STRATEGIC MANAGEMENT8. National economic policy

Situation of the Hungarian economyTrust in forecasts

It is impossible to manage an enterprise without understanding the national

economic policy.

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Introduction

In accordance with the classic theories the five main spheres which can influence the firms’ competitiveness are: rivalry amongst established firms, change of strategies of suppliers and buyers, threats of new entrants and substitute products (M. Porter). All these are actors (elements) of the micro economy.

Micro economic actors can be influenced however by the economic policy as well (figure).

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3

Economic system

families firms

state

manpower, money

wages, products

Source: own figure based on many publications

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Main goals of an economic policyTheories often stated that the main goal of an

economic policy is the welfare of the nation.According to the new views the welfare of a

nation is determined by its competitiveness. This can be measured by the GDP per capita (M. Porter).

GDP: national income, sum of firms’ value added. Its main elements are the income of families (wages), firms (profit) and state (taxes).

Some researches stated however that often the main goal of politicians is to create good circumstances to their re-election.

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Porter analysed 120 successful industries in 10 countries. He stated that the determinants of the countries’ success are on one hand the micro economic base (effectiveness of firm’s functioning, e.g. the productivity), but, on the other, it influenced also /3/ by the macro economic environment, and /4/ the micro economic business environment as well.

The traditional factors (sources) of GDP growth are /1/ the level of employment and /2/ firm’s productivity.

An economic policy have to influence the environmental determinants first of all.

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Tools of an economic policyIt is difficult to clarify, what are the elements of an

economic environment. Nobody discuss however that some important elements of it are the four classic tools of the regulation (and an economic policy), so,

• the monetary, • fiscal, • foreign trade and • social policies (see P. A. Samuelson). The utilisation of the above tools has manifold

effects to the economy. 6

Monetary and fiscal policies regulate the volume of money. Main tools of the first are the influencing the obligatory reserves’ rate, open market operations, and the influencing of discount rates. A fiscal policy fixes the budget (taxes and state expenses). Foreign trade policy fixes customs duties and influence the exchange rate. Main task of a social policy is the decrease of social inequalities (e.g. with creation of a good systems of pensions and public health).

Sometimes the utilisation of the above tools needs great prudence (e.g. the Laffer curve, see the next slide).

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The Laffer curve

Revenue from taxation

Rate of tax, %

100

Maximum

Own figure based on many publications

With the help of the monetary and fiscal policies the central bank can influence the business cycles.

There are three type of important economic cycles. Period of the long-range, or Kondrateff cycles can be 40-50 years, the business cycles are 6-10 years long, and length of some cycles is only 1-2 days.

The causes of different cycles are much debated topics. But all experts are agree that the cycle regulation is very important.

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The renewed views stated, that in the modern economy some new elements of an economic policy are important as well. Notably:

• Some global tools, e.g. the improvement of the institutional framework (business environment) of firms’ functioning can be very effective.The institutional framework is effective, if „transaction” costs of production is minimal (see Coase).

• But politicians often use some selective tools (e.g. subventions of the SMEs, branches) too.

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Main elements of an institutional (business) environment are /1/ property and contractual rights, /2/ traditional behaviour of economic actors, /3/ economic policy, /4/ and the educational system. Economic policy can (globally) influence these elements.

• Property and contractual rights – and the real possibilities of law enforcement – determine key elements of firms’ functioning. In case of their mistakes the bureaucracy (so, the transaction costs) can be too high or the business risks are not acceptable for a fair firm.

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• Firms’ behaviour – if it is fair - can compensate the lack, or mistakes of some laws. In a reversed case, e.g. in case of illegal competition the real value of the correct laws is nothing.

• The businesslike and predictable cycle regulation and the strict control of enterprise behaviour – or, their reverse, the high bureaucracy and corruption - have great influence to the economic environment too.

Corruption is the misuse of public power for private benefit (if in the abuse there are minimum two stakeholders).

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Because of the great losses caused by corruption all over the world, a main goal of many international organisations (e.g. UN, World Bank, EU) is to fight against it.

Corruption is frequent in construction; sometimes collapsing buildings kill people. Under its influence costs of an investment can double, entrepreneurial risks increase, FDI decrease etc.

Transparency International (TI) has pioneered the measurement of the level of corruption all over the world. Since 1995 it has published many Reports on the results. They stated the strict relations between the level of corruption and GDP too (figure).

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A korrupció és a GDP szintje

0

1

2

3

4

5

6

7

8

9

10

0 10000 20000 30000 40000 50000 60000 70000

GDP/ fő, USD

CP

I, p

on

t

LU

US

HU

DE

RU

Forrás: GDP: IMD, 2007. CPI: TI, 2007

Levels of corruption and GDP

GDP per capita, USD

CP I, point

Source: GDP: IMD (2007), CPI: TI (2007)

• Often the development of the system of education is an effective global tool of the economic policy too. It forms competitive labour for the national economy. But it can help the resolution of other problems, like the fighting against the corruption as well.

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Some selective tools also can help the realisation of the economic policy. E.g.:

• SME sphere can support by the control of monopolies. If it is impossible to liquidate a monopole position (e.g. in case of electricity services), the EU offer the creation of an contestable (attackable) market (the entry of new firms in the given market).

• Sometimes the economic policy has to support innovations, e.g. the formation of new branches (the distribution of the IT application etc.) as well.

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Situation of the Hungarian economyHungary is a catching-up economy (as it was

mentioned, its GDP/capita is low).Today it is the entry from a crisis (in 2009 the „growth”

was minus 7%, in 2010 and 2011 it was 1%).

The main problem is, that in spite of the high taxes ant the everyday stability programs, the deficit of the government balance is high (forecasting of which is difficult as well). It increases the indebtedness of the country (which is high).

The foreign indebtedness is also high, aldough nowadays the current account balance is positive.

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Some great problems of the Hungarian economy are „structural” ones. I can mention the low activity rate, the small number of graduates and innovative firms.

The problems of business environment, the lack of the good development plans, the costly bureaucracy, the high taxes, the corruption etc. are very hard too.

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Trust in forecasts

GKI Economic Research Co. has prepared economic forecasts since 1968. Their main goal is the forecasting of the business cycles.

Today our forecasts are as follows:• brief monthly forecasts (see: www.gki.hu) on the

expected processes of the given year, 12 in a year, • Detailed forecasts on the processes of the given year,

four times a year,• in June and December, forecasts about the expected

processes of the next 3 years.

The most important sources for the forecasts of GKI Co. are

(1) global and national statistical trends, (2) the information of business cycle reports, (3) the half yearly surveys on the expectations and

economic prospects of enterprises and (4) the information considering the aims of the

government.

The monthly forecasts of GKI Co. are based on the short term corporate expectations about economic processes measured with the help of EU-harmonised enterprise surveys. The survey results constitute coinciding information (next slide).

On the reliability of monthly surveys

90,0%

95,0%

100,0%

105,0%

110,0%

115,0%

120,0%

125,0%

130,0%

1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4 5 6 7 8 9 10

11 12 1 2 3 4

1996 1997 1998 1999 2000 2001 2002 2003 2004

-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

survey results (3 month moving average) volume index of production (3 month moving average)

Source: K. Németné Pál

GKI forecasts the most important economic indicators of a particular year six times:

• in October and December of the preceding year; and

• in March, May, October and December of the given year.

The forecasts examine (1) the possible trends of GDP growth, (2) expected demand (domestic consumption and export), (3) the expected supply (value added in the major branches and import), (4) the perspectives of the internal and external financial equilibriums.

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The forcasts’ control should evaluate the following two different coherencies:

• the size (mean and dispersion) of estimats’ errors

• the concordance (correlations) between the trends of the forecasts and the facts (statistics).

Annual forecasts for the GDP (the pace of expected economic growth) published from 1994 to 2011 turned out to be quite reliable (see the next slide), aldough in 2007-2008 GKI do not forecasts the crisis.

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Forecasted dynamic of GDP and the statisticsPercent, previous year = 100 %

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A relatively favourable (but not as favourable as previously) picture can be given about the reliability of forecasts between 1995 and 2011 on the market conditions of economic growth (first of all on the future consumption; the forcasts of investments are not so good).

At the same time, GKI’s estimations are quite moderately reliable for the production of the most important branches (see data of the industrial forecasting on the next slide).

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Forecasted dynamics of industrial value added and the statistics, percent, previous year = 100 %

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Inflation forecasts are very accurate (see the next slide).

It must be mentioned however that GKI Co.’s forecasts concerning the internal and external financial equilibrium of the Hungarian economy were often not accurate enough in the examined period (see the slide).

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Inflation’s forecasts and the statistics, percent, previous year = 100 %

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Balance of current accout’s forecasts and statisticsBillion euros

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GKI Co.’s longer term forecasts are based partly on the examined statistical trends, partly on information about the expected changes of corporate strategies and economic policy aims.

It seems however, that our forecasting capabilities today are not enough to give reliable enough long-term forecasts (see the next slide).

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GDP statistics and medium-term GDP forecasts (1993 = 100%)

0,9

1

1,1

1,2

1,3

1,4

1,5

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

actual 1 year forecast 1,5 years forecast 2 years forecast

2,5 years forecast 3 years forecast 3,5 years forecast

%

Thank you for your attention!

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