A Comment on High Social Expenditures in Hungary

By Ekes, Ildiko | Journal of Economic Issues, September 1995 | Go to article overview
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A Comment on High Social Expenditures in Hungary

Ekes, Ildiko, Journal of Economic Issues

Experts [World Bank 1992] are of the opinion that too much money is spent on social expenditures (social incomes(1) plus financially supported consumption and housing) in Hungary and in other Middle and Eastern European countries compared to their level of economic development. Actually, more and more Hungarian economists have come to this opinion. In what follows, I put forward four arguments in opposition to this view.

1. In supporting their statements, the experts at the World Bank

compare social expenditures to GDP calculated by the Hungarian

Central Statistical Office. However, this comparison is misleading

because of the large and growing hidden economy in Hungary (and

in other Middle and Eastern European countries) where the experts

at the World Bank actually accept the existence of it. The

hidden economy increases not only incomes, but production as

well. Although it is part of the economy, the production of goods

and services is hidden from the tax authorities and from official

statistics. Therefore, the actual output of the economy is larger

than that shown by official statistics.

I carried out a sample survey [Ekes 1993] financed by the Hungarian

Academy of Sciences and made an estimate of the extent of

the bidden economy in Hungary in 1992. This estimation used the

results of the sample survey. According to my final calculation, the

invisible incomes of the country amounted to 23-24 percent of the

official GDP. The ratio of the social expenditures to the corrected

GDP is less than indicated by official figures.

Of course, one can argue that hidden economies exist in every

country, and the official figures on GDP are always used in comparing

expenditures for social purposes. However, the relevant

point is the rate of growth of the hidden economy. For some years

now, the hidden economy has been growing fast in Hungary (and

this is the case in other Middle and Eastern European countries

too). Unfortunately, experts know less and less about the actual

performance of the national economy from year to year. In stable

and developed market economies, statistical data on economic

processes are obviously more reliable than those from the countries

in the Middle and Eastern European region. 2. In support of their opinion, the experts at the World Bank use

another international comparison as well. They present the social

expenditures of less wealthy OECD countries as a proportion of

GDP. We must therefore compare Hungary to these countries. We

do not have to worry too much that the World Bank experts used

1986 figures concerning OECD countries; this is probably an appropriate

lag for Hungary.

What is not understandable is why Hungary is said to be the odd

one out here. The proportion of social expenditures in Ireland is

higher than that in Hungary. Such a comparison would be much

more realistic if figures on wages as a proportion of GDP were also

shown in Table 1 so that one could see how GDP is distributed.

Then, one could get a more realistic picture of whether our social

security system is too large or not. What proportion of GDP goes to

consumption? Is a large proportion of GDP really consumed, and

does this hinder investment and economic development in our

country? That is the main charge hidden behind the reasoning by

some World Bank officials.

Table 1. Social Expenditures in the Proportion of GDP in 1986
Country             Proportion
Greece               16.5
Ireland              26.1
Spain                17.0
Turkey               20.6
Hungary              24.4
Source: A Vilagbank szocialpolitikal jelentese Magyarorszagrol [World Bank
Report on Social Policy in Hungary 1992). 

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