THE MACROECONOMIC PATH OF SUSTAINABLE CONVERGENCE
3 The macroeconomic path of sustainable convergence The convergence of the Hungarian economy restarted in 2013, accompanied by a robust, extensive growth period. One of the most important economic policy questions is whether Hungary’s convergence, which restarted in recent years along a balanced path, will continue in the future. Our Growth Report focuses on what macroeconomic and medium-level goals are needed for that to occur. In this chapter, the emphasis is on macroeconomic goals. During a country’s convergence process, various states of equilibrium are conceivable. A unique opportunity for the Hungarian economy after the 2010 economic policy turnaround that it can become a group of developed economies with reforms, while on the other hand, if reforms do not take place, it may become stuck in the so-called middle-income trap. Based on the principle of the multi-equilibrium approach, over the long run both paths can be considered as equilibrium paths. There are various studies on the reasons why certain economies get stuck in the status of medium development (e.g. low-quality human capital, lack of innovation, income disparities, financing difficulties, etc.) and why others are able to implement successful convergence. The countries that implemented successful convergence are rather heterogeneous and different in terms culture and geographical location as well. At the same time, application of advanced technology and operation with high economic efficiency are observed in the case of all successful converging economies. Accordingly, the conditions for exiting medium development include the realisation of this common feature, as well as efforts to avoid various traps. A sustainable macroeconomic path implemented as a result of a turn in productivity (reform path) and a scenario for comparison (middle-income trap) are outlined in this chapter. The reform path is the macroeconomic path of sustainable convergence taking place if the reforms are implemented. The other one is the middle-income trap path, resulting in Hungary’s remaining in the status of medium development if the competitiveness reforms fail to be implemented. Accordingly, this path also serves as a kind of benchmark. It is not possible to exit the status of medium development as an undesirable equilibrium by taking small steps: comprehensive measures are needed. In the case of Hungary, this means competitiveness reforms in the coming period. If such reforms are implemented, wages will nearly double in the next 10 years, and from the current 55 percent level, Hungary will reach 80 percent of the level of development of Austria. Looking ahead, the aim is to sustain organic economic growth, the main driving forces of which are a significant rise in real wages, robust economic growth, maintaining full employment and a considerable increase in capital intensity and productivity. With comprehensive reform measures, all of this can occur along an equilibrium path: a steady surplus is registered on the current account, a completely balanced budget is achievable and the government debt-to-GDP ratio declines significantly.
GROWTH REPORT • 2018
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