No. 47, 1997 - Towards Sustainable Growth?

The present paper uses the term sustainable growth as it is understood in official and unofficial international publications on the economies of Hungary and the other transition countries. It essentially covers ways and means of economic recovery on the medium term, without the recurrence of shocks, faltering or recession. “Structural reforms” aimed at increasing productivity and international competitiveness are usually referred to as being conductive to such growth, but this conceptual category is so broad, it embraces anything from the privatisation of state enterprises and the external and internal liberalisation of the economy through the transformation of the operating conditions of the corporate sector to the transformation of the taxation system and taxation procedures and the revision of the role of the state in the economy, especially in the welfare and social fields. However, the first and perhaps sole condition of sustainable growth if financial equilibrium (sound finances): growth cannot be sustained if it is so fast or takes place in such an unfavourable structural context that the deterioration of the external and/or internal balances or incidentally inflation become intolerable. In this interpretation, the requirement of satisfying conditions of financial soundness comes as a constraint on growth: economic growth will only be sustainable if its pace is not faster than permitted by the equilibrium criteria. More precisely, internal demand and especially private consumption must not exceed the level specified by the equilibrium requirements.
The paper targets the specific problem of economic transition, i.e. how the former socialist countries could recover from severe recession of the years after the political change. The concept of “sustainable” growth as it is used here has nothing to do with the old debate, made political again by the current lasting American uptrend, as to whether business cycles (recession periods) have or could come to an end in the developed economies, and even less with the concept of limits to growth introduced by the Club of Rome in the early seventies, i.e. the deliberate barring of economic growth so that it should not be limited by the scarcity of non-renewable natural resources, the devastation of the human environment or overpopulation.
In what follows, I will first review the current position of Central and Eastern Europe in the process of economic transition and conclusions offered by staggering and/or unexpected crises having taken place in the countries of the region in recent months. After that, I will discuss some of the current problems of Hungarian economy, factors threatening the sustainability of growth, with special regard to those that may perpetuate slack consumption. Finally, I will outline some interconnections between welfare reform and sustainable growth.
The paper is available here.