BOKROS AND SIMOR: A "GEEK CHORUS" FOR ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 001143

SIPDIS

DEPT FOR EUR/CE, EB/OMA, INR/EC; USDOC FOR SAVICH; TREASURY
FOR ERIC MEYER, JEFF BAKER, LARRY NORTON; USEU FOR HAARSAGER

E.O. 12958: DECL: 11/26/2013
TAGS: ECON EFIN PREL PINR HU
SUBJECT: BOKROS AND SIMOR: A "GEEK CHORUS" FOR ECONOMIC

REFORM IN HUNGARY

REF: A. BUDAPEST 1139

B. BUDAPEST 1059

Classified By: ACTING DCM ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. (C) With the minority socialist government stuck in the
refrain that it is pursuing "all the economic reforms the
public is willing to accept," and the leading opposition
FIDESZ party often resorting to populist rhetoric rather than
practical alternatives, there is a vacuum of prominent
Hungarian voices to lead the chorus calling for greater
structural reform. In recent weeks, however, some new "old"
voices have begun to make themselves heard.

LAJOS BOKROS - THE RETURN OF THE REFORMER


2. (SBU) Lajos Bokros, currently professor and COO of the
Central European University, is perhaps Hungary's best known
economist because of his controversial "Bokros Package"
austerity measures enacted during his tenure as Finance
Minister in 1995-96. Although extremely unpopular at the
time, in recent years his reform package has come to be
viewed as "necessary medicine" to help stabilize the
Hungarian economy. After leaving the Hungarian government in
1996, Bokros joined the World Bank where he provided policy
advice on banking and financial reform issues.


3. (C) Having returned gradually to public life in the past
years, Bokros has become increasingly vocal in recent weeks
both about the need for fundamental economic reform in
Hungary, and about his doubts that it will take place. Like
many economists, he sees the root of Hungary's problem as a
vicious circle of high taxes, low payment rates, and poor
services which have increased indebtedness and undermined
competitiveness.


4. (C) Commenting on his own reform record, Bokros noted
"comprehensive reform was carried out in Hungary, including
reform of the pension system." Since then, he argues, "there
were anti-reforms rather than progress." In his view, a
succession of "profligate governments" risked "making Hungary
a banana republic every four years" as spending surged before
each election. Recent reform efforts, according to Bokros,
have been "timid" and even those efforts to "do the right
thing" have been met with strong public opposition. He
accuses the current government of being "unable to correctly
diagnose the disease" and thus "incapable of finding the
right treatment."


5. (SBU) But Bokros also believes that Hungary's situation is
also the result of "problems we imported." In public
comments, he has characterized the global financial crisis as
a "huge government failure on the part of the United States."
He blames former Fed Chairman Alan Greenspan for a
"misguided" monetary policy that kept interest rates too low
for too long and fueled cheap borrowing, overconsumption, and
overinvestment. He maintains that the problem is not
necessarily too little regulation in the U.S., but that
regulation and oversight is "fragmented," and is "lacking in
key areas." For example, he notes that both Fannie Mae and
Freddie Mac are heavily regulated, but argues they lack
sufficient regulation in the area of risk management.
Similarly, he argues that greater regulation over investment
banks and international aspects of insurance is needed. He
sees the current situation as a "global breakdown of common
sense" and argues that global coordination of financial
system regulations is urgently needed. He has also suggested
that other EU member states should do more to "prevent
Hungary from failing."

ANDRAS SIMOR - WORKING FROM THE INSIDE


6. (U) Another advocate of greater structural reform is
Central Bank Governor Andras Simor. Prior to assuming his
post in 2007, Simor served as Chairman of the Budapest Stock
Exchange, and was Chairman of Deloitte Hungary. He began his
professional career at the National Bank in 1976, and is now
often mentioned as a potential Prime Minister should Hungary
consider a government of experts.


7. (SBU) Together with Finance Minister Veres and Economy
Minister Bajnai, Simor led negotiations of the IMF/EU/World
Bank stabilization package. During this period, he defended
the agreement's lack of specific conditions for structural
reform, maintaining that "structural reforms take time," and
that Hungary "does not have the luxury of time."


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8. (C) Since then, however, he has increasingly exercised his
independence as Central Bank Governor. His recent message
has been that the IMF package helped "reestablish stability"
and "buys time" for the government to enact structural
reforms. He expressed hope that the financial crisis will
help "speed up the most important structural reforms in
Hungary."


9. (C) A pragmatist with open channels to both the MSzP and
FIDESZ, Simor is fully cognizant of the political realities
impeding reform. But he has been urging the government to
move beyond "crisis management mode" - often to the vocal
displeasure of Socialist officials. In an interview with the
daily Napi Gazdasag, he argues that "the measures of the next
12 months should be (focused on) how to improve the growth
outlook without chasing dreams." Simor notes that "wrong
incentives", such as "generous early retirement and maternity
leave schemes," and a very high tax wedge are "hindering the
labor supply," and need to be scaled back "in order to foster
potential growth and stabilize public finances."


10. (C) Comment. Most observers believe there is little
chance in the current political environment for economic
reforms beyond those proposed by the government to meet
IMF-imposed deficit reduction targets. Indeed, most are
resigned to waiting until after the 2010 elections. Seeing
the risks of further inaction, Bokros and Simor are helpfully
keeping attention focused on the issue, at a time in which
many consider the past weeks to be the result of a foreign
conspiracy rather than the market's logical reaction to bad
policy. While it is important that Hungarian voices carry
this message, it is unclear whether Bokros and Simor's modest
success in focusing public attention can be translated into
public policy. Simor is circumspect about his chances for
success in the near term, commenting publicly that "scaling
back the overly generous welfare state is painful and the
political willingness to do so is not so strong." He has
gone further in private, admitting that his efforts to
motivate the government "are failing." Bokros is even more
pessimistic, warning that there is "no prospect" for Hungary
to "grow its way out of the problem" - or even to meet "more
than one of the Maastricht criteria" - before the expiration
of the stabilization package. In his view, it is a
"certainty" that Hungary will need to renew the stabilization
package, if only to provide the security it needs to maintain
access to capital markets to continue rolling over government
paper. That will likely mean few reforms in 2009, and quite
possibly an extension of the stabilization package in 2010.
End comment.
Foley