CYAN BLACK The studies in Deficit and Debt in Transition skilfully apply insights from political economics, macroeconomics and public finance to illuminate developments in fiscal outcomes across transition economies during the run-up to the financial crisis The book is a rich source of ideas and evidence for anyone interested in these issues, whether familiar with the region or not Wendy Carlin, Professor of Economics, University College London and Research Fellow, Centre for Economic Policy Research Nowadays the debate on austerity and growth, as well as on the sustainability of public finance architecture is culminating, both in the academe and in policy-making bodies such as the European Parliament Emotions have led people to the streets of Paris, Athens or Rio de Janeiro Thus, what can be more topical and more controversial than the insights arising from empirical studies of fiscal adjustment before, during and after the crisis? This collection of articles by young yet already accomplished academics sheds a fresh light on how the specific postsocialist experiences fit – or not fit – in the overall European and global landscape A must read for anyone interested in real world economic issues! László Csaba, Professor of International Political Economy at Central European University, Budapest, Member of the Hungarian Academy of Sciences and of Academia Europaea/London Government deficits and the resulting public debt are often treated as topics that can be adequately addressed using the tools of technical economic analysis This book makes clear that the wider perspective of political economy is also needed, and applies this insight to the economies of Central and Eastern Europe The result is a fascinating series of studies from which useful lessons can be drawn Paul Hare, Emeritus Professor of Economics, Heriot-Watt University, Edinburgh This book highlights the achievements and challenges Central and Eastern European transition economies face in their public finances The book provides a sophisticated political economy treatment of these issues Arguments raised in this book are relevant for macroeconomic policies in these countries Julius Horvath, Professor, Central European University, Budapest Professor Grzegorz W Kolodko, Kozminski University, Warsaw, author of “From Shock to Therapy: The Political Economy of Postsocialist Transformation” ISBN 978 963 386 058 Central European University Press Budapest – New York Edited by István Benczes At the time of comprehensive financial crisis in the West it is good to learn why most of the Central and Eastern European countries are in a better shape Deficit and Debt in Transition, edited by Istv n Benczes, sheds additional light on the issue Such comprehensive and comparative work is a valuable contribution at the time of celebrating a quarter of century of systemic postsocialist transformation DEFICIT AND DEBT IN TRANSITION István Benczes is Professor of European Political Economy, Faculty of Economics, Corvinus University of Budapest YELLOW The Political Economy of Public Finances in Central and Eastern Europe About the author MAGENTA DEFICIT AND DEBT IN TRANSITION The Political Economy of Public Finances in Central and Eastern Europe Sales and information: ceupress@ceu.hu 789633 860588 90000 Website: http://www.ceupress.com Edited by István Benczes Popular political economy research has remained biased towards advanced countries and has neglected developing and transition economies Publications on CEE countries' public finances seem to be reluctant to apply the conceptual framework of standard political economy to these countries because of the assumption that CEE economies are different from their western peers But is this really the case? Are CEE economies so much different that none of the well-known “western” political economy concepts or models can be applied to the analysis of fiscal performance in the region? Benczes and his colleagues demonstrates that they can be safely applied in the context of CEE economies as well On the cover: Victor Vasarely, Keple Gestalt (1968) circa 1992 © HUNGART, 2014 DEFICIT AND DEBT IN TRANSITION i6 deficit.indb 2014.07.08 11:52 i6 deficit.indb 2014.07.08 11:52 DEFICIT AND DEBT IN TRANSITION The Political Economy of Public Finances in Central and Eastern Europe Edited by István Benczes press Central European University Press Budapest–New York i6 deficit.indb 2014.07.08 11:52 © 2014 István Benczes Published in 2014 by Central European University Press An imprint of the Central European University Limited Liability Company Nádor utca 11, H-1051 Budapest, Hungary Tel: +36-1-327-3138 or 327-3000 Fax: +36-1-327-3183 E-mail: ceupress@ceu.hu Website: www.ceupress.com 224 West 57th Street, New York NY 10019, USA Tel: +1-212-547-6932 Fax: +1-646-557-2416 E-mail: meszarosa@ceu.hu All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the permission of the Publisher ISBN 978-963-386-058-8 Library of Congress Cataloging-in-Publication Data Deficit and debt in transition: the political economy of public finances in Central and Eastern Europe / edited by István Benczes pages cm Includes bibliographical references and index ISBN 978-9633860588 (hardbound) Finance, Public—Europe, Central.  Finance, Public—Europe, Eastern.  Debts, Public—Europe, Central. 4 Debts, Public—Europe, Eastern 5 Finance, Public— Europe, Central—Case studies. 6 Finance, Public—Europe, Eastern—Case studies.  I Benczes, István HJ1000.7.D44 2014 336.43—dc23 2014016286 Printed in Hungary by i6 deficit.indb 2014.07.08 11:52 Table of Contents Acknowledgementsvii List of Tablesix List of Figuresxi List of Boxesxiii List of Abbreviationsxiv List of Contributorsxvi Introduction: Political Economy and Public Finances István Benczes1 I Cross-Country Analysis of Public Finances in Central and Eastern Europe 13 Economic Freedom and Public Debt in Central and Eastern Europe – Oliver Treidler15 Political Business Cycles: Theory and Empirical Findings for the CEE Region – András Olivér Németh35 The Strategic Use of Public Debt in Central and Eastern Europe – Vera Takács and István Benczes59 Varieties of Capitalism and Public Finances in Central and Eastern Europe – Zsolt Szabó87 i6 deficit.indb 2014.07.08 11:52 vi Table of Contents II Case Studies in the Public Finances of Central and Eastern Europe105 Passive Macroeconomic Populism in the Baltics – Gábor Kutasi107 Values, Norms, and Beliefs: The Case of Poland – Judit Kozenkow133 Critical Junctures and Unintended Consequences: The Case of Hungary – István Benczes153 Structural Reforms in a Low-Trust Environment: The Case of Slovakia – Dóra Győrffy175 Europeanization with a Detour: The Case of Croatia – Fruzsina Sigér197 Index219 i6 deficit.indb 2014.07.08 11:52 Acknowledgements The idea of publishing a book on the political economy of public finances in Central and Eastern Europe (CEE) is not a new one; the topic has been at the back of my mind for many years now What has made this project a reality, however, is that a small group of enthusiastic researchers has emerged, people who have been publishing high-quality work on CEE on the one hand, and who have also been employing the conceptual and analytical framework of standard political economy to the analysis of these countries on the other hand Therefore, first and foremost, I wish to thank my co-authors for all their dedication and professionalism, without whom this volume would never have materialized This book would never have been written without the full support and guidance of László Csaba, either—to whom I am immensely grateful However, László Csaba’s role extends much further beyond this; many of the contributors not only had the pleasure of working with him, but some of us were actually introduced to comparative economics and political economy by Prof Csaba It is no wonder that the spirit and style of the individual chapters often reflect that of his works On behalf of the contributors I also wish to thank the colleagues who were willing to act as reviewers of the chapters: András Balatoni, Carsten Colombier, Pál Czeglédi, Beáta Farkas, Péter Gedeon, Mihály Horváth, István Magas, Péter Mihályi, Woytech Pyndrochsky, Tamás Szemlér, and Krisztina Vida Their insightful comments have considerably helped to fine-tune the manuscript The editorial work has greatly benefited from the collegial and supportive environment of Indiana University, Bloomington I am especially i6 deficit.indb 2014.07.08 11:52 viii Acknowledgements thankful to Christopher Atwood, László Borhi, Jamsheed Choksy, Michael Kaganovich, and Karen Niggle Last but not least, I am especially thankful to CEU Press for accommodating this project, and to Krisztina Kós and Linda Kunos in particular for all their help in the publication process István Benczes i6 deficit.indb 2014.07.08 11:52 List of Tables Table 1.1 Table 1.2 Table 1.3 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 3.1 Table 4.1 Table 4.2 Table 4.3 Table 5.1 Table 5.2 Table 5.3 i6 deficit.indb Economic freedom scores and rankings, 2012 Combined scores in a historical perspective Debt and competitiveness Political budget cycles in the 12 original members of the Eurozone, 1995–2008 Political budget cycles in the CEE countries, 1995–2008 Political budget cycles in the CEE countries, 1995–2012 Partisan fiscal differences in the CEE countries, 1995–2008 Cyclically adjusted net lending/borrowing, excluding interest payments, 1998–2007 The main characteristics of LME and CME economies State revenues in LME and CME economies Public expenditures in LME and CME economies Output gap of Estonia, percentage of potential GDP, period of 2000–12 Share of foreign currency (mostly euro) loan of resident actors in Estonia German trade balance with Baltic countries, 2004– 07 and 2011 22 26 29 49 52 53 55 68 89 98 99 121 121 127 2014.07.08 11:52 .. .DEFICIT AND DEBT IN TRANSITION i6 deficit. indb 2014.07.08 11:52 i6 deficit. indb 2014.07.08 11:52 DEFICIT AND DEBT IN TRANSITION The Political Economy of Public Finances in Central and Eastern. .. Capitalism and Public Finances in Central and Eastern Europe – Zsolt Szabó87 i6 deficit. indb 2014.07.08 11:52 vi Table of Contents II Case Studies in the Public Finances of Central and Eastern Europe 105... Congress Cataloging -in- Publication Data Deficit and debt in transition: the political economy of public finances in Central and Eastern Europe / edited by István Benczes pages cm Includes bibliographical