The Invisible Hand

Why is the reputation of the IMF not so bad in Hungary as elsewhere? asks Hungarian economist László Andor     

The career of the International Monetary Fund stretches to more than half of a century, and it can be broken down into various periods. The early 1970s is clearly a turning point when the IMF lost its original mandate—that was to manage the gold—dollar standard within the so-called Bretton Woods system. The main activities of the Fund in the 1980s and 1990s were managing the global debt crisis, assisting the East European economic transition, andstabilizing the emerging economies hit by the new age currency crises. These latter emerged after the recipes of the so-called Washington consensus started to drive the global economic system into excessive liberalization.

The IMF has become a financial supervisor for the peripheries and semi-peripheries of the world-system. However, most countries that went through IMF and World Bank treatment do not feel better. It is thus understandable, that the international literature, the image of the IMF is dominated by the following negative features:

--lack of transparency and accountability,

--dominance of OECD countries, and within those:

--excessive American influence,

--monetarist bias in the economic analysis,

--superficial and uniform analyses, and due to the last two:

--ignorance about the specific nature of less developed economies, and consequently:

--mistaken diagnoses and unsuccessful therapies.


If one goes to a library or a bookstore in a Western city or university campus, he or she finds a couple of books that praise the IMF for its achievements. At the same time, one can find shelves and shelves with books that describe the mistakes and failure of the Bretton Woods institutions, or even the completely degenerated nature of the world economic system. Conservatives give credit to Henry Kissinger and progressives to Joseph Stiglitz – both very critical about the operations of the IMF in the recent two decades. This is what we mean by the dominance of critical approach in the Western analysis of the global financial architecture.


In Hungary, the above mentioned features are not so strongly connected to the name of the IMF. One could believe that the reason for this is that the Fund would have been more successful in this country than elsewhere. The likely explanation, however, lies with other factors.

In 1982, Hungary joined the IMF in the wake of a severe liquidity crisis. The relationship that emerged after this period can be characterized with financial assistance but also with ever stronger dependency and exposure. These, for a while, counter-balanced the unilateral Eastern dependency of the previous period. The Hungarian public, however, remained mostly unaware of the deeper political implications and economic consequences of this situation because the subsequent administrations presented the adjustment and austerity policies as their own, contrary to the regular international experience. Thus, the fact that in Hungary the IMF is less unpopular than in other parts of the world, cannot be explained by the assumption that the IMF policies in Hungary would have been more successful than elsewhere.

Despite doubts and subsequent failure, the IMF in Hungary has received much less public criticism than elsewhere. In the 1980s, the IMF was dealing with a monolithic political structure that managed to hide from the public not only the actual data about indebtedness but also the entire policy dialogue between the government and the IMF. This secretive connection had serious political consequences. In a paper written in 1989, Andrea Szegő of the Social Science Institute of the Central Committee of the ruling HSWP explained how damaging it was for the intellectual renewal of the Left in Hungary that conservative economic policies were sold by the ruling party behind a Marxist façade. Thus the political consequences of the debt crisis in Hungary were completely different from those in Latin-America, where IMF austerity provided fuel for the Left. In Hungary, it strengthened the momentum for the breakthrough of the Right which, with the unintended assistance of the Communists, managed to portray the financial crisis as the failure of the socialist system, regardless the wider context of the global debt crisis.

In the early 1990s, many supporters and members of the right of centre Anntall government would have been critical against the IMF policy framework and requirements, but they remained loyal since they saw the IMF and the World Bank as political allies that had excelled in the long struggle against communism, and eventually played a decisive role in overthrowing the state socialist regimes. The only faction of the Right that came out with an outright opposition to the IMF was the far right tendency of István Csurka. However, they interpreted the situation within the context of a world wide Jewish-Bolshevik-liberal conspiracy against Hungary. This methodology guaranteed that their extremist opinion remained without significant influence, and also discouraged many others to criticize the Bretton Woods institutions.

The 1995 stabilization package was implemented after a long period of disputes between the IMF leadership and the Hungarian government. However, the public and the social partners were not told about the details, or even the existence, of this debate. Prime Minister Gyula Horn, as it can be read in his memoirs, deliberately isolated the information about his talks with the IMF from the trade unions. However, when the government eventually embarked on the stabilization program, the IMF refused to sign a stand-by, and only provided that facility when the success of the heterodox stabilization was already fact, and Hungary did not need the stand-by funding any longer.

Hungary closed the decade of transition as one of the relatively more successful East European economies. Her relative success that distinguishes her from the most unfortunate nations of the region are partly due to the fact that economic reforms were on the political agenda well before 1989, partly in collaboration with the IMF and the World Bank. Thus the economic agents of Hungary were not unprepared for market transition when the time came. However, the IMF and also the World Bank are to a great extent responsible for the fact that the economic performance of the transition countries turned out to be much lower than popular expectations, professional forecasts and political promises indicated at the beginning of the transition. In the late 1990s, the World Bank exposed itself to systematic criticism under the auspices of SAPRI (Structural Adjustment Participatory Review Initiative). This project highlighted a number of mistakes in the World Bank policies in Hungary, and found the whole paradigm of the Washington consensus problematic. Such a review has not yet been carried out with the IMF, although there would be a lot to discuss.

The Hungarian debt crisis and the involvement of the IMF in that offers some lessons for our times as well. In 1994, the budget deficit was approaching ten per cent of the GDP. The IMF, and its managing director, Michel Camdessus personally demanded a cut to three per cent of the GDP. In his memoirs, prime minister Gyula Horn comments this demand by saying: „had we fulfilled this demand, it would have amounted to a natural disaster”. Horn’s thesis can be applied to the financial situation of Hungary in 2002. The budget deficit is approaching ten per cent of the GDP, even if one third of this ratio comes from accountancy, and not economics. Some economists demand the government to cut the deficit to three per cent of the GDP immediately, and to zero per cent afterwards. We can, however, quote Gyula Horn: had we fulfilled this demand in 2002 or 2003, it would have amounted to a natural disaster. The only reason for the Hungarian economy growing by 3.5 per cent annually in 2002 is that neither the IMF nor the EMU forces us into a macroeconomic straight jacket. The transitory situation of the Hungarian economy between the realm of the IMF and that of the EMU allowed us to escape the tough consequences of the current world economic recession. The IMF may have an opinion about the finances of Hungary, but they do not have a say in those. At the same time, the increasing likelihood of EU accession improves the market evaluation of Hungary—at least with Moody’s—in spite of the apparently deteriorating macroeconomic indicators.

László Andor is Associate Professor  at the Budapest University of Economic Sciences and Public Administration. He can be contacted on