Industrial Policy in Eastern Europe: The Case of Hungary

By Hare, Paul G. | Atlantic Economic Journal, June 1994 | Go to article overview

Industrial Policy in Eastern Europe: The Case of Hungary


Hare, Paul G., Atlantic Economic Journal


2004   158.72         168.80         182.45        123.05
2005   167.92         178.63         193.05        130.41
2006   177.66         189.03         204.28        138.23
2007   187.97         200.04         216.15        146.54
2008   198.87         211.69         228.72        155.38
2009   210.40         224.02         242.01        164.78
2010   222.61         237.10         256.11        174.83

Projected Output Indices by Industry with 1989 = 100

1995 2000 2005 2010

I. Conceptions of Industrial Policy

Amongst the OECD countries, conceptions of industrial policy have changed considerably over time. Typically, when economic activity is buoyant and growth is moderate to strong, official support for industrial policy as an identifiably separate component of economic policy tends to be weak, while in recessionary periods, especially if concerns over inflation or the balance of payments restrain the use of broader monetary and fiscal policy instruments to boost the economy, industrial policy is more likely to find support. At the same time, during recessionary periods the preferred mix of industrial policies tends to shift away from "horizontal" policies which benefit the whole of industry more or less uniformly, towards "vertical" policies focusing on branches and activities considered to be in temporary distress.

This pragmatic approach is sometimes overlaid with a more ideological view of the appropriate limits of economic policy. Thus in the 1980s, several western governments more or less wholeheartedly adopted in their macroeconomic policy the basic tenets of monetarism. This envisages a very limited policy role for the government, especially at the microeconomic level, partly because of a general belief in the effectiveness of "normal market forces," partly because of increasing doubts about the effectiveness of government intervention in market-type processes. The latter concerns arose because many models of government behavior and the behavior of bureaucracies emphasized the probable inefficiency of the resulting resource allocation, a conclusion further strengthened by other models which drew attention to the issues of policy credibility and incentives for efficient adaptation. Within this framework, government was expected to confine itself to maintaining overall macroeconomic stability through the prudent exercise of monetary policy.

Interestingly, though, monetarist thinking unintentionally paved the way towards a more rigorous reworking of the traditional, pragmatic approach to industrial policy. For if government intervention is unjustified when markets are functioning well, then by the same token it might be justified in cases where there is substantial and persistent market failure. And even the possibility of government failure itself does not necessarily imply inaction. Instead, it suggests that forms of intervention should be devised which, as far as possible, are market-conforming, supporting and strengthening rather than opposing normal market forces. Thus in practice, the pragmatic and ideological approaches to industrial policy turn out to be closer than might have been expected.

Turning to the actual content of industrial policy, this can be considered at several levels: the macroeconomic, the industrial level; and within industry the sectoral or branch level, and the enterprise level. The first of these, concerned with establishing and sustaining the general environment within which the whole economy functions, is not usually considered part of industry policy per se, though it obviously has some effect on industrial activity and performance. To this extent, when discussing Hungary later on it will be impossible to avoid a brief reference to this aspect of policy. For a fuller account of macroeconomic policy in Hungary, extending well beyond the scope of this study, the reader should consult OECD [1993a]. …

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Industrial Policy in Eastern Europe: The Case of Hungary
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