1. METHODOLOGY
• To determine success of democratic transition and the level of divergence among former-Soviet states, I
decided to focus on economic growth and size of government. Since part of the process of democratic
transition from a soviet system is decentralization, success in this process can be measured in the level of
decentralization and placement on the optimization frontier.
• For this assessment I refer to the analysis done by Marijana Baduna, Vedrana Pribicevic and Milan Deskar-
Skrbic. This analysis calculates the optimal size of government and estimate the efficiency of government
spending by applying data envelopment analysis and Tobit regression models.
• Average optimal size of government in old EU states is larger than in new EU member states.
• New EU member states need to cut their government expenditure more sharply in order to reach the optimal
size.
• These steps to rationalize public spending is relevant both in reaching optimal frontier and to satisfy Maastricht
criteria, not merely for economic growth.
Western Ideas, Eastern Implementations: A Comparative
Analysis of Democratic Transition in CEE States with a Focus on Hungary
Examining Growth and Size of Government
BACKGROUND
In 1989 the process of democratic transition began following the end of the Cold War, as nations began to
abandon socialist ideals and implement a Western model. To this day, this gradual process continues to shape
Central and Eastern European states as some follow the progressive path to an economically and politically
inclusive system and others deviate and even reject the progress made so far.
In this research I examined the reasons behind the success and failures of the transition with Hungary’s case in
point. The questions I explored focused on whether it is the political heritage, societal structure, and geographic
proximity to the West that swayed the developments in the individual states or the mere will of the leadership at
hand.
Long-standing, deep-rooted political and social challenges have shaped each national institution and economy.
While two similar institutions in two different countries can affect their respective economies differently or two
different political institutions result in similar outcomes in two countries, one consensus is shared among scholars.
Inclusive political and economic institutions and optimal government spending to GDP yield to greater economic
growth.
Orsolya Buzas
School of Policy, Government, and International Affairs, George Mason University
ANALYSIS
Index of Economic Freedom – Comparison of Overall Score (out of 100)
Government Size and Institutional Quality
Fiscal Volatility and Macroeconomic Growth
• For the OECD (EU) countries an increase of one percentage point in the share of total expenditure to GDP
would decrease growth by 0.13 (0.09) percentage points
• A different pattern emerges in terms of spending volatility. While it has no effect on growth for the OECD
countries, it has a negative and significant effect for the EU countries. For these countries in particular, an
increase of one percent in spending volatility (on average) would decrease growth by 0.76 percentage points.
• Two measures of fiscal volatility: relative size of each fiscal variable as a percentage of GDP, and business
cycle volatility.5
• If we accept that fiscal policy is in some cases driven by considerations which are not linked to macroeconomic
stability, then there is the possibility that by limiting such actions the society will gain by having less economic
volatility.5
• Empirical analysis shows that the behavior of fiscal policy depends on the political and institutional
environment. Governments that face more constraints are less likely to use discretionary fiscal policy.5
RECENT DEVELOPMENTS
The ‘Hungarian Model’ of Economics and the ‘Bumblebee’ of Europe
• The question remains whether this model is sustainable and what social and political implications it will have
on the country that already has a questionable relationship with its leadership. Hungary’s position also
contributes to its complexities as it is between the European Union, which continue to pour billions into
development projects and Russia, to which it is indebted for the coming decades and relies on for much of its
exports.
DISCUSSION
Observing the democratic transition of the past 25 years among Central and Eastern European states revealed
that while political heritage may be binding within a region with shared institutional legacies, individual states will
deviate from expected behavior based upon unexpected shifts in ideology or simply the desire to try different
models despite popular opposition. Hungary, in particular must be observed by the US. With regards to NATO
partnership. Energy dependence on Russia and geographic proximity to Russian operations demands more
attention.
This region does not demand the lives of hundreds of service men, thousands of combatants, aimless foreign aid,
or democracy building from the ground up. The United States instead needs a validation of NATO commitment,
consistent military support, and expansion of strategic efforts such as energy diversification and programs like
Radio Free Europe.
ACKNOWLEDGEMENTS
I would like to express my very great appreciation to George Mason’s Students as Scholars Office of Student Scholarship,
Creative Activities, & Research for guidance and funding during the process.
I am grateful for the assistance of Professor Eric Shiraev throughout the research and especially his stimulating classes where
the idea of this research was born.
My special thanks are extended to Antal Örkény and Frank Zsigó, professors who inspired me during my semester in my home
country, Hungary, where the first stages of the project began.
Finally, I would like to commend Professor Peter Boettke for embracing this project in the final months of my undergraduate
research and for all of his economics wisdom.
REFERENCES
Map: Constructed from data in Jerome Blum (1998) The End of the Old Order in Rural Europe (Princeton: Princeton University Press)
1. Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown, 2012. Print.
2. Badun, Marijana; Pribicevic, Vedrana; Deskar-Skrbic, Milan (2014) Government size and efficiency as constraints in economic growth: comparing Croatia with
other European countries. Post-Communist Economies. 26:3, 297-323
3. Plattner, Marc F., Gabor Halmai, and Christopher Walker. "Rise and Fall of Constitutionalism in Hungary." National Endowment for Democracy, Washington DC. 8
July 2014. Lecture
4. António Afonso and João Tovar Jalles. Economic Performance and Government Size. ECB Working Paper Series No. 1399/ November 2011
5. Fatas, Antonio. Mihov, Ilian. Fiscal Discipline, Volatility, and Growth. INSEAD and CEPR
A quarter century ago, at the time of the revolutions of 1989, Hungary was widely regarded as the
post-communist country that had the best chance of building a durable democracy. It produced an
interim constitution guaranteeing fundamental rights to its citizens as well as institutional checks
and balances. More recently, however, Hungary has come to be viewed by most observers as a
democratic laggard. It enacted a new constitution that is regarded as having weakened the protection
of individual rights and diminished the power of constitutional court and other countervailing
institutions.
Marc F. Plattner Vice President for Research, National Endowment for Democracy3
• Common approach to evaluate
democracies as liberal or illiberal is to
look to the institutions
• Extractive or inclusive institutions1 can
be indicators of democratic transition
and the progress made by the CEE
countries
• A correlation exists between extractive
institutions, government spending as
large share of GDP, and slow barriers to
economic growth
• The relationship between size of
government and economic growth rate
displayed through the Armey Curve
• Curve suggest a positive relationship
between public expenditure and growth until
a point at which too much of the economy is
made up of public spending.
• Public spending or size of government at
optimal level reflect the necessary
institutions to help facilitate production and
trade.
• Most of the change following 2008 reflect the reaction of each state to the effects of the
global financial crisis.
• Whereas Estonia embraced neo-liberal principles and refrained from interventionist
policy, Hungary nationalized industries including banking and utilities providers.
Governments tend to absorb a sizeable share of society’s resources and, therefore, they affect
economic development and growth in many countries. However, despite necessary, government
intervention is not a sufficient condition for prosperity, if it leads to the monopolization of the
allocation of resources and other important economic decisions, and societies do not succeeded in
attaining higher levels of income.
European Central Bank Working Paper Series – No. 1399/ Nov 20114
• Researchers find that the
negative effect of
government size on
economic growth is more
pronounced in countries with
low institutional quality, and
that the positive influence of
institutions is stronger in
countries with smaller
governments.4
• Hungary that recently yielded
European Union’s fastest clip with
a 3.9% growth in GDP and bonds
maturing over a year yielding 51%
return to investors compared to
38% from Poland and 23% from
German securities.
Rejection of Neo-liberal Solutions
• To generate this revenue, the
government nationalized $12
billion worth of private industry
including two major international
banks.
• Imposed historically high taxes on
industries like energy, tobacco,
and banks
• Foreign banks ruled by Hungarian
courts to have conducted unfair
practices and refunded $4.1
billion to Hungarian borrowers