Home > Uncategorized > János Kornai: Breaking Promises: The Hungarian Experience, Part I

János Kornai: Breaking Promises: The Hungarian Experience, Part I

January 12, 2013

János Kornai, professor emeritus at Harvard and Corvinus, is the foremost economist in Hungary today. Several of his books have been translated into English, including a book that made him a maverick in the tightly centralized planned economy of the 1950s entitled Overcentralization in Economic Administration (Oxford University Press, 1959). He is also the author of Anti-Equilibrium (Amsterdam: North Holland, 1971; 2d ed., 1975 in English); Rush versus Harmonic Growth (Amsterdam: North Holland, 1972); Growth, Shortage and Efficiency (Oxford: Basil Blackwell and Los Angeles: University of California Press, 1982); Road to a Free Economy. Shifting from a Socialist System: The Example of Hungary (New York: W. W. Norton); Vision and Reality, Market and State: New Studies on the Socialist Economy and Society (New York: Routledge, 1990); The Socialist System. The Political Economy of Communism (Princeton: Princeton University Press and Oxford: Oxford University Press, 1992);  and By Force of Thought. Irregular Memoirs of an Intellectual Journey (Cambridge-London, The MIT Press, 2007), his autobiography. Professor Kornai has been awarded honorary doctorates from dozens of prestigious universities.

I’m grateful for the opportunity to be able to post his latest contribution on the pages of Hungarian Spectrum.

The publication of this essay is timely. It appeared just as the Orbán government decided to embark on its latest promising spree. It is lowering the price of natural gas, and there are rumors that the government may introduce an extra month of pension in order to regain the allegiance of the retirees. All the while there is not enough money for education, research, and culture. We will see whether these will be broken promises or not. Naturally, the best would be if the Hungarian political elite gave up the bad habit of promising the land of Canaan when it cannot deliver.

Introduction[1]

I was still in high school when I first read that harrowing ballad by Friedrich Schiller, “Die Bürgschaft”, The guarantor (Schiller [1794], 2004) [2]

In the ballad, a man named Damon sneaks into the court of the ancient Greek city of Syracuse with a dagger under his toga, intent on stabbing the tyrant Dionysus, but he is arrested by the guards and brought before the tyrant, who condemns him to be crucified. Damon does not plead for mercy, but asks for three days’ parole, so that he can give away his sister in marriage. He will leave a friend as a guarantor, who may be executed in his stead if he fails to return. The tyrant agrees and the friend steps in. Damon dashes away to the wedding, and tries to return just as fast.

But the weather is against him. There is a fearful storm, causing the river to flood and washing away the bridge. Damon manages to swim across, but then meets with a band of robbers whom he has to fight off. Eventually he reaches the edge of the city, only to hear that the friend he left as a guarantor is being raised up on the cross. People advise him at least to save himself, but he bursts through the crowd to embrace his friend. The news reaches the tyrant, who relents of what Damon has been through and what self-sacrifice Damon’s friend has shown, feeling certain that Damon would not break his promise. The tyrant turns to the pair and says:

In truth, fidelity is no idle delusion,
So accept me also as your friend,
I would be – grant me this request –
The third in your band!

And now let us turn from the realm of poetry to that of reality, from ancient Greece to present-day Hungary. I often go to a retreat for scholars, where I’ve come to know the kind waitresses in the dining room well. One of them, Éva, took out a bank loan to buy a flat and a car, and the bank’s terms required the signatures of two guarantors. She asked Vera and Klára, colleagues of long standing and personal friends, who agreed to act as guarantors.[3] Éva promised the bank and her two friends that she would service the loan properly. But in the end she let everyone down. She did not pay the installments and fled from her obligations. The bank is charging the debt on the two guarantors.

In the ballad it is a matter of life and death. The promiser goes through fearful vicissitudes to keep his word. The guarantor is set free. In the real case, the breach of contract by the promiser did not spell death for the two guarantors, but it means that two women with financial problems of their own are left to wrestle bitterly with the debt, because their colleague and friend broke her promise and failed to meet her obligations.

promises

What significance does keeping promises bear? Why do so many people break their promises? What consequences ensue from this flood of promise-breaking? These are questions this study sets out to address. Though this paper is illustrated mainly by Hungarian examples, I assume that the problems brought up here are present also elsewhere, and my argumentation can be used to analyze this complex issue also beyond the Hungarian borders.

Conceptual clarification

The term promise is clear: someone, the promiser or maker of the promise – one person or a group or an organization (e. g. a firm, a state agency, a party, or a government) – undertakes an obligation to the promised, the beneficiary of the promise. Again the latter may be one person or a group (e. g. the population of a city or a country) or an organization. In the Schiller ballad Damon was the promiser and the tyrant and the friend were the promised; in the Hungarian story Éva, the debtor was the promiser and the bank plus the two colleagues serving as guarantors were the promised.

A promise may be unilateral, so that the promiser expects no recompense from the promised, or it may be bilateral, so that a pair of reciprocal promises appears: promiser A stipulates at the time of formulation and utterance of the promise that B, to whom the promise is made, will simultaneously make a promise of which A is the beneficiary. Both make a promise contingent on reciprocity. Such a promise contingent on reciprocity is known as a contract (Sharp 1934, p. 27). I fulfill my promise on the understanding that you will fulfill yours.

This study considers both types simultaneously in the main. I allude to the distinction between them only where my argument requires it.

A promise is often made in an informal way. If I order lunch in a restaurant, we do not draw up a contract, but I promise implicitly to pay the bill after eating the lunch. Other promises have a formal framework, e. g. a solemn oath is taken in the presence of witnesses according to a traditional ceremony. It is very common for a detailed contract to be drawn up in writing, where the contracting parties describe their obligations precisely.

There is no clear dividing line between informal and formal promises; there are many transitional cases. The possibility of enforcing fulfillment depends among other things on whether the promise has been formalized. This study disregards in several places the distinctions with regard to formalization.

To forestall misunderstandings, let me point out that the fulfillment of promise/breach of promise pair of opposites do not coincide with another pair of opposites to which great attention is paid: whether a statement is true or false. Both contrast words with reality, but this study examines a special form of contrast. The question of truth/falsehood contrasts words uttered at a given time with the reality of that time or a past time, or perhaps with a reality quite independent of the speaker. The question of fulfillment/breach of promise contrasts the words being uttered now with the subsequent conduct of the speaker and final result after a period.

Defining the subject-matter

My main aim is to present the phenomena related to fulfillment and breach of promises and the economic, political and ethical problems arising from these. I discuss questions that we all meet with in daily life and see mentioned in the press, other forums of public discourse, gatherings of friends, or sessions of Parliament. There are some who complain that a building contractor has not done a renovation job properly according to contract. Economists argue over the outcome of late repayments on loans advanced for purchasing real estate. Opposition meetings chide the governing party over unfulfilled campaign promises. I am seeking what is common among these seemingly different cases. Can we see identical or similar behavior patterns and social mechanisms in them? Do they lead to similar decision-making dilemmas and reactions?

I do not set out to report on the general state of promise fulfillment. I cannot say if the world, or even Hungary, has improved or deteriorated in this respect. Although I deal here with observable and in many cases even objectively measurable events, unfortunately there are only sporadic data available.

The study mentions tasks – what should be done to make promise fulfillment more frequent. But I have not sought to devise an action program to this end.

The paper draws on experience in Hungary. Hungary’s experience serves solely for illustrating certain phenomena and not as evidence for proving general statements.

An initial look: five types of promise

It would be an interesting subject for research to examine breaches of promises between individuals in private life, for example by those who dangle a prospect of marriage and fail to fulfill it. This study does not deal with private life, concentrating instead on promises closely connected to economic and political life. I see five basic types:

A.        Producers promises to users, about what product or service is being offered, when, and under what conditions.

B.        Users promises to producers, about how much, when, and under what conditions they will pay the producer for the goods or services received.

Types A and B are usually reciprocal and laid down in a formal or informal contract of purchase and sale. However, it is easier to discuss them separately and postpone examining the tie between them.

C.        Debtors promises to lenders (usually a bank or other financial institution), about when and under what conditions the debt will be repaid.

D.        Government (central or local) promises to citizens – all citizens or a certain group of them – about what services they will provide for them and under what conditions.

E.         Political promises (by individual politicians, parties or movements) to electors, about the program they will implement if they are elected.

These five basic types do not include all types of promise made in the economic and political spheres, but they suffice to exemplify the interrelations and problems discussed in this study.

A.       Producers promises to users

Daily occurrences in all our lives: the electrician promised to be here by ten, I did not go to work so as to be here to receive him, but he failed to come; the roofer undertook to insulate the floor of the terrace, but the room beneath got soaked the first time it rained.

In each example the promiser is an artisan and the promised a household. In subsequent examinations households remain the recipient of the promise, but the sphere of promisers extends to all who provide any kind of product or service to them, from hairdresser to taxi driver, dentist to cable TV provider. A “producer” may be a one-person firm, or a small, medium-sized or large company.

Consumers in Hungary have several kinds of body they can turn to with a complaint. Figure 1 shows four lines of data, in all of which the numbers of complaint tend upwards. We do not know whether grievances actually became commoner or the propensity to lodge an official complaint increased. The data certainly do not include all breaches of contract, as in most cases the injured do not turn to the authorities for legal redress.

Looking at such events from the consumers’ angle, breaking a promise may have several kinds of consequences. It may damage the consumer’s material surroundings: the light still does not go on in the cellar; repainting the ceiling is costly. Beyond the material loss there is damage to the well-being of the aggrieved, who may be outraged in a serious case.

The recipient of a promise may be another producer, so that breaking it will cause disruption to input-output flows between firms or organizations. A component manufacturer which fails to meet the promised deadline for delivery upsets the user company’s production plan. Various kinds of loss ensue: a whole line has to be stopped, causing disruption in sales; employees stand idle. If the delay is often repeated, the user firm will become cautious and build up a greater inventory, which ties down capital. Often the problem is not the arrival date, but the quality of the consignment. If the user fails to notice the fault in the input and incorporates it into its product, it will damage the quality of its own output, which will cause sales losses sooner or later. All these eventualities ultimately reduce the efficiency of the user firm or other organization.

Here as in households the damage is not just material. All troubles caused by suppliers breaking promises annoy users, from workers to managers, and create a bad atmosphere. This psychological effect must also be added to the direct consequences of promise-breaking.

Especially serious is the damage to producer/user relations that is protracted in time. This applies to all longer-term investment projects, including all building construction. When the project commences, its input suppliers all shoulder to contractual obligations. All participants should fulfill those obligations in consort, in a disciplined way. Any failing or breach of contract disrupts all the other participants as well. The more of them breach contract discipline, the graver the shortcomings, the more completion is delayed, and the lower the efficiency of the construction and investment becomes.

Figure 1 Number of consumer complaints, 1997 – 2011 figure 1

Notes. The Hungarian Authority for Consumer Protection is a central state agency. The Hungarian Financial Supervisory Authority is a central state agency, its general task being to monitor banks, insurance companies and other financial institutions. Its activities include the investigation of complaints received from the clients of financial institutions. The Foundation for Consumer Protection is a non-governmental organization, giving advice and forwarding complaints to the state agency in charge, but having no state authority. Conciliatory Bodies are independent state organizations, mediating between parties on the basis of written requests they receive.

Sources. Nemzeti Fogyasztóvédelmi Tanács [Hungarian Authority for Consumer Protection] (2012a, b, c, d), Pénzügyi Szervezetek Állami Felügyelete [Hungarian Financial Supervisory Authority] (2012a, b, c) and Fogyasztóvédelmi Alapítvány [Foundation for Consumer Protection] (2012). The latter source yielded the data on the Conciliatory Bodies.

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 Users build up self-defense mechanisms. These can be seen also in households. It is easy to find the names of artisans or firms on the internet, but many people prefer to use a producer or service provider tried out and recommended by a friend or acquaintance. One of the most important criteria in such cases is reliability: keeping promises.

This applies still more in relations between firms. The procurement department of a user firm does not always seek out all possible sources or in every case ask for multiple estimates. It may simply place the order with a supplier it already trusts. There emerge networks of producers and users that trust each other. Selection by networking has its advantages, but also its risks (Woodruff 2004). Such rigid networks reduce competition and may rule out in advance potentially advantageous offers. Not infrequently corruption creeps into relations between exclusive partners: strictly commercial conditions are watered down by mutual favors; firms may begin to look more leniently on breaches of contract.

B.         Users promises to producers

It may appear self-evident in a market economy that users will pay for products and services received. Those buying in a store, or procuring a service in a hairdresser’s or fast shoe-repair outlet, naturally fulfill the informal contract behind the transaction straight away, by paying. There is a different situation when events are normally protracted: on one side supply of the good or performance of the service, and on the other payment for it. This is typical in relations between firms, especially on construction or other types of investment projects. If the contract so prescribes, part of the price has to be paid in advance. Another installment must be met within a given period after arrival of the consignment (say 30 or 60 days). A further part may be withheld until the purchaser has tested the article supplied (for instance a piece of technical equipment or a building).

There are, unfortunately, only very few aggregate data available for breaches of Type B promises.

Let us begin with households as consumers. I know of no aggregate and detailed figures for the debt of households to private producers, but their debt to utility companies is reported regularly (Sík 2011, Bernát 2012).[4] In 2011 20 per cent, in 2012 22 per cent of the households were late with their utility bills. This is three to four times the 6 per cent European average. (More on this is in Ingatlan és befektetés, 2012.)

If the utility companies were to press consistently for punctual settlement of their bills, households breaking their contracts would be in deep trouble, as these service providers have a natural monopoly. Electric current and running water are practically indispensable. At first sight one would think that this dependency would enforce strong payment discipline. In fact, under the political, social and cultural conditions of Hungary, the situation unfolds in a different, controversial and confusing, way, and the effect is in the opposite direction. Cutting off the electricity or water supply has such dramatic effects that all compassionate people would sympathize with the ones who have broken their contracts by failing to pay, so that the utilities dare not do it in most cases even in cases when the regulations would allow, and social aspects and the consideration of need would not go against the harsh measure either. This encourages contract-breaking in others who might be capable of repaying their debt, at least in part. (At the same time it is not uncommon that families in utter destitution, needing social solidarity the most, are left without utility services.)

The proportion of firms that fail to make payments when due and break their contracts is very high. Missing deadlines are common. It is worth noting that many of the organizations behind with their payment obligations are state agencies or publicly or municipally owned institutions, such as hospitals, schools and universities.[5]

The victims of the contract-breaking in these cases are producing or service-providing firms. If they are short of liquidity and do not have an adequate credit rating, late or lost revenue may threaten their very existence. Large numbers of them fail.

Bankruptcy of firms is on the increase. They may have hit trouble because they failed to find buyers in a period of general decline in demand, or because buyers are not seeking their goods or services, since they regularly commit Type A breaches of promises by being late with their supplies to buyers or sending faulty goods. It may also be because they have fallen victim to Type B breaches of promises: they as sellers regularly fulfilled their obligations, but users did not pay.[6]

Sellers try to cover themselves by laying down in contracts that part of the purchase price must be paid in advance (Raiser, Rousse and Steves 2004.), but this only provides partial protection. It may eliminate the crude cases of contract breaching where buyers pay nothing at all, but it does not prevent them being late with the rest or not paying the residual at all.

The loss of revenue that rightly belongs to a firm damages its owners, endangers the jobs provided by the firm in financial difficulties, and if failure ensures, leads to employees being pushed out into the street.

As with Type A breaches discussed above, this is not just a question of material losses. For the victims of the breaches, they mean an end to peace of mind and a sense of security. People become embittered and angry. Protests by entrepreneurs being in trouble because unpaid bills are frequent.

C.        Debtors promises to lenders

A producing or service-providing firm provides a commercial loan to a user firm if it does not insist on prompt payment of the sale price.This is established practice in market economies: customary contracts of purchase and sale lay down the allowed period of payment postponement. However, when buyers have exceeded that, forced lending begins: the seller is obliged by this breach of contract to increase the amount of commercial credit.

Let us turn to the other, greater component of the total amount of credit: bank loans. Here the bank, or a bank-like financial organization extends the loans and households, firms or other organizations (non-profits, state agencies, voluntary associations etc.) are the debtors. So in this respect the debtors are the promisers and the banks the promised.

Looking first at debts of households, their indebtedness has proliferated in recent years. Large sections of the Hungarian public became addicted to buying on credit. More and more people in the previous decade took out larger volumes of credit to buy cars and purchase or build housing as well. A very high proportion of such mortgage loans were denominated in foreign currencies, notably Swiss franc, which required much lower rates of interest at the time than did loans in the Hungarian national currency, the forint. [7]

Two changes ensued after the loans were taken out. Hungary became embroiled in the international financial crisis, so that some debtors lost their jobs or saw their income fall dramatically. Meanwhile the forint weakened fast against the Swiss franc and other foreign currencies. Repayment obligations that seemed tolerable to meet from original household incomes became unbearably high. The proportion of the personal debt in arrears rose suddenly. This alarming tendency is illustrated by the second and third lines in Tables 1 and 2.

To express this in the language of this study, a high proportion of such households have broken their promises to lenders. Many still pay in part or in arrears: they have half-broken their promises. Others have become irrevocably insolvent, so breaking their promises entirely. Here the intention is only to note the phenomenon without going into the detailed reasons behind it. Let me just add, however, that the blame for the situation by no means attaches wholly to the promisers, the households failing to meet their obligations. Banks in those years hoped for good returns, and virtually persuaded the future debtor to take the loan, often failing to verify the creditworthiness of the household . In other words, the recipients of the promises walked into a trap of their own making.

table 1


table 2

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The economic stagnation and recession have also reduced the solvency of the corporate sector. The number of overdue loans to firms has increased alarmingly. This threatening tendency is illustrated by Figure 2, and the last lines of Tables 1 and 2. (‘Other sectors’ in the two tables mean the loans given to the sector of firms and the projects financed by the EU and the Hungarian state.) Figure 2 shows that a quarter of all project loans falls into the non-performing category. This rate is seriously high.

Figure 2 Proportion of overdue loans 

figure 2Note. Loans late more than 90 days are called overdue loans by the Hungarian National Bank.

Source. Magyar Nemzeti Bank [Hungarian National Bank] (2012), pp. 33.

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The conceptual framework of this study gives a more explicit name to the trend in the figure and the two tables: the number of firms not keeping their payment promises to banks is increasing. The same applies to many LGOs, which borrowed sizeable sums that they cannot repay over the promised term.

D.         Government (central or local) promises to citizens

Some regulatory measures spell out obligations undertaken by the state, others make silent implicit promises. Let us look now at those where the state shouldered long-term obligations. The promised, the beneficiaries of the regulations, trusted in the state’s promises and accordingly organized their lives, family budgets, and savings habits in the long term.

Let me take a single example, albeit a weighty one. The Hungarian government in 2010 and 2011 unexpectedly and radically altered the pension system. Hitherto a fixed proportion of the centrally collected pension contributions were allocated to private pension funds, called the ‘second pillar’ of the pension system. The new measures ended this important component of earlier practice. Since then the entire mandatory pension contributions go into the state pension fund. The capital accumulated in the private pensions funds were swiftly transferred to the state budget. Much has already gone on day-to-day public spending (Simonovits 2011, European Economic Advisory Board 2012, p. 128). This study does not set out to decide whether the new laws meet the requirements of constitutionalism and protection of rights. Reputed lawyers at home and abroad have responded with a resounding negative to these questions. Rather than commenting further on the legality of the decisions I will stick to my subject. The insured, understandably, viewed it as a state promise that the capital accumulated from setting aside those pension contributions in private pension funds would remain their own property. In their view the radical alteration of the system, that is, the elimination of the ‘second pillar’ means the state has broken its promise. It is still unsure what the change means for the future income of pensioners. Nobody will be able even in the future to give an appreciable estimate of the loss or gain, as there will be no basis for comparison. No one will be able to say with hindsight what the pension income received from the private pension funds would have been had they not been abolished. Whatever the case, there is disillusionment, outrage due to the state’s broken promise and anxiety for the future among those pressurized by the state into abandoning the expected income from the contributions paid into private pension funds.

E.          Political promises (by individual politicians, parties or movements) to electors

Citizens of all parliamentary democracies often complain that politicians promise the earth during election campaigns, then fail to keep their promises. Vehement disenchantment with political parties and leading politicians has often been heard in Hungary since the multiparty system was reintroduced.

There is no space here to examine the relationship between political promises and their in the last 22 years. Let us look just at the last elections in 2010. Party leaders and election candidates mouthed various promises. Fidesz, the party that won over the electorate, was cautious about making numerical promises for which it might be called to account later. One figure they gave, however, made a big impression on voters: they would create a million new jobs (Matolcsy 2010). (Hungary, incidentally, has a population of around 10 million.) They gave themselves ten years to fulfill the promise. Later, when Fidesz had formed a government, one leading economic politician put the promise more specifically. They would fulfill it evenly: 400,000 new jobs would appear over the four years of their present term of office (Varga 2010).

So far the government has not fulfilled the first part of the promise due in the first two-year period, the increase in the total employment rate is much slower than promised. And if we disaggregate the employment figures, it turns out that they was blown-up by the rapid increase of so-called public work, which replaces social benefits with mostly part-time jobs paid at starvation wages by the state. Job numbers in several sectors with actual employment in normal employment relationships fell.

The promise was addressed primarily to those who would gladly have taken a job. They suffered a big financial loss. Mention must also be made of the disillusionment. Unemployment generates fear among those who still have a job, but feel insecure because of the threat of unemployment..Many anxious people were filled with hope by the party seeking their vote. Now they are dismayed to find the promise has not been kept.

Interactions

 Spill-over effects in production and the credit system

For each basic type of breach of promise discussed in the last section of the paper it was established that it caused not only material losses to the aggrieved but also effects on their mental state, mood and well-being. Each type of damage was examined separately. In actual fact there are many types of interaction between the thousands or hundred thousands of micro-events.

The best known is the interaction between belated or omitted payments, i. e. spill-over effects of breaches of Type B promises, in this paper’s terminology. Firms G, H, and I should be paying firm M for products received, but they break their contracts and fail to pay. Firm M in turn owes money to firms X, Y and Z, but not having received its dues, it in turn, against its intention, breaches its promise and does not pay. Firms X, Y and Z are now unable to pay other obligations, and so on. The phenomenon is called chain-indebtedness in the Hungarian economic jargon. Each link in the chain means that there is a debtor in arrears and a forced creditor waiting for his money in vain. Circular indebtedness appears when the chains formed by overdue payments link together. The troubles form a spiral, a vicious circle, an accelerating, deepening whirlpool of indebtedness. For example, circular indebtedness is estimated to be 400 billion forints in the construction industry, which is approximately one quarter of the production value there. The situation is well described by a press-release on the topic: “No way out from the vicious circle of circular indebtedness?” (MTI – Stop, 2012. See also MTI – Figyelő, 2012)

One after the other, the indebted firms start to fail, and B and C-type breaches turn into type A. Producer or provider firms in deep financial straits cannot meet their obligations to produce or provide services. This too has spill-over effects well known from the economics of trade cycles. Production growth deceleration may switch into recession. Shrinkage of the real economy may hit back on the financial positions of firms, which accelerates the spiral of indebtedness.

The situation is worsened because the victim of the C-type breaches of promise (failures to service or to make repayments of bank loans) is the banking sector. However much the banks themselves may be to blame for allowing the proportion of loans in arrears and non-performing loans to rise so high, the consequence is the serious deterioration of the state of affairs in the banking sector. This is one of the factors behind the alarming fall in the level of bank lending activity. This too holds back production growth and may contribute to a recession process. There then appears in the chain of cause and effect a further consequence mentioned before: liquidity in the household and corporate sectors is reduced, which produces further spirals of promise breaching.

Mass occurrences of broken micro-promises of types A, B, and C, through the mutually reinforcing interactions just detailed, eventually cause serious macroeconomic damage.

Spirals of bad mood and bad example

Economists, citing the well-known relevant theories, easily recognize the spirals engulfing production and the credit system, and the multiplier effects whose interactions turn a thousand little micro promise breaches into a macro-level crisis. However, it is more a task for social psychologists to describe how the annoyance and outrage at the breaches of promise pass from one person to the next. One person leaves his home angrily because the plumber failed to turn up yesterday and there was no hot water in the pipes this morning. Driving along he shouts insultingly at a pedestrian crossing the road, who also ends up in an up-set mood and quarrels with colleagues at work. At the end of the day, all these people return home feeling nervous and irritated. They stick their or own anger and bad mood on the members of the family .The bad temper and tensions spread like a disease from one person to the next.

Nor is the problem confined to mood. Bad examples also spread like an infection. Many people say to themselves, “If others keep breaking their promises, why should I be the fall guy who always keeps his word?” The more bad examples people see, the more they wonder why they should be the exception and take their promises seriously, to their own detriment. These spill-over effects from person to person cause the vicious circle to spread and worsen: promise-breaking breeds yet more promise-breaking.

The people in the political/government sphere and the business sphere are not isolated from each other. Talented and/or smart ones pass repeatedly through the revolving doors between them, holding political, administrative and commercial posts by turns. Once they have become accustomed to irresponsible promise and responsibility-breaking in one sphere they will take the behavior pattern with them into the other.

It is especially dangerous for the feeling to emerge among ordinary people that “those above,” those at the pinnacle of political power, are not keeping their word. Tables 3 and 4 show the findings of an international survey. Table 3 ranks the countries based on the share of those, who strongly doubt the trustworthiness of politicians. Hungary is among the first ones; two third of the population strongly or very strongly disagree with the optimistic statement according to which politicians keep their election promises. Table 4 presents the rankings based on the proportion of those strongly believing in the trustworthiness of politicians. In this table Hungary is among the tail-enders: only every tenth Hungarian thinks (with strong or even with very strong conviction) that politicians fulfill their promises made during the election campaigns.

table 4

Note. The survey was conducted in the framework of the „International Social Survey Programme”, in 1994-1995. Information on the data collection methodology is described in the cited source as follows: The following question was asked: „How much do you agree or disagree with the following statement. People we elect as (MPs) try to keep the promises they have made during the election 1 Strongly agree 2; Agree 3; Neither agree nor disagree;  4 Disagree; 5 Strongly disagree 8 Can’t choose, don’t know 9 NA, refused”

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The above percentages were arrived at by calculating the proportion of those choosing 4 or 5 to all answers, and countries were listed in the decreasing order of the proportions. The table was compiled by Tamás Keller. Source. International Social Survey Programme (1996).      

“If those up there can get away with not fulfilling their promises, then why should I, the little man, fulfill 100 % of my promises?” It is distressing that this line of thought have probably crossed many people’s mind.

table 3

Note. Information on the survey is available in Table 3. The above percentages were arrived at by calculating the proportion of those choosing 1 or 2 to all answers, and countries were listed in the decreasing order of the proportions. The table was compiled by Tamás Keller. Source. International Social Survey Programme (1996).

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[1] I am grateful for their help in the research and their useful advice to the following colleagues: Zsuzsa Dániel, Tamás Keller, János Köllő, Sylvie Lupton, Boglárka Molnár, Mária Móra and István György Tóth. Let me thank the translators, Brian McLean and László Tóth. The attentive and efficient contribution of my assistants, Rita Fancsovits, Klára Gurzó and Andrea Reményi, means a lot to me. And my thanks go to  Corvinus University of Budapest for the inspirative environment and the support for my research.

[2]  Schiller’s poem has been translated to English several times. Below I quote Scott Horton’s translation, published in 2007. Horton translates the German Bürgschaft to ’hostage’ in the title and in the text at a point, though the latter rather means Giesel in German. In the context of my study the English guarantor  is a better match, which also happens to appear in Horton’s translation.

[3] The story is real, but I have changed the names.

[4] Keller (2012) shows interesting figures about household indebtedness in Visegrád countries. Data based on the Eurostat (2011) report, up to 2009, indicate the highest increase of household indebtedness in Hungary.

[5]  In May 2012 overdue bills of public institutions reached the substantial amount of 42.2 billion forints (Népszava 2012).

[6]An example was construction of the Megyer bridge over the Danube, where the government made a contract with a main contractor, which farmed out tasks to numerous subcontractors. The work was done properly but the government did not pay, and the main contractor could not meet its financial obligations. The subcontractors held several demonstrations in protest at this.

[7]The mounting personal indebtedness, including the problem of so-called foreign-exchange debtors, is covered in numerous studies.  (See, for example, European Economic Advisory Group 2012, pp. 125-127, Hudecz, 2012.)

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  1. nyaripal
    January 12, 2013 at 3:38 pm | #1

    Pedants’ Corner (sorry, but I have a thing about tables used in articles)

    In the ‘Ratio of citizens who doubt the reliability of politicians’, 59% of Israeli Jews doubt the reliability of politicians, but only 18% of Arabs. Does this strike anyone else as odd?

  2. nyaripal
    January 12, 2013 at 3:41 pm | #2

    OT. but whilst we’re on the subject of pensions – we were discussing this today (pensions in UK v pensions in Hungary) and we couldn’t find out what the current Hungarian State retirement pension is, or what the retirement ages are (or how and when they are due to change), al the data on the internet (in English) is out of date. Can anyone help me on this please? Ta.

  3. January 12, 2013 at 3:45 pm | #3

    nyaripal :

    Pedants’ Corner (sorry, but I have a thing about tables used in articles)

    In the ‘Ratio of citizens who doubt the reliability of politicians’, 59% of Israeli Jews doubt the reliability of politicians, but only 18% of Arabs. Does this strike anyone else as odd?

    Re your first comment. This is not really an article. It is a fairly lengthy study. More than 13,000 words.

    Perhaps Professor Kornai will have an explanation for the discrepancy between Jewish and Arab citizens of Israel. He will, I’m sure, will read the comments.

  4. January 12, 2013 at 4:37 pm | #4

    Naripal: “Does this strike anyone else as odd?” No. I had no a priori default assumptions. You seem to have had. How can one be surprised by data when one is not in a position (judging by your lack of alternative sources) to provide other data.

    The sources are quote clearly stated, so how can one be ‘surprised’? Surely the rational thing to do is conclude that one’s a priori default assumptions need adjusting based on new data?

    {p.s.Shame to see Irish politicians’ popularity decline. The taoiseach Mary Robinson managed to achieve 93% halfway through her term.

    Personally, I’d also be interested to see where Estonia stands}

  5. wolfi
    January 12, 2013 at 4:41 pm | #5

    I didn’t have the time yet to read all of this but there’s this interesting difference between East and West Germany – though the study was done several years after reunification as I understand it.

    So the experience of the “Communist” regime has lead many more people to doubt the words of politicians – probably not really unexpected …

  6. Qaz
    January 12, 2013 at 6:18 pm | #6

    nyaripal :
    Pedants’ Corner (sorry, but I have a thing about tables used in articles)
    In the ‘Ratio of citizens who doubt the reliability of politicians’, 59% of Israeli Jews doubt the reliability of politicians, but only 18% of Arabs. Does this strike anyone else as odd?

    The answer probably lies in the way the question was framed:

    “The following question was asked: „How much do you agree or disagree with the following statement. People we elect as (MPs) try to keep the promises they have made during the election.”

    One could safely assume that Israeli Arabs are reflecting on the Arabs members of the Knesset they elected.

  7. gdfxx
    January 12, 2013 at 7:28 pm | #7

    I find it amazing, how an expert scientist and educator can put together such an interesting document that really doesn’t do more than summarizes common knowledge. It makes it obvious why some people teach at Harvard and others do not.

  8. CharlieH
    January 12, 2013 at 7:58 pm | #8

    London Calling!

    A very interesting analysis! Thank you.

    Many of us on Eva’s blog have been watching the slow slow festering of the financial climate in Hungary.

    From the utility-debt deterioration; the forex-mortgage gambles; the private pension grab; the ex-mayor of Hódmezővásárhely’s forex gambling; the reneging on the ‘emergency’ Bank tax – and the list goes on.

    From an intruding foreigner’s view it seems that ‘my word is my bond’ and integrity of contract law is a moving concept in the Hungarian psyche.

    A psyche that has been ‘configured’ by communism – where personal responsibility is another moveable concept – and where the realisation that a capitalist system allows people and companies to fail is not so readily understood.

    None of this appears in the analysis as far as I can see.

    Of course the Banks will market their products – naive Hungarians have signed their forex mortgage agreements which have included – in most cases – the clause that warns them about currency risk.

    In many cases delinquent mortgages shot up when Orban forbade Banks foreclosing on the loans. Many just stopped paying knowing the banks couldn’t evict them – and still can’t. Live for today – tomorrow will take care of itself.

    And the unbelievable interference of contract law by the state that has allowed ‘consumers’ to change the terms of their mortgage contracts.

    Just as the consumers are not paying their utility bills,

    And just as the state could confiscate the private pensions – and squander them on MOL shares, inter alia.

    And now the breach of contract is occurring on a mega-reneging scale with municipal debt – Orban is holding the Banks to ransom (again) by trying to renegotiate the terms. Quite quite astonishing.

    Only in Hungary.

    No – it must be in the psyche.

    I once had to deal with a second-hand car-parts dealer (Auto-Bonto) in Hungary. We had agreed a price over several months – and even phoned to confirm it before we set off on a long journey. On arrival he insisted that he couldn’t let the items go at the agreed price – and insisted on more. Only on walking out in disgust and after a long diatribe – did he agree the original price. Even then he begged for more (yes begged!) and I foolishly paid more – having never been in this situation in my life. I paid a further 1000Fts – and he opened his palm and said “Only one more”. His view of a contract – even a verbal one was that it is a moveable feast.

    Only in Hungary.

    It must be in the psyche.

    Even on here I caught out a contributor with his own words – and on pointing out that no apology was forthcoming he said ‘Hungarians never apologise’!

    Being an English resident all the examples above have occurred probably somewhere in the UK. But not on this scale.

    Pensions are sacrosanct and contracts are in the main honoured.

    The commercial climate can only operate if the man on the Győr omnibus honours his obligations.

    I think what we are witnessing is the wholesale collapse of trust and honour in the financial climate of Hungary.

    Whatever happened to ‘My word is my bond’?

    Regards

    Charlie

  9. January 12, 2013 at 9:16 pm | #9

    Qaz :
    One could safely assume that Israeli Arabs are reflecting on the Arabs members of the Knesset they elected.

    At beginning of the 90s (when the study was conducted) two third of the arabs voted for Jewish parties. Not so much nowadays.

  10. January 12, 2013 at 9:52 pm | #10

    Well, yeah. We all should live by high moral standards. Like the 15 commandments (Mozes actually had 3 tablets but dropped one).

    So where does the moral end and where do the street smarts take over? Aren’t people, especially politicians, break promises because they can get away with it? WE let them get away with it.

    Hungary’s problem is the lack of “law and order”. The impotent law enforcement, the destroyed courts, the incompetent and corrupt judges. These are caused by something in the nation’s psyche – maybe the servile, passive character – but I think the phenomenon of the “breaking promises” is a secondary effect.

    Of course financial hardship is different – you need to feed the kids. That is another moral obligation.

  11. Ms KKa
    January 12, 2013 at 10:32 pm | #11

    CharlieH :
    Whatever happened to ‘My word is my bond’?
    Regards
    Charlie

    Perhaps, nothing happened to it…perhaps, it was never part of the Hungarian psyche at all.

  12. wolfi
    January 13, 2013 at 2:29 am | #12

    @Charlie:

    I have experienced something similar here near Hévíz. One of our neighbours rebuilt the old farmhouse into several apartments. Whenever there was the time to pay one of the builders he’d say, oh – I’m a bit short and would deduct say 10 % from the agreed sum …

    Nobody could do a thing because of course this was all “black work” without taxes being paid etc …

    After a time everybody in the village knew about this and he could no longer get anyone to work for him. So one day when he had a problem with the central heating (installed by someone from another town) he came to me and asked me if I would call my specialist. This guy at first said, sure I’ll come tonight – but when I told him who the customer was he said:

    No way! Only if he first pays me the xxx thousand HUF I should get from the last job and …

    If he pays in advance !!!

    PS:

    After 10 years the house already looks in shambles, many of the planted trees have withered away – and there are rarely any guests, because it seems he treats his guests similarly!

  13. wolfi
    January 13, 2013 at 2:35 am | #13

    Of course I’m not saying that all Hungarians are like this, not even the majority – but it seems to be in the culture somehow.

    For some/many people cheating is a way of life here.

    So I select very carefully the people I do business with – my wife and my neighbours have helped me and of course we also recommend only those people/businesses that we rely on:

    The gardener, the farmer, the repairmen, the shops, the doctors, the masseur, the restaurants etc – the good side of it is:

    There is so much competition here in any field that the bad apples are soon weeded out (excuse my bad metaphor …)!

  14. An Israeli.
    January 13, 2013 at 2:58 am | #14

    “Note. The survey was conducted in the framework of the „International Social Survey Programme”, in 1994-1995….” End of the quotation.

    It is very odd!! I am very much surprise to read the above mentioned data, redarding Isreal from 1995. As a reminder, in that year PM Rabin was murdered and the political climate in Isreal was polarized. Since then, Israel has goen a long way. The division between the Israelis (Jews and Arabs) is the wrong one because all of them vote for the same Knesset (general elections). It should have been that the Arab minority believes LESS in the politics in Israel but based upon the above mention info. It is the opposite. Strange.

  15. wolfi
    January 13, 2013 at 3:36 am | #15

    Just two comments after reading the article again:

    There is an old saying in German: Bürgen heißt würgen!

    Loosely translated: to guarantee means to suffer (choke, be strangled)

    and the German alternative word is “Geisel” = hostage

    And now something totally OT:

    I came to hate these ballads by Schiller (who also was a Schwab) because not only had we to learn them by heart (like “The Bell”) – I always had to recite them, having the “best” voice in my school class …

  16. LwiiH
    January 13, 2013 at 7:47 am | #16

    CharlieH :
    London Calling!
    A very interesting analysis! Thank you.
    A psyche that has been ‘configured’ by communism – where personal responsibility is another moveable concept – and where the realisation that a capitalist system allows people and companies to fail is not so readily understood.

    Judging from the number of empty shops I see that are kiado I’d say it’s a lesson people have learned. Not only that, we’ve been witnessing a decline in the variety, quality and quantity of goods on the shelves while prices are noticeably higher. Corporations can only be squeezed so far before they’ll take agressive measures to protect profits and in this case it the Hungarian consumer thats taking the hit.

    None of this appears in the analysis as far as I can see.
    Of course the Banks will market their products – naive Hungarians have signed their forex mortgage agreements which have included – in most cases – the clause that warns them about currency risk.
    In many cases delinquent mortgages shot up when Orban forbade Banks foreclosing on the loans. Many just stopped paying knowing the banks couldn’t evict them – and still can’t. Live for today – tomorrow will take care of itself.
    And the unbelievable interference of contract law by the state that has allowed ‘consumers’ to change the terms of their mortgage contracts.

    If the forex mortgage problem had of been allowed to progress to it’s natural conclusion it would have been both a huge social catastrophe and a much bigger financial disaster. The banks were going to take a hit wether or not the government steps in. They would have foreclosed on more than 100,000 homes forcing people into the streets and then what. Sell the properties for what ever they can get in a collapsing market? As I’ve said before on this blog, there are 3 parties that are responsible for this mess, you have borrowers signing up to something they didn’t understand, you have the banks who knew quite well what the currency risk was and what would happen should that risk be realized. I don’t believe they could have been so naive as to believe that people would be able to afford anything more than modest fluctuations in exchange rates. Finally, the government for allowing people to take these risks on their primary residence knowing the disparities in the financial sophistication of the lenders and the borrowers!

    While we might quibble over the details, the government had to stick it’s finger in the dike. The question is, who let the dike get to that state in the first place!

    Just as the consumers are not paying their utility bills,

    The average take home in our area is about 125,000HUF. This is for degreed people working at skilled office jobs. Heating during the winter will reach 50,000HUF minimally. That means minimally 40% of income wil be consumed simply by heating. If you want to know why people aren’t paying all of their bills, it’s because it often comes down to a choice of eating at the end of the month or not heating and dealing with that. In fact I would say our air quality is now suffering because people have taken to burning anything they can in order to avoid using the utilities they can’t afford.

    Let’s put the against the back drop of Lego. Lego wanted to pay workers what they considered to be a living wage but the local Fidesz lead council wouldn’t allow it. Oh if you think MSzP is better, Lego came to town when they were in power.. no living wage then either.

  17. CharlieH
    January 13, 2013 at 9:31 am | #17

    London Calling!

    Yes Some1>/b> The government doesn’t understand capitalism either. Remember Leman Brothers? Fanny Mae?

    He should let companies pay the going rate – as in Lego – (and Audi btw.)

    Orban doesn’t realise he is playing in a global arena.

    He and Matolcsy believe that the EU should follow his lousy contracting economy with loopy short-term economic policies! Dream on sunshine. We are watching what NOT to do! We had a contributor on here who believed the bullshit – amazing! With the Forint collapsing around their ears – hurting more Hungarian forex mortgagees. And buying off the electorate in a self destructive binge of promises the only direction for the Forint is down. It is clear Matolcsy will devalue the currency substantially when he sits in Simor’s seat before it is allowed to get cold.

    Matolcsy, dangerously, doesn’t understand capitalism either.

    The Banks mostly involved in Forex mortgages should have been allowed to foreclose – and some banks to fail – a necessary component of capitalism – and a healthy democracy.

    Tough love.

    Otherwise you just have moral hazard after moral hazard.

    With Orban nationalizing everything – he is indirectly hurting every Hungarian consumer in thr future.

    We learnt that lesson in the eighties – Margaret Thatcher ‘un-privatised’ everything – with acknowledged success (mostly!). (Queue Paul comments here….)

    As I said about Hungary – a crazy quasi-capitalism fashioned by communism – neither one thing nor the other.

    And crazy unorthodox economic policies of the communist era.

    With the concomitant economic climate where commerce and companies cannot survive – and no one wants to invest.

    And finally Orban issuing foreign currency bonds for domestic investment.

    Haven’t enough Hungarians got their fingers burnt on currency risk yet?

    Crazy crazy crazy!

    Regards

    Charlie

  18. January 13, 2013 at 12:50 pm | #18

    The statistics for US Congress are pretty damning: “Congress Less Popular Than Nickelback, Donald Trump, Head Lice, Cockroaches, etc…” http://www.ibtimes.com/congress-less-popular-nickelback-donald-trump-head-lice-poll-1001516

    For a graphic, see: https://www.facebook.com/photo.php?fbid=471412562896752&set=pb.155857464452265.-2207520000.1358099303&type=3&theater

  19. Kirsten
    January 13, 2013 at 3:27 pm | #19

    I have not yet part II of the analysis, and perhaps I read it too quickly, but for me the main issue is not whether Hungarian or other politicians, sellers, borrowers etc. understand the concept of ‘promise’ (although Prof Kornai in some cases refers to ‘contracts’), but whether a society (broadly speaking, ie the critical mass) is able to identify means that make systematic breaking of promises and contracts impossible. The debates in Hungary about what government or the state should be about are not really illuminating (party programmes as that sketched by Nepszabadsag about DK or the speeches of Gordon Bajnai are rare examples of that it could be different, while otherwise romantic ideas of some national unity are at least quite prominent if not the only idea of relevance), which is why people seem to be so astonished when confronted with the outcome

  20. Kirsten
    January 13, 2013 at 3:31 pm | #20

    …of this poor knowledge of the political process. In a society preocuppied with the issue of who is ‘really’ allowed to belong to the great Hungarian nation and who is in actual fact alien or at least crypto-alien, it might be difficult to develop ‘trust’ including on that promises or contracts are to be fulfilled.

  21. 1Yankee1
    January 13, 2013 at 3:46 pm | #21

    With all due respect to Prof. Kornai, I believe that the public opinion tables should be left out. First, the tables are old, the polls were conducted almost twenty years ago. Second, the data do not paint a clear picture. True, Hungary is at the top and at the bottom, and these positions seem to support our feeling re Hungary, but what about the relatively minor difference between Hungary (10.2) and Sweden (14.2) and Hungary (66.7) and US (51.1). And what does the fact that Bulgurians and Philippions doubt politicians even less than the Swiss tell us? Or that Cypriots and Bulgarians believe politicians much more than Americans, New Zelanders or the Swiss? Not much I guess. I would have doubts about the as well.

    If you want to prove the problem of broken promises you only need two data: investment (as it presupposes a longer term period of advantageous environment) figures (really bad, much worse than eny of our peers) and money transferred to foreign banks (obviously not only Hungarians did so, but Hungarian savers sent a lot to Germany, Switzerland and Austria – not for tax reasons, but because they are afraid that the government appropriates the savings). Though surely, causation is difficult to prove.

    The funny or sad thing is that there was a tax amnesty for amounts held abroad by Hungarians. Those monies could be sent back to Hungary and declared and legalized. However, what bankers tell me is that in most cases the money was transferred to Hungary, a 10% tax was paid, and right after it the money was transferred back where it came from. Obviously, people with serious money dont want to run the risk of an appropriation.

  22. nyaripal
    January 14, 2013 at 4:07 pm | #22

    An Israeli. :
    “Note. The survey was conducted in the framework of the „International Social Survey Programme”, in 1994-1995….” End of the quotation.
    It is very odd!! I am very much surprise to read the above mentioned data, redarding Isreal from 1995. As a reminder, in that year PM Rabin was murdered and the political climate in Isreal was polarized. Since then, Israel has goen a long way. The division between the Israelis (Jews and Arabs) is the wrong one because all of them vote for the same Knesset (general elections). It should have been that the Arab minority believes LESS in the politics in Israel but based upon the above mention info. It is the opposite. Strange.

    Thank you for this reply, this was exactly my point.

    My understanding of Arab politics within Israel is that the Arab pooulation tends to not be interested in politics and plays very little part in it (even to the point of not tending to vote). This is assumed to be because the Israeli Arabs see Israel as a Jewish State (as indeed it states itself to be), and therefore not interested in its non-Jewish citizens.

    So, in that light, the statistics quoted seem very odd indeed. I assume there is an explanation – maybe the way the question was worded (as others have suggested) or perhaps assumptions made by the authors of the table who possibly aren’t aware of the details of Arab/Jewish politics within Israel.

    But, as things stand, we have a table which contains a very obvious oddity.

  23. nyaripal
    January 14, 2013 at 4:10 pm | #23

    nyaripal :
    OT. but whilst we’re on the subject of pensions – we were discussing this today (pensions in UK v pensions in Hungary) and we couldn’t find out what the current Hungarian State retirement pension is, or what the retirement ages are (or how and when they are due to change), al the data on the internet (in English) is out of date. Can anyone help me on this please? Ta.

    Does anyone have an information re this? It would be greatly appreciated if we could get answers to at least some of my questions. Trying to find the answers by more ‘traditional’ routes has proved fruitless so far.

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