans due to insufficient progress on economic reforms (Adam 1999: 60). Especially the issue of privatisation proved to be contentious, as Hungary under the previous government was heavily criticised for its protectionist attitude towards FDI by the leading international financial organisations and the EU. As a result, Hungary’s credit rating position worsened considerably leading to increased interest rates and rising debt servicing obligations (Hanely et al. 2003 156-157). Additionally, the West was increasingly wary about a further former socialist country being ruled by the successors of the previous socialist regime (Andor 2000: 58).116 Hence, the MSZP under the leadership of Gyula Horn was anxious to demonstrate that the party had discarded its past and become a modern social democratic party. This in part explains the haste with which the government pursued further European integration, by officially applying for EU membership in December 1994. It also makes clear why Horn chose to form a coalition government with the previous dissident movement of the Alliance of Free Democrats (SZDSZ), despite the MSZP presiding over an absolute parliamentary majority. The decision was aimed at calming simplistic Western fears of reconstructing a Socialist one-party-state (Andor 2000: ibid). The coalition with the liberal SZDSZ allowed the government to avail of a 2/3 parliamentary majority. This essentially allowed the executive to bypass the cooperation constraints stipulated in the constitution and therefore opened the possibility for virtually unchallenged constitutional amendments by the social-liberal coalition. Hence, the internal autonomy of the state was further increased (Andor 2000: 62). 116 In 1994 Hungary was the third country in the region to be ruled by decedents of the previous socialist regimes following Lithuania in 1992 and Poland in 1993 (Andor 2000: 56). 127 Finally, the state’s internal autonomy was further increased by the disempowerment of the labour movement. Initially, the MSZP managed to win union support during the election and promised in return to allow a higher degree of union influence on socioeconomic issues (Andor 2000: 200). Nevertheless, the unions as well as employer organisations were quickly sidelined, when an austerity package was announced overnight without any prior consultation with the social partners or even with the MSZP parliamentary group (Deppe/Tatur 2002: 202; Andor 2000: 63). Hence, the politics of exclusion were continued. The precarious economic situation obviously reduced the state’s capacity. Next to a pension reform, the austerity package, also known as the Bokros Package,117 was introduced in 1995. The enacted measures were aimed to improve the state’s capacity to implement its economic policies. The Bokros Package adopted a two-pronged approach by combining macroeconomic stabilisation with economic restructuring. Macroeconomic stabilisation was to be attained by reducing the country’s twindeficit problem by focusing on revenue, monetary and trade policy (Stephan 1999: 236-237). In terms of resolving the budget deficit, the social-liberal coalition focused on both state expenditure and revenues (Henderson et al. 2001: 15). Next to increases in consumption taxes and energy prices, these measures contained also cuts in wages and social welfare benefits.118 The aim was to cut spending by 3 Forint for every additional 1 Forint of expenditure (Kornai 2000a: 256). The state used its position as the country’s largest employer and enterprise owner to freeze nominal public sector wages. Similarly, short term import surcharges were levied to create extra revenues. The import charges were also aimed at correcting the current account deficit, resulting from the trade deficit (Deppe/Tatur 2002: 103). Similarly, the 9% forint devaluation and the implementation of an export promotion scheme were aimed to increase sales of Hungarian exports (Stephan 1999: 237). The export promotion scheme was closely related to the reshaping of the privatisation policy, which took the needs of TNCs into stronger consideration. The precarious economic situation of the country highlighted the need for export revenues and non-debt related capital inflows. In the absence of sufficient indigenous actors to undertake the task of economic restructuring, TNCs were seen as the ultima ratio for the transition process. Next to their pivotal role in transition, they were also considered to be the prime agents to support Hungary’s EU integration course (Mihályi 2001: 62). The government redesigned its FDI policies to cater for both market seeking and export-oriented TNCs. Essentially; this move signalled a more strategic approach to 117 The measures are named after the Finance Minister Lajos Bokros who introduced the austerity package. 118 Government expenditure fell from 60.4% of GDP in 1994 to 49.4% in 1997, with social spending declining from 20% of GDP (1994) to under 15% in 1997 (OECD 1998: 49).The universal nature of social welfare and health care benefits was significantly reduced by the introduction of means based benefits (Deppe/Tatur 2002: 203, fn 11). 128 FDI in the transition process. The aim was, therefore, to attract FDI not only for export-oriented greenfield investments, but also for brown field investments oriented towards the internal market. The attraction of export-oriented FDI was implemented by the amended law on corporate tax, which awarded generous tax exemptions to export production and additional tax rebates for investment in areas stricken by high unemployment (ÉltetQ 2000a: 50). Although the status of the FDI attraction agency established in 1993, ITDH, was augmented, it had no discretionary powers. It functioned solely as a sourcing and promotional agency for greenfield investments. Decision making rested with the line ministries of which the ministries of economy and finance as well as the Prime Minister’s Office were the most important players. The regulations regarding the status of EPZs were also changed in order to incite the location of TNC suppliers (Antalóczy/Sass 2001: 45). A grant system was established through several investment promotion schemes which benefited TNCs and indigenous firms alike through subsidies and loans. The impetus of these subsidies was to steer FDI and incite indigenous investment in designated economic areas, geographical regions and to increase employment creation as well as R&D activities (Szanyi 2003: 12-13). These programmes were also aimed at increasing the cooperation between TNCs and indigenous firms such as the industrial parks programme. Furthermore in 1997, the Horn government introduced the Supplier Target Programme, which aimed at reaping the benefits of possible spillovers by offering matchmaking services in order to promote Hungarian firms as potential suppliers (Szanyi 2001a: 4) The attraction of FDI for brown field investments was implemented by the renewed privatisation process. The previous government’s reluctance at prioritising FDI was discarded. Accordingly, SOEs were sold to TNCs, initially interested in gaining access to the highly profitable domestic and regional markets in the CEEC (Czabán/Henderson 2003: 182). It was argued that the sale of state assets to TNCs would fetch higher prices than alternative forms of privatisation. In 1994, the privatisation agency (ÁPV) estimated that of the remaining 1,500 state-owned firms in its portfolio, only 30 to 50 companies were of strategic value to the development strategy (Mihályi 2001: 67). Consequently, the agency exclusively sourced TNCs as potential buyers. The remaining firms of less strategic importance were sold in line with the privatisation guidelines to Hungarians It was expected that these companies would eventually be bought by foreign companies at a later point in time (Mihályi 2001: 67).119 The priority of generating cash revenues also meant that the government was less fickle over the issues of strategic national importance. With the assistance of the IMF, World Bank, EBRD and EU, a specialised programme was developed to also 119 As a result, privatisation revenues grew by almost 280% in 1995 compared to 1994 (Kornai 2000a: 169).The share of purchases by foreigners grew from US$ 123 mn (7.4%) in 1994 to US$ 3.12 bn. (87.2%) in 1995. In total, the proportion of foreign participation averaged 75% p.a. between 1996 and 1999 (Mihályi 2001: 66). 129 sell state monopolies in utilities, banking, petroleum and telecommunications (Hanley et al. 2002: 158-159). As demonstrated by the case of utilities, the government essentially created a monopoly under foreign ownership (ÉltetQ 2000a: 52; Andor 2000: 64). As a result of these measures, foreign firms had assumed control over 66% of previously stateheld assets in the manufacturing sector, 90% in telecommunications, 60% in energy production and distribution and 70% in the finance sector (Hanley et al. 2002: 159). By 1998, 85% of state assets had been successfully privatised (Deppe/Tatur 2002: 204). Despite wage earners and pensioners experiencing a 10% drop in their real incomes in 1995 (Andor 2000: 65) and union protests against the austerity package, depicting the exclusionary governance style of the social-liberal coalition as “reform dictatorship” (Deppe/Tatur 2002: 208), the level of protests was insignificant (Deppe/Tatur 2002: 207). Low dissent to the austerity programmes is linked to the continued marginalisation of the social partnership process and to the individual exit strategies. As a result, the size of the informal economy remained large (Frey/Schneider 1999: 7). In effect, the population did not preside over a platform with which it could voice its dissent. In regards to the social partnership process, on the one hand, the government continued its divide et impera strategy. With the exception of measures to increase the flexibility of working time regulations, the government did not tamper with the unions’ statutory rights (Andor 2000: 65). However, the government was able to sideline the unions due to their low capability to mobilise support, as the majority of union members were against any form of collective action despite their opposition to the Bokros Package (Deppe/Tatur 2002: 207). The Horn government was prepared to co-operate with the trade unions in those branches, which were characterised by a high degree of labour organisation and militancy (Deppe/Tatur 2002: ibid). On the other hand, the privatisation boost throughout the social-liberal coalition’s term in office generally weakened the social partnership process. The sale of former state assets to foreign owners had created a vacuum on the side of the employer representatives, as the new foreign owners were reluctant to organise themselves or participate within the ÉT. Instead, they preferred decentralised and micro level negotiations. Finally, the trade union movement was itself embroiled in conflicts over the right to represent labour interests (Deppe/Tatur 2002: 212). As a result, the population was more or less “sentenced to patience” (Greskovits 1998: 80) until the elections in 1998. By 1997, the economy recovered, growing by an average of 4% to 5%. As a result, unemployment decreased and the twin-deficits were reduced by 50% to 4.5% of GDP in 1998. However, economic recovery was driven by an externally driven investment boom, as TNCs invested heavily and foreign capital was attracted by favourable Hungarian interest rates (Stephan 1999: 232-233). In contrast, private consumption was negligible, as many households were affected by the cuts in social transfers and suffered real income losses. Between 1995 130 and 1996, real incomes fell by an average of 8.5% p.a. with public sector employees experiencing higher income losses due to the cap on wage rises. Similarly, minimum wage earners were faced with declining real earnings, as the minimum wage was not increased despite rising inflation. Economic recovery was attained at the cost of household incomes and consumption and, therefore, of living standards (Deppe/Tatur 2002: 204-205). Consequently, the incumbent government narrowly lost the election, as popular dissent to the social hardships was voiced at the ballot box. Furthermore, the ruling coalition was shaken by a large privatisation scandal. Consequently, this corruption case fuelled the conservative opposition’s claims that ex-communists were enriching themselves through the transition process (Andor 2000: 66). It was taken as a further example of incumbent arrogance (Ágh 2000: 299). The second phase of the Hungarian FDI-led development regime led to its final instalment. The economic malaise and international pressure to introduce economic reforms led to the open use of TNCs as developmental agents. Again the state presided over a considerable degree of internal autonomy, allowing the unopposed initiation of austerity measures and the realignment of the development strategy. Subsequent fiscal recovery supported the state’s capacity to implement the development policies, which centred on exports and FDI-led growth. However, the ensuing social disparities culminated into popular dissent, which was voiced at the ballot box. Creation of a Counter-Movement (1998-2002) The 1998 election was an important turning point for the Hungarian political system. The incumbent parties only narrowly lost the 1998 election. Although the MSZP had won almost the same amount of votes as in the 1994 elections, due to the peculiarities of the Hungarian election system the socialists were defeated in the second round, as they failed to win seats in important counties. The victorious Federation of Young Democrats-Hungarian Civic Movement (FIDESZ-MPP) under the leadership of Viktor Orbán formed a conservative coalition with the remnants of the MDF and the smallholders’ party FKGP in 1998 (Andor 2000: 71). The victory of the conservatives signalled the creation of a de facto two party system with two opposing parties controlling 73% of the parliamentary seats with the remainder divided between four smaller parties (Ágh 2000: 299). 120 The emergence of FIDESZ as the strongest opposition party displayed a deep leftright divide within Hungarian society. After having undertaken a remarkable ideo- 120 The Hungarian election system is a mixture of both proportional and majority voting systems. Split in two rounds, the first round entails the proportional vote of nationwide party lists for half of the seats in parliament. The second round, which takes place two weeks after the first round, is characterised by the “first past the post” system in the constituencies for the remaining 50% of the parliamentary seats (Körösényi/Fodor 2004: 343-344). 131 logical shift from liberalism to conservatism, FIDESZ was able to reconstruct the highly fragmented conservative opposition after the implosion of the MDF and Christian Democrats following their election defeat in 1994 (Kiss 2002: 757). By defining the party as “the leading force of the Christian-Nationalist Right” (Kiss 2002: ibid), FIDESZ successfully positioned itself as an antipode to the “Left”, in the form of MSZP and SZDSZ. The party managed to unify the traditional horizontal populist/rural versus metropolitan/modernist cleavage with the vertical communist versus anti-communist divide (Kiss 2002: 753). Basically, FIDESZ was everything the MSZP was not. It won the 1998 elections by gathering support from those voters detrimentally affected by the 1995 austerity package and those who felt ignored by the Horn government. FIDESZ took a populist economic stance, which focused on reintroducing universal welfare benefits and promising to increase support for indigenous middle class entrepreneurs and agricultural smallholders. Furthermore, in emulation of the first conservative government’s “etatist” position Orbán propagated a strong executive and staunchly conservative positions on social welfare (Kiss 2002: 744). Critical of Hungary’s course of western integration, Orbán announced a revisionist foreign policy. It bordered on irredentism by questioning the validity of the 1920 Trianon Treaty and Orbán claimed to represent the interests of the Magyar minorities in the neighbouring countries (Kiss 2002: 745). Despite Orbán’s criticism of the previous government’s prioritisation of FDI, his nationalist economic rhetoric remained largely symbolic, as the development regime was left unchanged (Andor 2000: 84). Upon coming into office, the FIDESZ-led government coalition recognised the inevitable reality of the dire state of Hungarian enterprise and was left little option other than to continue with the previous government’s FDI-friendly policies. Instead, industrial policy was fine tuned in support of indigenous firms. The rationale was to create entrepreneurial power base in order to catch vital middle class votes in an increasingly polarised polity (Ádám 2004: 14). Similarly, the decision to continue with Hungary’s course of EU integration was also the result of the low external autonomy. The level of external pressure stemming from international financial organisations overseeing the Hungarian economic restructuring process was reduced in accordance with the improvement of the country’s economic credentials (Deppe/Tatur 2002: 213).121 Nevertheless, economic policy was now formulated and implemented in accordance with the accession process (Andor 2000: 154). Furthermore, any profound change would not only have conflicted with the agreed course of EU integration, but would have also severely jeopardised Hungary’s attractiveness as a TNC location. The economy’s most important actors, foreign firms, originated from the EU and were producing for European markets and were obviously interested and actively advocated the continuation of the integration process (Andor 2000: 87-88). Hence, the FIDESZ-coalition continued with EU 121 In 1998, exports were 20% higher than in 1997, industrial production had increased by 12.5% (WIIW 2004). 132 membership negotiations with the EU-Commission. Orbán sold EU integration to his voters as “compensation for Trianon” (Andor 2000: 152). In terms of state’s internal autonomy, the Orbán government concentrated its efforts on expanding its internal autonomy to formulate its socioeconomic agenda. The FIDESZ-led government introduced the most severe changes to the Third Republic since 1990 (Kiss 2002: 745). The conservative coalition followed the distinct aim of entrenching itself firmly within Hungarian society by creating and nurturing its clientele in order to create a social countermovement to the alleged post-socialist networks (Ágh 2002: 16). After coming into office, Orbán further centralised power within the executive and the central state, thereby additionally insulating the policy making process (Henderson et al. 2001: 17). The role of parliament as well as local government in the political process was consequently dramatically reduced. Sessions were limited to only every third week per month with the effect that parliamentary debates were stifled. Similarly, budget periods were extended to two years. Furthermore, the government increased its influence over the state-owned media by installing faithful stalwarts to top positions. Public events and ceremonies were organised without members of the opposition underlining the government’s claim to exclusive representation (Kiss 2002: 746- 747). Furthermore, the already weak social partnership process was additionally marginalised. Social dialogue was de facto abolished by the government’s decision to replace the ÉT by the National Council for Employment (OMT) in 1999 and the dissolution of the Labour Ministry (Henderson et al. 2001: 17). The statutes of the new OMT only allowed the social partners to convene in order to pass recommendations on wage increases and the level of the minimum wage. Advice on socioeconomic issues was delegated to the newly created Economic Council. Nevertheless, the role of the Economic Council was negligible. Similar to the OMT, the Economic Council acted in reality as a fig leaf for the government to demonstrate its commitment on social dialogue in order to fulfil its EU membership obligations. Finally, the government’s parliamentary majority passed legislation abolishing the unions’ tariff monopoly (Deppe/Tatur 2002: 215). With policy formulation under the government’s control and economic recovery having eased spending constraints, the conservative government sought to augment its capacity to support indigenous firms (Ádám 2004: 14). The government announced the “Széchenyi Plan” in 2000, as its industrial development programme. Although the programme was announced as a radical departure from the previous government’s developmental trajectory, in reality it bundled and reorganised existing programmes. However, explicit support for indigenous SMEs only marginally exceeded the previous government’s proportions (Hashi/Balcerowicz 2004: 40; Szanyi 2001a: 6, 2003a: 12). However, the FIDESZ-led government did renew the linkage programmes and concentrated on cluster building. In the forefront of the upcoming 2002 election the state-funded venture capital programme was reformed. The funds of the Regional Development Holding, financed by the ÁPV with a proportion of the privatisation 133 revenues, was distributed by the government among specialised state-owned venture capital agencies for SME seed financing (Karsai 2003: 285). With this step the Regional Development Holding became the lead agency in indigenous enterprise development, managing both the funds of the linkage and the cluster development programmes besides also being in charge of regional development funds (Szanyi 2001a: 6). Furthermore, the Orbán government also used public procurement to support indigenous firms in the areas of infrastructure development and tourism (Ádám 2004: 14). This led to allegations of corruption, as certain entrepreneurs affiliated with FIDESZ were commissioned without prior public tender (OECD 2002a: 94). Faced with elections in 2002, the Orbán government stepped up its attempts at attaining social consent to its policies. However, again the state’s policies were driven by the rules of political efficacy (Greskovits 1998: 143-144), and expressed itself in political clientelism. This implied on the one hand that dissent was silenced. The Orbán government’s anti-corporatist policies together with the reduced importance of parliament and the incumbent parties’ grip on the state media hindered the role of liberal democratic institutions as a platform to voice opposing views (Ferge/Tausz 2002: 179). On the other hand, despite its rhetoric of compassionate conservatism, the government explicitly supported middle and higher income groups via widened tax allowances for family and child benefits as well as introduced mortgage support schemes for large families (Ferge/Tausz 2002: 178). Additionally, social policy also increasingly represented the coalition’s staunchly conservative outlook, whereby social benefits were designed to support the classic family. Within the context of support through the voluntary sector, the conservative coalition increasingly transferred services to the Churches as well as to organisations politically affiliated to the incumbent parties (Ferge/Tausz 2002: 182). Furthermore, the staunchly EU critical FKGP enjoyed the merits of controlling the EU financed PHARE funds as well as the area of regional development, which was put under the aegis of agricultural ministry headed by the smallholders’ party (Andor 2000: 154). After having neglected the adjustment of the minimum wage to the inflation rate, the government decided to increase the minimum wage by over 57% in 2001 and announced a further 25% rise for 2002 (OECD 2002a: 127). It effectively doubled the monthly statutory rate within two years, in an attempt to increase its appeal to low income groups, despite strong protests from both social partners. Similarly, wages in the public sector were increased following years of negligence by 22% in 2001 (OECD 2002a: 60). Together with the increases in infrastructure investments and consumption, the budget deficit jumped from 3.0% (2000) to 9.2% of GDP in 2002 (OECD 2002a ibid). However, despite the Orbán government’s attempts at securing its parliamentary majority in the 2002 elections, dissent was once again voiced at the ballot box. The government narrowly lost the election to the MSZP, which formed a coalition with the liberal SZDSZ under the premiership of Péter Medgyessy with a parliamentary majority of only 10 mandates. 134 The political polarisation between left and right continued in a campaign which “was the most intense and bitterly contested since 1990” (Fowler 2002: 2). The two largest parties, FIDESZ and MSZP secured over 83% of the first round votes with the remaining votes distributed among their smaller respective coalition partners, MDF and SZDSZ (Fowler 2002: 4). The election campaign focused on welfare issues, whereby the largest parties attempted to outbid each other on spending promises and on issues of national identity (Fowler 2002: 2). It was the latter issue in combination with the collapse of Orbán’s junior coalition partner FGKP over corruption charges that led to the slim victory of the MSZP/SZDSZ coalition (Fowler 2002: 3). By following its programme of creating a historical conservative countermovement, FIDESZ had alienated potential voters by taking up increasingly extremist positions in an attempt to maximise its votes on the right fringe (Kovács 2002: 408). Hence, the third period of the Hungarian FDI-led development regime was again characterised by a further increase in state autonomy. Participatory possibilities were further constrained. The improved fiscal situation augmented state capacity allowed the government to increase its focus on indigenous enterprise. Nevertheless, economic reality and EU integration upheld the key role of FDI in the development strategy, displaying the low level of external autonomy. However, the increased focus on indigenous development as well as the government’s compensatory policies followed the lines of political clientelism and was aimed at establishing an affiliated conservative middleclass. 3.4 The Irish FDI-led Development Regime Breen et al. (1990: 37) as well as Smith (2005: 105) relate the switch in the Irish development strategy based on FDI-induced and export-oriented growth to “a revolution from above”. This perspective interprets the change in development regimes as a rational technocratic decision, which was first formulated in 1958 in the publication of a policy paper by T. K. Whitaker, Secretary of the Department of Finance. Although not completely obsolete, this popular position cannot entirely account for the change in development regimes. 122 In contrast, O’Hearn (2001: 127) argues that the construction of the Irish FDI-led export-oriented development regime was foremost the result of pressure from USled international capital interests. However, this dependency-driven assessment is again only part of the story. Rather, the development regime reorientation in Ireland was attributable to a culmination of several factors of internal and external nature, which had created an institutional space to create a development regime centred on an alliance with foreign capital (Ó Riain 2004a: 173). 122 The popular view on the change in Irish development regimes can be found in Mac Sharry and White (2000) and Sweeny (1998).