Dóra Győrffy

Governance in a low-trust environment: The difficulties of fiscal adjustment in Hungary

Abstract The favourable assessments of international organisations regarding the character of democracy in the Central European countries seem to suggest that, in spite of early fears, democracy can be established even in a low-trust environment. Through analysing the difficulties of fiscal adjustments in Hungary this article examines how lack of trust affects the quality of these democracies in terms of effective governance. Hungary used to be a front-runner in the transition process but given its ballooning budget deficit, it is now considered a laggard in terms of meeting the requirements for introducing the euro. This article claims that while strong continuities from the socialist period gave the country a head start at the beginning of the transition process, the same continuities have slowed down development more recently because of their effects on the general level of trust. The prevalence of distrust both towards and within the elite provides a fertile environment for economic populism and under such circumstances fiscal adjustment becomes more difficult. The main conclusion is that while the low level of trust did not prove decisive in terms of establishing the institutions of democracy, the existence of trust is critical for effective governance.

Political Trust and the Success of Fiscal Consolidations

The paper examines the effects of political trust on fiscal consolidations. Building on the works of Easton (1965) and Gamson (1968) a theoretical framework is derived on the main channels through which the success of fiscal consolidation can be affected by the level of political trust in the system. The predictions of the theory are tested quantitatively based on evidence from the Economic and Monetary Union and qualitatively through a most-likely - least-likely case comparison between Hungary and Sweden. The results provide strong support for the hypotheses and indicate that in the absence of external pressures lasting fiscal consolidations can take place only in a high-trust regime. In a low-trust regime even if an external crisis triggers adjustment, the incentive to buy support through short-term promises ultimately erodes the commitment to restraint and imbalances reemerge.

The Enduring Lure of Socialism: the Political Economy of the Subprime Crisis

Market failure and the need for stronger state involvement in the economy has become the dominant perspective in the interpretation of the subprime crisis. After providing a brief description of the various stages of the crisis, the paper challenges this view by showing how monetary, fiscal and regulatory policy in the United States contributed to the crisis through giving rise to false perceptions regarding the magnitude of investment risks among market actors. Furthermore it is also shown that these policies are not due to random mistakes, but rather reflect illusions about technological progress and the possibilities of risk management. The paper‟s main claim is that whether these beliefs were genuine or served to conceal identifiable political purposes, they should make us equally careful about advocating greater state involvement in the economy.