Goulash Capitalism
By MARGIT FEHER

BUDAPEST — Wanted: an economic visionary.

Hammered by three severe currency crises last year, suffering a stubbornly
large budget deficit and nursing ambitions to join the euro zone, Hungary
desperately needs an economic ironman to implement tough reforms.

And the recent sacking of Finance Minister Csaba Laszlo because of the
swollen 2004 budget deficit won't help. Markets respected Mr. Laszlo. He
knew the ins and outs of Hungary's finances of the past 18 years, having
spent nearly all his professional life drawing them up while rising
through the ministry ranks. But Mr. Laszlo's now a scapegoat, taking the
blame for last year's rise in the deficit to 5.6% of GDP, well over the
original 4.5% target.

But the budget overshoot raises doubts about the government's
responsibilities, not Mr. Laszlo's abilities. Mr. Laszlo, who most likely
wouldn't have objected to reforms, never even had a chance to draw them
up. And it's doubtful his successor, designate Finance Minister Tibor
Draskovics, Prime Minister Peter Medgyessy's chief of staff, will ever
have a chance either. The manner of his nomination, which came while he
was on holiday in Kenya, reflects how haphazard the decision was.

Meanwhile, the architects of the 1995 austerity measures — former Finance
Minister Lajos Bokros and former central bank president Gyorgy Suranyi —
are both rumored to have turned the job down. Will Mr. Draskovics be able
to rise to the task and reform Hungary's ailing health sector, bloated
public administration and overly complicated tax system? Will he be able
to sweeten the soured relationship between the cabinet and the central
bank — a tough task, give the current central bank chief, a former
finance minister under the previous government, had Mr. Draskovics removed
from the post of state secretary at the ministry?

And will Mr. Draskovics have what Mr. Laszlo would have most needed to
accomplish deep-rooted reform — political support from the ruling
Socialist Party? It's doubtful, at best. The Socialist Party, formerly the
Communist Party, is in the process of remaking itself in the mold of a
social democratic party. It needs to change its spots, and not only
because of the communist image. During its previous stint at the helm of
the country between 1994-98, it did the lion's share of a successful
transition from command economy to market economy, via privatization and
reforms. But the measures failed to bring votes, and the party lost the
1998 elections.

That's why short-term political gain and not the long-term good of Hungary
is what holds the government back from drastic measures this time. And
that's what got them into this budget mess in the first place. To boost
their popularity further, they hiked public-sector employees' wages by a
hefty 50% soon after getting into power, raised social benefits while
productivity growth declined, export growth sagged and foreign direct
investment drastically slowed. Aggravating the political scene further,
Messrs. Laszlo and Draskovics are both Medgyessy's men and not necessarily
the party's, which is divided along the lines of the many interest groups
it represents.

With the Socialists' track record, few onlookers thought when they won the
polls two years ago that they would mess up the economy. Now it's more and
more likely that if the Socialists continue down this path, the baton
marked "urgent reforms needed" will be handed to the center right again at
the next elections, in 2006. The Socialists seem stuck: Even if they do
carry out drastic reforms, the steps will likely cost them the elections.

The only way out is if Hungary's political elite — the left and the right
— strike a compromise and face up to the task at hand. That would mean
finding someone with the stamina and broad-based political backing to
carry out the difficult reforms. Mr. Draskovics is not that man.

Ms. Feher has been covering Hungary for Dow Jones Newswires since 1997.

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