6-8 June 1998

Civil Society Perspectives on Economic-Reform Measures

The Hungarian Opening National SAPRI Forum was held on 6-8 June in the historic town of Esztergom, northwest of Budapest. The Forum was organized by a national steering committee of the local civil-society network, SAPRIN, composed of 22 members that include large trade-union alliances, farmers' organizations, the National Alliance of Small Industries, and other key constituency groups. Organizing efforts were coordinated by the lead organization in Hungary, the Alliance of Social Associations (ASA). Approximately 180 people participated in the three-day event, including over 100 civil-society representatives. The World Bank was represented by six officials from Washington and Budapest, while the Ministry of Finance led the government delegation, which included the participation of four government State Secretaries and ten ministerial department heads. Also present were four representatives of the global SAPRIN Steering Committee and officials from the IMF and the ILO.

Through extensive outreach to ten regions of the country, and after considerable review with the Bank/government team, the local civil-society steering committee chose four priority issues for consideration at the Forum. After introductions by the Bank and government on each issue, civil-society representatives from various sectors and population groups -- educators, health-care workers, women's and family associations, trade unions, farmers, small businesses, environmentalists -- presented analysis and perspectives on that topic. The presentations were followed by debate and broader discussion. The civil-society assessment of the effectiveness and impact of four areas of the country's economic-reform program supported by the Bank and Fund is summarized below.

I. Public-Finance Reform: Impact on Social Services and the Population's Economic Security

It was documented that, through 1996, the government's social expenditures in Hungary had fallen in both real and nominal terms, limiting both the quality and the scope of these services. These budget cuts have had far-reaching negative effects in specific areas of activity, including housing, education, health, small-enterprise development and women's economic advancement. The greatest decreases were price, residential and family subsidies, which fell 65 percent, 80 percent and 50 percent, respectively. A decrease in housing subsidies was a strict condition of one of the Bank's structural adjustment loans, leading to the elimination of low-cost housing loans, a move questioned by citizens, given the country's intense population pressures. In addition, many pensioners have been forced out of their homes.

Public spending on health care has been reduced to a level which places it sixth from the bottom out of 26 budgetary sectors. Among other problems, this has caused the health system to rely on outdated equipment and places it 20 years behind Western European technology. In the area of education, cuts in public expenditures radically reduced teachers' real salaries by 30 percent between 1994 and 1997, with 8,600 teachers dismissed from higher education institutions alone, undermining the viability of the education system. These layoffs have led to a radical increase in the number of classes for which teachers are responsible, as well as an increase in the number of students per class.

Under the adjustment program, the government passed a law that made education funding the responsibility of local governments, which then would receive national government contributions based on student-enrollment figures. A vicious cycle has been created whereby many local governments do not have sufficient resources to fund the schools, leading to higher drop-out rates, which in turn has led to decreased national funding. Significant segments of the educational system have also been privatized, including the entire nursery-school system, school dormitories (which were put under the control of a hotel chain) and day-care centers. Fees for books have also increased, and many families are now unable to afford them.

The government and the Bank have touted the success of pension reform. Yet, with nearly one million people now transferred to the new pension system, the national budget deficit has escalated dramatically. While the government foots the bill, domestic and international financial interests are benefitting from the available pool of capital. Civil-society forum participants agreed that the national budget needs reform, but questioned whether long-range community interests are being served through pension reform while other social services are sacrificed.

As a result of cuts in social expenditures, more family needs must now be covered with household funds. At the same time, however, some 70 percent of the Hungarian people have seen their real wages fall by at least 40 percent. Many are now spending as much as 80 percent of their income on rent. This leaves less for food and other essentials, evidenced by the fact that nutritional consumption declined some 13 percent in the 1990s, with per capita meat and milk consumption dropping by 15 percent and 28 percent respectively.

According to forum participants, government social policy under adjustment has been driven by a model of the single-income family, with women relegated to the background even though their responsibilities have increased tremendously in terms of child rearing, caring for elderly family members, running the household, and so forth. Public-sector layoffs have sharply increased unemployment among women, many of whom have been unable to find their way back into the labor market. Extensive layoffs have also hurt the economy due to the costs of re-hiring and then re-training workers.

Policy recommendations made by participants included proposals to establish loan financing for private households, particularly for those which cannot pay current market housing rates or cover their higher gas bills. It was also suggested that there be significant investment in increasing the knowledge base of youth, who have been among the hardest hit by the economic-reform program. Similarly, there was support for the new government's position that education should be entirely free, with no fees required.

II. Trade and Price Liberalization: Impact on Hungarian Enterprises and Consumers

As a result of liberalization, industrial productivity in Hungary dropped by 25 percent, agricultural productivity by 35 percent, and the GDP by 18 percent. Small and medium-sized enterprises involved in production and retail services have been particularly hard hit, and many eliminated, by the country's rapid-paced open trade policy. Most of these businesses simply have not been able to compete with the flood of cheap, high-quality imports. As they employ about 70 percent of all Hungarian workers, civil-society participants argued that these firms deserve, but have not received, special consideration. The retail-trade sector, in particular, has been in crisis due to the entry of international supermarket chains, selling primarily imported food stuffs, a development that has also devastated Hungarian food producers. This entry of supermarkets and cheap goods from abroad, which has also been facilitated by the privatization process, has distorted national consumption away from local products, like milk, that are of high quality in Hungary.

Hence, a closer look at both retail and agricultural trade, and a reconsideration of economic policy in these areas, were said to be essential. Tens of thousands of small shops have lost or will lose their viability without medium-sized enterprises to integrate them into a larger system, and the World Bank and other institutions were urged to help modernize the larger enterprises. It was also suggested that small agricultural producers be directly assisted through tax policy and be integrated into a system similar to the Danish cooperative model.

The plight of small producers has also been greatly exacerbated, participants explained, by the growth of unemployment and poverty and the fall in effective demand. Under liberalization, there was a drop in domestic demand of about 15 percent between 1989 and 1994, with per capita food consumption down sharply. This drop in consumption, disposable income and domestic demand can be explained by the fact that some 1.5 million Hungarians have lost their jobs, minimum salaries are being taxed, and utility rates, pharmaceutical costs, school-related expenses and other household expenditures have all risen substantially due to the nature of the country's public-finance reform. People were not ready for the high unemployment caused by the reforms, and the country is badly in need of a real social policy, it was argued, but little has been done about the growing impoverishment of a significant segment of the population. For those still employed, wages have not been able to keep pace with inflation: between 1989 and 1997, purchasing power declined by some 20 percent. This period has also been marked by growing income inequality, further skewing local demand patterns.

III. Privatization of the Industrial Sector: Impact on Production, Employment and the

Concentration of Wealth

According to the World Bank, Hungary has undergone the most comprehensive privatization process of any East-Central European country. Civil-society participants remarked that the process has been extremely fast paced, has been plagued by corruption and cronyism, and has had a negative impact on workers and on the value of firms. Thus, it is not surprising that a 1994 survey showed that only 35 percent of the population approved of the process. Between 1990 and 1996, 11 percent of state-owned firms (in terms of total equity capital) were liquidated, and another 20 percent of the value of the original equity capital was lost due to the privatization process. Privatization, automation and the loss of the Soviet market have led to a 30 percent reduction in the country's workforce, effected in part through early retirement. Romas, or gypsies, have been hurt the most, as they have historically performed the dirtiest work at the lowest pay but were forgotten during the privatization process and were thrown back into absolute hopelessness.

In addition to efforts by employers to obstruct the formation of unions, participants argued that the very real threat of unemployment has also led workers to compromise their own rights. With the economic architects not wanting to slow down the process of privatization, employers have proceeded to sweep aside trade unions. Payment of salaries has often been late and, with no limit on overtime, workers are often forced to work 6-7 day weeks, according to labor representatives. It has become common practice, the participants said, for newly privatized companies to contract employees for only one to three months at a time, leaving the workers in a highly vulnerable situation. In addition, they explained that safety standards are low, with most privatized firms unwilling to adhere to safety regulations or to adequately invest in plant improvements. Although the participants primarily blamed employers for the problems facing workers, they did note that the Employment Code that came into effect in 1992 weakened the rights of labor unions, indirectly contributing to a decrease in union membership.

Privatization has also contributed to an increasing concentration of wealth in the country. The Law on Economic Partnership, passed in 1988, allows the heads of state-owned enterprises to place a part of the company's assets (usually the most productive ones) into a private partnership. These directors inevitably became the owners of these partnerships, meaning that the privatization process has managed to transfer public assets into the hands of a few, influential individuals.

IV. Reform of the Public Utility Sector: Impact on Workers and Consumers

Participants pointed out that many people have also lost their jobs in the process of privatization of public utilities, which is not yet completed. In the electrical-energy industry alone, 9,000 jobs have been abolished in the beginning phase of the privatization process. The national government, it was charged, did not live up to the commitments it made to the unions. One result has been that many maintenance people have been laid off, thus also negatively affecting consumers, who have lost services. Forum participants called for investors who purchase enterprises to negotiate a collective bargaining agreement with the unions.

The government originally took the position that privatization of public utilities was necessary in order to increase their working capital. However, faced with fiscal shortages, local governments have sold their management rights of public utilities for as little as 25 percent of the company's value, as in the case of the Budapest Waterworks. In addition, revenue from privatization has not been invested in improving services, while rates have been increased in order to guarantee returns to private investors. According to civil-society participants, the move to privatize public utilities was a result of pressure from the World Bank. They argued it was an error both because of job losses and because of the lost government income from service provision.

Some Conclusions and Next Steps

Civil-society participants explained how liberalization and privatization programs and budgetary policy, implemented in their country under IFI guidance, had increased both poverty and unemployment while substantially diminishing demand and the capacity of local enterprises. Education, health care and food production have been sacrificed under the new economic system, it was argued, while workers, youth, women, pensioners and romas, along with small businesses and farms have suffered the greatest losses. Further investigation and an exploration of alternatives in most of these sectors is being planned by a civil-society/World Bank/government team.

It was also suggested that a serious look be taken at the rational behind Hungary's privatization program, at the negative effects of private monopolies, and at the possibilities of greater regulation in this sphere. With the liberalization of the economy, world prices have been introduced into Hungary while salaries remain one-tenth those in the European Union, so ways must be found, it was urged, to protect the particularly hardest-hit consumers. It was agreed that a field-based examination of any or all of these issues would require an assessment of the impact of economic-reform policies differentiated by gender and region.

Photos from the Opening National SAPRI Forum

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