Did state socialism have an (unfinanceable) welfare state?
Historians and social policy experts will most likely be arguing for a long time about whether Soviet-style planned economies were, in fact, welfare states. What is certain is that they provided free education for all at every level, free healthcare, maternity benefits and old age pensions, as well as heavily subsidised housing. In all of these aspects, they closely resembled Western European welfare states. (There were no unemployment benefits or anti-poverty transfers, of course, because officially these phenomena did not exist in a “socialist” state.) A quarter of a century ago, the dominant view of transition was that these systems were unfinanceable and had to be downscaled. In the famous words of Hungarian Harvard economist János Kornai, Eastern bloc countries had “premature welfare states”.
Kornai’s claim was taken for granted, with only weak protests from the then-emergent and still feeble social policy profession, most notably Professor Zsuzsa Ferge. This is all the more surprising considering that the claim does not stand an empirical test. At around this time, Hungary was spending far less on social expenditure in an international comparison, although higher spending would have been justified considering the large ratio of old and unhealthy citizens, as well as the extremely low employment rate that emerged from the cloud of transition. In 1990, Hungary was spending no more than 18.4% of its GDP on social expenditure, in contrast to 22.7% in West Germany, 23.4% in Italy, 24.8% in Austria, 18.5% in Holland and a whopping 35.9% in Sweden. Hungary was definitely not a huge spender, but could the country afford even this diminutive amount of spending? Opponents of the welfare state would claim it could not.
The “premature welfare state” was accused of preventing the efficient operation of the market. The issue of state versus market, according to dominant theory, posits that these two areas are inevitably in conflict – either one or the other must be chosen. The mainstream response of domestic economic policy-makers in recent decades has emphasized the drastic reduction of the welfare state as, in their view, state interference tends to suppress market effectiveness.
State socialist Hungary had accumulated an enormous debt burden, demonstrating how “an unsustainable level of welfare” had been financed from foreign borrowing. But is this really true? Journalist Attila Mong recently published a well-researched book on the accumulation of “Kádár’s debt”, named after János Kádár, the long-time party secretary of the 1956-1988 era. Mong demonstrates how this debt had in fact not been spent on consumption, but on the party leadership’s desperate attempts to invest in gigantic projects, ranging from oil and coal to hydroelectricity to agricultural modernisation, which were expected to yield badly needed hard currency. Despite claims to the contrary, the growth of final consumption remained significantly below GDP growth for almost all of this period.
Liberals still believe and often scornfully repeat that Hungarians wanted a Scandinavian welfare state without having to pay taxes. The first half of the sentence is true. Contemporary representative research by Tárki showed that most Hungarians around the time of transition would indeed have preferred to keep the welfare state; they saw it as a civilisational achievement, perhaps the most important heritage of an otherwise repressive system that they were happy to leave behind. It had created never before seen equality and provided opportunities for mobility. Hungarians expected politicians in the new era to find the tax resources to finance this valuable system.
Neoliberal ideology had a strong influence on the transition, however. Governments considered the broadening of social inequalities to be a necessary consequence of transition. It was also regarded as economically incentivising, since unemployment would create a new situation in which wages were forced to adapt to changing market conditions. However, these enormous social changes, together with the under-performing economy, destroyed the social fabric before it was able to adapt to the new market conditions. This process could not be adequately mitigated by a welfare system lacking in resources. It was simply unable to shoulder social burdens, the consequences of which are clearly visible today.
Post-socialism certainly did not have a welfare state
Nevertheless, these same politicians shied away from taxing wealth, high incomes, inheritance, capital, environmental degradation and the like. Instead, they began to dismantle the welfare state, with catastrophic effects. By 2009, Hungary (along with the rest of the Visegrad region) was one of the lowest spenders in the European Union in terms of social expenditure. In that year Hungary spent just 23.5% of its GDP on social policy, according to the European Union’s social protection database, and other countries of the region even less (CZ 20.4%, PL 19.7%, SK 18.8%), compared to a European Union average of 30.3%. Mediterranean countries, traditionally believed to operate only a reticent welfare regime, were also already ahead (ESP 25%, Portugal 26.9%, Italy 29.8%), not to mention full-fledged Scandinavian welfare states (SW 32.1%, DK 33.4%). This comparison is all the more surprising given that Hungary has a very aged population, one of the lowest employment rates in the EU, and some of the worst general social and health status indicators. Moreover, the rate of wage increase has consistently been below the rate of GDP growth, burdening social benefits and services. Social expenditure per person amounted to €3,478 in purchasing power parity, whereas it was twice or three times as much in Western Europe. Two decades after transition, four million people, or two-fifths of the population, had an income lower than the subsistence minimum according to the Central Statistical Office. In effect, these people found it impossible to meet even their most basic physical needs. The problem of caring for the homeless has also never been solved in a satisfactory manner.
According to current Eurostat figures, the number of people living in poverty in Hungary has increased by 500,000 in the last five years. Today, 3.285 million people (33.5% of the population) are regarded as poor. Among them approximately 350,000 – 460,000 adults have no regular and legal income. In order to prevent social groups from sinking, an effective redistribution system which targets the lower layers of society is needed.
As if low overall spending was not bad enough, the redistributive effects of the Hungarian welfare state are also deeply disturbing. Rather than funds being channelled from the rich to the needy, by 2009 taxation and social spending had resulted in the flow of resources from the lowest tenths of society to the highest tenths! This is what eminent social policy Zsuzsa Ferge has called “a perverted redistribution”; a social redistributive system that channels resources from low- to high-income families cannot be called a welfare state, even if it formally bears that name.
It is perhaps worth briefly discussing one more dimension of the Hungarian welfare state: that of education. According to research in recent decades, the growing differentiation of the school system runs in parallel with the increasing inequality of life opportunities. On the basis of available research, it can be concluded that the structurally altered school system tends to preserve or even – from secondary education upwards – reduce the possibility of mobility for lower-income families. Research confirms that, within the school system, the real chances for further education are determined far more by social status than by individual skills or pedagogical work. In effect, the parents’ (mainly the father’s) educational background determines the child’s educational career. The location, size and facilities of schools must also be taken into consideration. According to research carried out by leading education expert Péter Radó, based on internationally comparable PISA data, 72% of the educational attainment of Hungarian students is determined by where their school is located. The respective figure for Finland is 8%. Thus even educational mobility has become all but closed.
In a resource-deprived society like Hungary, having a welfare state is crucial. Two-fifths of society are struggling to meet their physical needs. Another third are earning just enough to make it from one month to the next. People on average incomes, found at the seventh tenth of society counting from the bottom, live at a per capita level of welfare that is comparableto the lowest one or two tenths of Western European societies. Thus, only a very narrow top layer of Hungarian society is able to compete, develop a bourgeois business and civic ethos, engage in mobility, and remain independent of clientelistic networks and populism. This narrow layer is already at the top. The rest do not have the necessary private resources. As a consequence, their market-based rise, as imagined by neoliberals, is a wishful fantasy. As Gosta Esping Andersen reminds us, democracy is only possible with a wide middle class.
A desperate social situation leaves the nominal political left disaffected
Hungary has chosen the opposite direction. Measures taken in social policy, as well as economic processes during the last couple of decades, have created a social situation in which the gap between social layers has grown enormously. Tárki’s survey data warns us that, in parallel with the forming income inequalities, there is also a kind of income polarisation in society. According to the figures, there has been a significant increase in the depth of poverty as more and more people come to live in desperate circumstances. In the meantime, a narrow layer of society has emerged at the top in regards to wealth and income status. This also means that the middle class has noticeably shrunk and polarised accordingly. The majority of the middle class is heading downwards and a small layer is rising.
The nominal political left in Hungary has so far been disinterested in championing this cause. One sign of this is that they have no nationally-known politicians specializing in social policy and no accepted social policy programmes. Not surprisingly, outside observers are worried about the rise of the far right in Hungary. They have been the main political force taking on the issue of social injustice – in their own radical way, of course. As Walter Benjamin observes, the rise of the far right signals the failure of the left.