Growth regimes of populist governments: a comparative study on Hungary and Poland

Kühnast, Julia Article Growth regimes of populist governments: a comparative study on Hungary and Poland European Journal of Economics and Economic Policies: Intervention (EJEEP) Provided in Cooperation with: Edward Elgar Publishing Suggested Citation: Kühnast, Julia (2024) : Growth regimes of populist governments: a comparative study on Hungary and Poland, European Journal of Economics and Economic Policies: Intervention (EJEEP), ISSN 2052-7772, Edward Elgar Publishing, Cheltenham, Vol. 21, Iss. 1, pp. 133-150, https://doi.org/10.4337/ejeep.2023.0104 This Version is available at: https://hdl.handle.net/10419/290108 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Growth regimes of populist governments: a comparative study on Hungary and Poland Julia Kühnast Berlin School of Economics and Law, Germany [email protected] This paper aims to contribute to the debate of post-Keynesian growth models and the political economy of populism by investigating the relationship between the changes in demand and growth regimes and the politics of the right-wing populist governments in Poland and Hungary after the Global Financial Crisis (GFC). In both countries, the GFC was a turning point, leading to the emergence of new economic and political ideas. These processes resulted in changes in the growth regimes and increased the importance of the export sector. Keywords: growth regimes, populism, comparative political economics JEL codes: E12, E65, F40, F43, G01, O57 1 INTRODUCTION Considering the recent rise of populism worldwide, Hungary and Poland are two very interesting cases. Since the Global Financial Crisis (GFC), a democratic and liberal regression has set in this region, which began with the election victory of the Hungarian right-wing populist party Fidesz in 2010 (Rupnik 2016: 78). In April 2022, after 12 years in government, Fidesz was even able to retain 53 per cent of the votes. Despite a questionable election campaign and a rather unfairly distributed electoral system, the clear success shows that many voters were apparently satisfied with the conditions in the country (Tagesschau 2022a). A similar situation prevails in Poland, where Prawo i Sprawiedliwość (PiS) has been in power since 2015 and was re-elected with great success in 2019 (Vetter 2019). After the end of the Soviet Union, the two countries implemented a series of neoliberal reforms with the goal to successfully integrate into the Western capitalist system and transform into competitive economies in the global market. Particularly important in this process, and in the resulting economic system, were the inflows of foreign direct investment (FDI) from the West. However, the GFC was a turning point, as the absence of these capital inflows highlighted the weaknesses of this dependent system, and new economic and political ideas emerged (Barber 2015). Fidesz in Hungary and the PiS in Poland realigned their party programs towards the right-wing populist spectrum and were able to grasp power from the previously ruling socialist-democratic or liberal parties (Orenstein/Bugarič 2020: 2). They achieved great success in the 2010 and 2015 elections, benefitting from a disappointed and disillusioned electorate in their respective countries after the crisis and were able to convince voters about their new visions for the political, social, and economic order (Appel/Orenstein 2018: 29–31). Research Article This is an open access work Received 14 November 2022, accepted 5 May 2023 European Journal of Economics and Economic Policies: Intervention, Vol. 21 No. 1, 2024, pp. 133–150 First published online: January 2024; doi: 10.4337/ejeep.2023.0104 Journal compilation © 2024 Edward Elgar Publishing Ltd © 2024 The Author However, not only in Central and Eastern Europe Countries (CEECs), but in almost all developed capitalist countries, the trend of financialization had, and still has, far-reaching effects. Different strategies have emerged to increase aggregate demand and GDP growth (Hein 2012: ch. 6, 116–120). The GFC triggered many changes, as established demand-led growth models had proven to be unsustainable. In this context, this paper aims to contribute to the debate ofpost-Keynesiangrowthmodels(cf. Hein 2012; Hein/Mundt 2012; Dünhaupt/Hein 2019; Akcay et al. 2022) and the political economy of populism debate (cf. Rodrik 2021; Guriey/Papaioannou 2022) by investigating the relationship between the changes in demand and growth regimes and the establishment of right-wing populist governments in Poland and Hungary after the GFC. In this context, the paper examines the influence of the GFC on political and economic decisions in the two countries. For this purpose, the consequences of the GFC as well as the economic policies of the two right-wing populist parties, Fidesz and PiS, and their influence on growth regimes are analyzed. It is also of interest to examine how the countries’demand and growth regimes evolved after the end of the Soviet Union until the GFC in order to better understand the events that unfolded after 2009. The paper proceeds as follows. After a brief introduction, Section 2 sets out the theoretical framework for the analysis. This is followed by a description of the evolution of the political economies of Hungary and Poland from the 1990s to 2008 and the growth regimes of the two countries between 2000 and 2008 in Section 3. Section 4 follows with a description of the economic policy situation of the two countries for the period from 2009 to 2019 combined with descriptive data on monetary, wage, fiscal, and trade policies, as well as an analysis of the implications for the growth regimes. Section 5 concludes the results in the context of the analytical concepts presented in Section 2. 2 THEORETICAL FRAMEWORK: A HYBRID APPROACH This paper builds on a hybrid comparative political economy (CPE) approach, consisting of the post-Keynesian approach of demand-side growth regimes (cf. Hein 2012; Hein/Mundt 2012; Dünhaupt/Hein 2019; Akcay et al. 2022) and an analysis of the political economy of populism (Rodrik 2021). The purpose of this methodology is to trace the relationship between the economic and political developments in Hungary and Poland after the GFC. An analysis of the countries’macroeconomic policy regimes (cf. Hein/Martschin 2021) is conducted to assess the policies of the right-wing populist parties that came into power in that time and their impact on the growth regimes. The post-Keynesian demand and growth regime approach was developed as an alternative to the strategies of earlier CPE researchers like Hall/Soskice (2001), who focused their analyses on the supply side (Baccaro/Pontusson 2016: 180). However, the demand-side focused Growth Model System is better suited to clarify common trends like financialization (Barnes 2015: 549–550). Hein (2012: ch. 6), Dodig et al. (2016), and Hein/van Treeck (2010) show in their work how this phenomenon has influenced economies and identified the four main channels: distribution, investment, redistribution, and consumption, in this regard. The resulting redistribution of investment in the capital stock as well as of income, especially a declining share of labor income, has led to the development of various strategies to boost aggregate demand and GDP growth. In the process, four contrasting models have emerged. As seen in Table 1, in the domestic demand-led regime (DDL), domestic demand drives growth while exports contribute almost nothing. If private consumption demand makes the largest contribution to domestic demand, while net exports make a negative contribution, then the regime is defined as 134 European Journal of Economics and Economic Policies: Intervention, Vol. 21 No. 1 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd a debt-led private demand boom (DLPD). In the case that the export sector particularly drives growth, a distinction is made between the two further subtypes of export-led mercantilist regimes (ELM) and weakly export-led growth models (WEL) (Hein 2012: ch. 6, 116–120; Hein/Mundt 2012: 43–53; Dünhaupt/Hein 2019: 4–5). The Macroeconomic Policy Regime Analysis, as conducted by Hein/Martschin (2021), helps to better understand the impact of specific economic policy decisions on growth regimes. It is based on a standardized set of indicators of monetary, fiscal, and wage policies as well as economic openness. The analysis of the monetary policy focuses on the short- and long-term real interest rate as well as the difference between the long-term real interest rate and the growth rate of real GDP. In the area of fiscal policy, government gross investment and the countercyclical or cyclical orientation of fiscal policy are identified and analyzed using structural budget balances and the output gap as a share of potential GDP. For the development analysis of wage policy, the growth of nominal unit labor costs is compared with the inflation rate and the development of the wage share is assessed. Finally, by analyzing import and export shares as well as international price and non-price competitiveness, the openness of the economy can be evaluated (Hein/Martschin 2021: 510–511). To elaborate on the relationship between changes in the political sphere and growth regimes, especially in the times after the GFC, the paper draws on the framework of Rodrik (2021) (Figure 1). It shows the causal relationships and mechanisms through which globalization could support the rise of populism. Different types of globalization Growth regimes of populist governments: a comparative study on Hungary and Poland 135 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd Table 1 Classification of demand and growth regimes Export-led mercantilist (ELM) Positive financial balances of the domestic sector Negative financial balances of the external sector Positive balance of goods and services Positive growth contributions of net exports Weakly export-led (WEL) Positive financial balances of the domestic sector Negative financial balances of the external sector Negative growth contributions of net exports Positive growth contribution of domestic demand OR Positive financial balances of the external sectors Negative growth contributions of net exports Domestic demand-led (DDL) Positive financial balances of the domestic sector Negative financial balances of the public sector Positive growth contributions of the domestic demand Positive or negative growth contributions of the balance of goods and services Debt-led private demand boom (DLPD) Negative financial balances in the private sector Positive financial balances of the external sector Positive growth contributions of largely credit-financed, domestic demand (particularly private consumption) Negative growth contributions of the balance of goods and services Source: Dünhaupt/Hein (2019: 4–5). Positive growth contributions of the balance of goods and services Balanced or slightly positive financial balances of the external sector shocks (trade, finance, or immigration) affect different components in the system. Rodrik distinguishes between the demand and supply sides of politics. Economic dislocations can directly or indirectly lead to changes in individual policy preferences as well as party platforms. In the process, these globalization shocks often work through culture and identity (Rodrik 2021: 139–140). That the GFC has decisively supported the recent rise of populism is also shown by Funke et al. (2016). They cite historical evidence that the political climate changes significantly after financial crises and that the far-right especially seems to benefit from this. Particularly after such crises, their nationalist or xenophobic rhetoric, which differentiate between the good, common people and the established, corrupt elites, tends to persuade voters (Funke et al. 2016: 2; Mudde 2007: 23). This paper follows the definition of populism by Mudde (2007), who emphasizes exactly these anti-elitist and anti-pluralist components of populism. Moreover, he describes it as a ‘thin-centered ideology’that has the advantage of being very adaptable and can be mixed with ‘thick’ideologies such as liberalism or socialism (Mudde 2007: 23, Muro 2017: 10). 3 GROWTH REGIMES OF HUNGARY AND POLAND: 2000–2008 After the collapse of the socialist system, economic and political changes were inevitable in Hungary and Poland. Most of the researchers predicted that economic reforms would especially generate such high transformation costs that they would be counteracted at the political and democratic level very soon (Myant/Drahokoupil 2011: 83; Przeworski 1991: 136–137; Sachs/Lipton 1990: 47–48); likewise, in a so-called neoliberal shock therapy, the two 136 European Journal of Economics and Economic Policies: Intervention, Vol. 21 No. 1 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd Globalization shock Economic dislocation Culture identity Individual policy preferences Electoral outcomes (rise of populism) Party programs Demand side Supply side Source: Own presentation based on Rodrik (2021: 140). Figure 1 Causal framework –globalization shock countries implemented as many reforms as possible in a short time (Appel/Orenstein 2018: 1). In this regard, the Washington Consensus institutions, IMF and World Bank, as well as the European Union (EU) played a crucial role in the transition process of Hungary and Poland (Babb 2013: 268; Gore 2000: 790; Appel/Orenstein 2018: 21–23). The reforms focused on stabilizing, liberalizing, and privatizing the former communist economies as well as limiting government spending and controlling the growth of the money supply (King/Sznajder Lee 2006: 754). EU membership negotiations also set in motion the deregulation and flexibilization of labor markets as well as the privatization of pension and healthcare systems and strategically important sectors such as finance or telecommunications (Feldmann 2004: 273; Toplišek 2020: 390–392). In this process, both countries became very popular FDI locations (Günther/Kristalova 2016: 99; Appel/Orenstein 2018: 24). Appel/Orenstein (2018: 25–29) argue that the huge demand for capital drove the countries of Eastern Europe into competition with each other for FDI, causing them to introduce more and more reforms, sometimes even going beyond the demands of the IMF, the World Bank, or the EU. 3.1 Demand and growth regime development: 2000–2008 These above-mentioned circumstances led to both the Hungarian and the Polish economy quickly entering an upswing at the beginning of the 1990s. From 1994 onwards, Hungary was able to record positive GDP growth rates (IMF 2022a), and between 2000 and 2008 the Hungarian economy continued to grow by an average of 3.5 per cent (Table 2). The recovery of the Polish economy began in 1992, and the country was able to show GDP growth averaging 4.1 per cent annually between 2000 and 2008 (Dymarski 2015: 11; IMF 2022b) (Table 2). Labor productivity increased rapidly, but at the same time the share of wages in GDP decreased since the 1990s (Ibid.: 12). The importance of FDI for the Polish and Hungarian economies can be observed in the share of GDP accounted for by net FDI flows. In Hungary it was 5.8 per cent in 2000 but rose by 20 percentage points in the year after the EU accession (World Bank 2022a). Even though the percentage changes in Polish net FDI inflows are smaller compared to that of Hungary, a comparison of the absolute figures also shows a significant increase here, especially since 2004 (World Bank 2022b, 2022c). The categorization of the Hungarian and Polish growth regimes is not quite straightforward, but despite the slightly negative financial balances of households, both can be classified in the group of domestic demand-led countries (cf. Table 2 and Section 2) in the observed period, as the negative financial balances of the public sector are deeper than the one of the private sector, suggesting that the public sector was in deficit for investment or consumption and consequently more important. In addition, both countries had low household-debt-to-GDP ratios. In Hungary, the average of Total Credit to Household between 2000–2008 was 19.97 per cent (as a share of GDP), while it was as low as 15.71 per cent in Poland (BIS 2022). This suggests that private debt was not of great importance in terms of economic growth, which is why the debt-led private demand boom regime was excluded. Dodig et al. (2016: 14) also classify Poland and Hungary in the group of DDL countries but emphasize the more dynamic and higher economicgrowthaswellasthesubstantial FDI inflows in comparison to the more matured DDL countries like France. The favorable investment climate created by the economic reforms and the relatively low wages attracted many transnational companies to Poland and Hungary and promoted economic growth. However, they did not succeed in creating their own national innovation system. The transnational corporations and foreign investors showed little interest in Growth regimes of populist governments: a comparative study on Hungary and Poland 137 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd the social and economic upgrading of the Hungarian and Polish economies. While the development of new technologies occurred mainly in other industrialized countries, both post-communist economies had to work mainly with the older technologies left to them by the foreign investors. As a result, they became dependent on imports, especially in machinery and technology, from Western European countries (Papava 2018: 121). Therefore, the neoliberal transformation process, combined with the post-communist low productivity of the domestic labor force as well as the poor competitiveness in international comparison, led to deep current account deficits. Economic growth was thus dependent on domestic demand, which was additionally boosted by the rising disposable household income (Statista 2021a, 2021b). 4 GROWTH REGIMES OF HUNGARY AND POLAND: 2009–2019 In many ways, the GFC was a turning point for both countries, leading to the emergence of new economic and political ideas (Barber 2015). The crisis quickly spilled over due to the sudden stop of capital inflows, hitting Hungary particularly hard as the country was heavily indebted in foreign currency in the private and the public sectors (Orenstein/ Bugarič2020: 4). This indebtedness increased the instability of the Hungarian financial system, leading Hungary to being no longer able to pay the loans in foreign currency 138 European Journal of Economics and Economic Policies: Intervention, Vol. 21 No. 1 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd Table 2 Growth regimes Hungary and Poland: 2000–2008 and 2009–2019 Average values for the respective periods Hungary Poland 2000–2008 2009–2019 2000–2008 2009–2019 Real GDP growth (in %) 3.55 1.93 4.14 3.59 Growth contribution in percent of real GDP Domestic demand 2.58 1.40 4.09 2.82 Private consumption 1.22 0.72 2.31 1.79 Public consumption 0.50 0.34 0.84 0.46 Investment (gross fixed capital formation) 0.86 0.33 0.94 0.57 Net exports (balance of goods and services) 0.25 0.38 0.15 0.82 Net exports as a percentage of GDP −2.81 5.56 −1.82 1.33 Financial balances Sectoral financial balance as a share of nominal GDP of the public sector, in % −6.17 −2.96 −4.17 −3.52 Sectoral financial balance as a share of nominal GDP of the external sector, in % 7.49 −1.33 4.56 2.40 Sectoral financial balance as a share of nominal GDP of the private sector, in % −1.33 4.29 −0.38 1.12 Regime DDL ELM DDL WEL Sources: European Commission (2022), Eurostat (2022), IMF (2022), World Bank (2022), author’s own calculations and presentation. 1 (Badics/Szikszai 2015: 44; Bugarič2019: 610). In contrast, Poland did not face such a high level of domestic debt in foreign currency, and financialization was generally accorded less importance in the country (Dymarski 2015: 66–69), which is why the impact of the crisis on the Polish economy was less severe (Dodig et al. 2016: 27; World Bank 2022d). Nevertheless, GDP growth also declined, while unemployment rates increased, as trading partners struggled with the crisis and FDI inflows dropped (World Bank 2022d, 2022f). In the elections after the crisis, the right-wing populist parties Fidesz and PiS managed to grasp power from the previously ruling parties (Huthmacher 2010: 1; Marcinkiewicz 2016: 466; Tagesschau 2022a). Many people were dissatisfied with the politics of the established parties during and after the crisis (Appel/Orenstein 2018: 29–31). The economic problems triggered by GFC not only led to discussions in the field of economic policy, but also to disputes in the social and cultural spheres. The right-wing populist parties offered convincing alternative answers to the economic and social concerns of the people (Funke et al. 2016; Bugarič2019: 610; Orenstein/Bugarič2020: 6) and marketed themselves as protectors of traditional Western values (cf. cultural backlash theory, Inglehart/Norris 2016: 2). They promised voters economic self-governance and the protection of the ordinary people and workers (Bugarič2019: 612; Bluhm/Varga 2020: 14; Orenstein/Bugarič2020: 6). 4.1 Hungary and Fidesz The discontent of the Hungarian population caused by the GFC, the ensuing recession, and the related austerity measures demanded by IMF and EU helped Fidesz in the 2010 election as party leader Victor Orbán blamed these institutions for Hungary’s problems (Orenstein/ Bugarič2020: 6–7, Johnson/Barnes 2015: 535). Fidesz emerged as the clear winner in the 2010 Hungarian elections, receiving almost 53 per cent of the votes, replacing the Socialist Party (MSZP), which had been in government for eight years. According to Huthmacher (2010: 1), this election fundamentally changed Hungary’s political landscape. The twothirds majority won by Fidesz enabled them furthermore to amend the constitution, leading to almost unlimited power of the executive and restricted power of the Hungarian Constitutional Court (Bugarič2019: 602; Szelényi/Csillag 2015: 42). The theoretical framework of Rodrik (2021) presented in Section 2 can be well applied here to Hungary. The economic problems in the country following the GFC triggered the rise of right-wing populism in different ways (Ibid.). Gyöngyösi/Verner (2022) point to the important role of the crisis-induced increase in household debt in the rise of Hungarian populism. They show that the share of votes for extreme right-wing parties increased significantly in areas that had a high share of household foreign currency loans in 2008 (Ibid.: 2472). Viktor Orbán shifted Fidesz’s originally moderate program further to the right, winning the 2010 elections with a populist agenda (Guriey/Papaioannou 2022: 785). 4.1.1 The economic politics of Fidesz since 2010 To distinguish his economic strategy from the Western neoliberalism implemented earlier, Orbán called his approach ‘east wind’(Orenstein/Bugarič2020: 7), focusing on regaining control over the Hungarian economy. To this end, sectoral taxes were introduced, and certain companies were nationalized in sectors that were previously mainly foreign-owned, such as energy, telecommunications, and the financial sector (Orenstein/ Bugarič2020: 7; Bohle/Regan 2021: 91; Toplišek 2020: 395). However, Bohle/Regan (2021: 91) emphasize the ‘selective character’of Hungarian economic nationalism, as Growth regimes of populist governments: a comparative study on Hungary and Poland 139 © 2024 The Author Journal compilation © 2024 Edward Elgar Publishing Ltd FDI is still very welcome in certain sectors and attracted by generous incentives (Toplišek 2020: 396). Fidesz managed to take advantage of the frustration of the national bourgeoisie as well as of the working class and successfully established itself as the representative of both (Ban et al. 2021: 16; Scheiring 2020: 217–260). While they ensured the emancipation of the domestic capitalists with their economic nationalism, they also allied themselves with some transnational capitalists (Scheiring 2020: 330–331; Bohle/Regan 2021: 91). In return, the Hungarian Chamber of Commerce significantly assisted Fidesz in the development of their new economic strategy (Ban et al. 2021: 16–19). To further limit the power of international companies and organizations, ‘near-to-Fidesz compan[ies]’(Kornai 2015: 38) were established by replacing the former owners with party supporters. Increasingly, all public institutions, as well as a growing part of the economy, have come under the control of the state (Fabry 2019: 135–136). Orbán’s government has also introduced unorthodox and national measures to control government deficits and debt, reducing the influence of international institutions (Johnson/Barnes 2015: 535). In addition, Fidesz uses its social policies to support its conservative nationalist ideology. The Orbán government created several financial incentives for large working families to increase Hungarian birth rates (Orenstein/Bugarič2020: 8; Fabry 2019: 135). While the minimum wage has been significantly increased (Toplišek 2020: 395–396), a new labor law allows more flexibility and deregulation in labor relations and restricts the right to strike. Support for the unemployed and poor is very low and based on a punitive and exploitative workfare program (Fabry 2019: 135–136). 4.1.2 Macroeconomic policies regime analysis To assess the impact of the policy change on the Hungarian growth system, the country’s macroeconomic policy regime is now analyzed. Following the example of Hein/Martschin (2021), monetary, wage, and fiscal policies as well as the openness of the economy itself are examined in more detail for that purpose. The data in Tables 3 and 4 indicates significant changes in Hungary in this respect from 2009 to 2019 compared to the previous decade. Similar to the European Central Bank (ECB), the Hungarian National Bank’s aim is price stability, for which it uses inflation targeting since 2001 to achieve it (MNB 2022). Monetary policy changed from being expansionary in 2000–2008 to contractionary in 2009–2019, with a positive difference between the long-term interest rate and real GDP growth. However, since 2013, the previous Minister of National Economy, György Matolcsy, has been pursuing a looser monetary policy to stimulate the economy and promote lending. For this purpose, the key interest rate was gradually lowered from 7 per cent to 1 per cent in 2016 (Toplišek 2020: 395) so that monetary policy appears to return to the expansionary stance. Furthermore, the central bank has placed a greater focus on the organization of the different branches of economic policy to improve the coordination of monetary and fiscal policy, lower the external vulnerability of the country, and create growth-enhancing credits (Palotai 2021: 464). Inflation was reduced and has moved closer to the target of 3 per cent (MNB 2022). However, the decline in the inflation rate went hand in hand with a decrease in the labor income share. While it increased in comparison to the period between 2000 and 2008, it fell on average to 46 per cent between 2009 and 2019 (Tables 3 and 4). 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