Decentralization and structural adjustment in Hungary

Hungary has gone through a radical structural change after the fall of the socialist block in Central-Eastern Europe. Two basic processes dominated the transition: privatization and decentralization. The Hungarian experiences have given evidence that political decentralization of the state sector can have a substantial contribution to an efficient economic adjustment in the transitional recession. Local governments under fiscal pressure enjoying broad expenditure autonomy have chosen the level and the form of public service provision which resulted in huge advantages both at macro and micro level. However, the Hungarian experiences show that the political, fiscal and administrative decentralization is a process with conflicts between different stakeholders. The sector ministries, the local government associations, different types of the local governments (small towns, big cities, the capital Budapest), and sect oral business groups (like service providers etc.) have different interest in the intergovernmental relations. The process of decentralisation has not been finished and in certain areas even a move towards centralization can be detected. The process of Hungarian decentralization has been burdened with several conflicts related to the typical weak and sensitive points of the intergovernmental relations: fragmentations, unfunded mandates, unclear expenditure assignments, moral hazard, incentives and deficit grant, equity issue and equalization grants, etc. The badly designed instruments (like grants, laws, etc) have incurred a social cost on the transition, but this has not outweighed the benefits of the decentralization. The three key elements of the process are 1. the democratic election of the local self-government; 2. substantial expenditure responsibility and autonomy, 3. hard-budget constraints on the independent local budgets. In Hungary from 1990 the law has provided these key elements of successful decentralization. The local governments expenditures have been deducted by 10 % between 1991 and 2000 in real value, while in the level and the scope of services provided has not been decreased. However, the country missed important elements of a well functioning system, like trained central and local administration, modern accounting system, tradition of public participation, a well developed statistical system, institution of objective auditing, practice of local budgetary and financial management, etc. Hungary has learned a lot in the past 10-12 years, and it is t ime to start a modernization of the intergovernmental fiscal relations based on the experiences and the expectations of the EU accession.