Structural change without trust: Reform cycles in Hungary and Slovakia

The recent admission of Slovakia into the Economic and Monetary Union (EMU) stands in sharp contrast with the considerable difficulties faced by Hungary with the fulfillment of the Maastricht criteria. This is a puzzling development for two reasons: first, during the early phase of the transition process Hungary was way ahead of Slovakia, and second, the high level of political polarization and general public disillusionment is a shared characteristic of the two countries and not conducive to reforms in either case. In order to address these puzzles a theoretical framework is developed examining the conditions of structural reforms in a low-trust environment, where promises about long-term benefits for short-term costs are not believed. After the identification of potential factors that can overcome the gap in credibility, the theoretical framework is applied to the transition history of the two countries. Based on this comparative analysis it is shown that in a both cases reform cycles rather than sustainable progress can be observed. The main conclusion of the analysis is that their current differences can be explained partly by their different position in the reform cycle and partly by the longer rule of reformers in Slovakia. This implies that in the absence of an elite consensus on continuing the reforms, the current success of Slovakia might prove temporary similarly to that of Hungary in the 1990s. The loss of an external disciplining force after Slovakia's recent admission into the EMU increases the chances of such development.