“Do Institutions Really Matter?” – a blog post and a reaction


Hereunder we publish an article by Professor Francis Fukuyama and an open letter which was written by Dr. Zoltán Kovács (State Secretary for Government Communication) as a reply.  Do Institutions Really Matter?
(by Francis Fukuyama)

Over the past decade the mantra in both development studies and comparative politics has been “institutions matter”—that is, you aren’t going to get economic growth or other human development objectives in the absence of institutions like rule of law, transparent and accountable governments, low levels of corruption, and the like.

The empirical basis for this assertion is actually much weaker than many of us would like to think, however. Plenty of countries, beginning with China, have grown very rapidly over the past generation in the absence of what is now called “good governance.” Indeed, the US and Britain charted the industrial revolution with governments that were substantially more corrupt and less capable than they are today.

The questionable relevance of institutions is brought home by the controversy over Hungary’s new constitution, which went into effect on January 1, and which has caused a firestorm of criticism in the European parliament and elsewhere. The document was the product of the electoral victory of Viktor Orbán and his conservative Fidesz party, which since 2010 has controlled more than 2/3s of the seats in the Hungarian Diet and has thus been able to change the Hungarian constitution.

The new constitution weighs in on a number of social issues, for instance by defining life as beginning with conception and marriage as between a man and a woman. Rick Santorum would like this constitution, and part of the criticism from the European left concerns these social issues. While they do not represent my personal preferences, that’s not what bothers me; it seems to me the Hungarians have the right to decide for themselves what positions to take on these issues.

The much bigger threat raised by the Orbán constitution is the weakening institutional checks on executive power, such as the lowering of the retirement age for Constitutional Court judges, eliminating the independence of the Central Bank, and grabbing control of the media regulator, changing the electoral laws to benefit Fidesz, and inserting a series of provisions to weaken legislative control over the budget.

The point about institutions not mattering is this. In terms of the formal powers the new constitution grants the Hungarian executive, they are not greater than those traditionally possessed by a British prime minister. The Bank of England became independent only in 1998; there is no British constitutional court and therefore no judicial checks on legislative power; not just 2/3s but a fifty percent plus one majority in the House of Commons is sufficient to overturn any law in the land, including any protecting England’s fabled press freedoms.

So the real difference between Hungary under Orbán and classic British governments does not lie in the formal allocation of powers in the political system. The problem lies entirely in how those powers are used: nobody trusts Viktor Orbán and Fidesz to use their powers responsibly, as evidenced in the way that the government rammed the constitution itself through the Diet last year, with little willingness to give ground on issues of grave concern to important parts of Hungarian society. Orbán’s behavior betrays an authoritarian thin skin that would rather ban opposition than engage with it. The very act of using Fidesz’s supermajority to embed its policy preferences in the constitution can also be seen as an abuse of power: if it is voted out in the future, a government replacing Fidesz will need a supermajority to change things like the tax rate or the rules on gay marriage which ought to be matters for ordinary legislation.

By contrast, the “democratic dictatorship” constituted by the Westminster system has worked in English history because of the underlying moderation of English politics: while some may have been tempted, few prime ministers have sought to use their majorities to, for example, shut down the opposition press. The new Hungarian constitution is bad not so much for what it is, but what it reveals about the long-term proclivities of its authors.

There are two potential lessons to be drawn from this. First, in contemporary Europe, some of the most important institutional checks on power are those exercised by the EU and the broader international community, rather than anything within Hungary itself. Orbán has made a mess of Hungary’s economy, and he is being called on the carpet by the European parliament, the Commission, the IMF, and a host of other international bodies. This enforcement of democratic norms is one of the important functions that the EU and other international bodies play today.

Second, I wonder about the ultimate utility of tinkering with institutional rules that either add or subtract checks and balances to existing democratic systems. If the political will exists to do something even in a system with a lot of veto players, it will happen; conversely, bad actors can undo even the best-designed institutions. Maybe institutions don’t matter, after all.

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The reply
(by Dr. Zoltán Kovács)

Dear Sir,

Last week you published an article by Francis Fukuyama on your website (“Do Institutions Really Matter?” January 23, 2012). Factual accuracy is a prerequisite for accurate reasoning. As some of Professor Fukuyama’s facts were inaccurate, so too was some of his reasoning.

Firstly, the retirement age of Constitutional Court judges remains unchanged under the new Constitution. With the introduction of a new general rule for the retirement of those holding public office (including “ordinary” judges), special rules for the Constitutional Court and for its judges remain intact. Secondly, although we are currently involved in the process of legal argument with the European Commission, it has not ruled that the Hungarian government is infringing the independence of the Central Bank, let alone “eliminating” it. Thirdly, concerning constitutional control over the budget, the truth is the exact opposite of what Professor Fukuyama states: with the introduction of the national dept “cap” we are not weakening control, but strengthening it.

Last but by no means least, a major inaccuracy undermines Professor Fukuyama’s reasoning on the new electoral law. It is important to emphasize that while the number of seats in the Hungarian Parliament will be halved at the next election, the so-called composite electoral system has been retained. The new electoral law in fact makes it easier for candidates to stand. Furthermore, it makes no sense to talk about the Government “changing the electoral law to benefit Fidesz,” since the 2010 results were completely atypical. In addition, besides winning 53% of the votes cast, Fidesz won a majority in 173 out of 176 individual constituencies. Imagine this result in a “winner takes all” system, as found in the UK or the US! Above all, in democracies elections are decided by the votes of the citizens, not by the specifics of any particular election system.

We respect critical opinion and welcome fair criticism, but it is disturbing to see such an eminent thinker basing his arguments concerning Hungary on factual errors. We shall nevertheless continue to read Professor Fukuyama’s contributions with interest, confident that they will prove as useful in understanding our contemporary world as they have proven to be in the past.

Yours sincerely,

Zoltán Kovács, Ph.D.
State Secretary for Government Communication


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Professor Fukuyama’s blog post was originally posted on January 23, 2012 at http://www.the-american-interest.com and the Editors got Dr. Kovács’s reply on February 3, 2012.

1 thought on ““Do Institutions Really Matter?” – a blog post and a reaction

  1. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    In short, the so-called “mother of all bailouts,” which will transfer $700 billion taxpayer dollars to purchase the distressed assets of several failed financial institutions, will be conducted in a manner unchallengeable by courts and ungovernable by the People’s duly sworn representatives. All decision-making power will be consolidated into the Executive Branch – who, we remind you, will have the incentive to act upon this privilege as quickly as possible, before they leave office. The measure will run up the budget deficit by a significant amount, with no guarantee of recouping the outlay, and no fundamental means of holding those who fail to do so accountable.

    Is this starting to sound familiar? Robert Kuttner cuts through much of the gloss in an article in today’s American Prospect:

    The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street’s dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson — a provision that evokes the Bush administration’s suspension of normal constitutional safeguards in its conduct of foreign policy and national security. …

    The differences between this proposed bailout and the three closest historical equivalents are immense. When the Reconstruction Finance Corporation of the 1930s pumped a total of $35 billion into U.S. corporations and financial institutions, there was close government supervision and quid pro quos at every step of the way. Much of the time, the RFC became a preferred shareholder, and often appointed board members. The Home Owners Loan Corporation, which eventually refinanced one in five mortgage loans, did not operate to bail out banks but to save homeowners. And the Resolution Trust Corporation of the 1980s, created to mop up the damage of the first speculative mortgage meltdown, the S&L collapse, did not pump in money to rescue bad investments; it sorted out good assets from bad after the fact, and made sure to purge bad executives as well as bad loans. And all three of these historic cases of public recapitalization were done without suspending judicial review.

    Kuttner’s opposition here is perhaps the strongest language I’ve seen used, pushing back on this piece of legislation, in any publication of repute, and even here, Section 8 is not cited by name or by content. McClatchy Newspapers also alludes to Section 8 with concern, citing the “unfettered authority” that Paulson would be granted, and noting that the “law also would preclude court review of steps Paulson might take, something Joshua Rosner, managing director of economic researcher Graham Fisher & Co. in New York, said could be used to mask previous illegal activity.” Jack Balkin also gives the matter the sort of attention it deserves on his blog, Balkinization.

    But elsewhere, the conversation is muted. The debate over whether Congress is going to pass the Paulson bailout package, or pass the Paulson bailout package really hard seems to have boiled down to a discussion of time and concessions. The White House has made it clear that they want this package passed yesterday. Congressional Democrats seem to be of different minds on the matter, with some pushing back hard, and others content to demand a small dollop of turd polish to make the package seem more aesthetically pleasing, at which point, they’ll likely roll over and pass the bill. Neither candidate, John McCain or Barack Obama, seem all that amenable toward the bailout, but neither have either demonstrated that they are willing to risk their candidacies to do much more than exploit the issue for electoral purposes.

    Sunday morning came and went, with Paulson traipsing dutifully from studio to studio, facing nary a question on Section 8. Front page articles in the New York Times, Washington Post, and the Wall Street Journal detail the wranglings, but make no mention of this section of the legislation. On TV, cable news networks are stuck in the fog of the ongoing presidential campaign.

    Throughout the coverage, one catches a whiff of what seems like substantive pushback on this power grab, but it largely amounts to a facsimile of journalistic diligence. Most note, in general terms, that the bailout represents a set of “broad powers” that will be granted to the Department of the Treasury. Yet the coverage offsets these concern

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