In the 1950s and 1960s, economic theory tended to regard maximum growth as the best available policy to overcome poverty and alleviate a variety of social strains. Following the oil price hikes of 1973 and 1979, as well as evidence of potential environmental problems, both theories and policies have changed. It has been demonstrated at both levels that maximising growth is not only harmful to a nation's financial health, but can also be economically costly. If an environmental and urbanisation crisis emerges and the physical infrastructure does not meet the needs of a mature and increasingly complex, expanding economy, the result can be costly. This sometimes forgotten point has been reinforced by the recent crises in south-east Asia.

It is no coincidence that, in overcoming their transformational recession, Central European countries have once again been carried away by an old-fashioned growth euphoria.

The slogan 'The bigger the better' has been revived. Poland has nearly doubled its Gross Domestic Product (GDP) after only a decade, and the four per cent growth registered by Hungary prompted some officials and policymakers to make similar five to seven per cent growth forecasts for Hungary as well.

In the Czech Republic the structural weaknesses of the system of financial intermediation, the inadequacy of financial regulation and transparency, and the sluggish pace of industrial restructuring, often criticised by leading Czech experts, did not make headlines until the April 1997 adjustment package nearly stalled GDP growth. It is possible to read a lot about the Czech crisis, although many of the regulatory loopholes have since been closed and the current account adjustment has proved to be reasonably successful. In sum, short-term growth indicators are of limited value - they did not anticipate the Albanian or Romanian crises of 1997 either.

If this is the case, sweeping judgments should not be made on the basis of a few selected macro-indicators. The leading Central European reform countries should not be called the 'tiger economies' of the late 1990s, since that might not sound terribly convincing or even appealing these days. Moreover, the theory of sustainable rather than maximum growth should be taken more seriously.

Most of all, the childish 'the bigger, the better' approach should be jettisoned in favour of a more sophisticated one. Even in pure growth terms it is surely not the maximum which will generate sustained (ie, five to ten year) growth. Current account equilibrium consideration has to be taken seriously, or else the international capital markets will correct the exaggerated scale of the developmental policies, as they did in Indonesia and Malaysia. But the question of social equilibrium also needs to be taken seriously. Albania is only an extreme case of a more generally valid point, namely that social acceptance of 'otherwise sound' policies can and does matter. The palpable slowdown of the Romanian reform and privatisation process since August 1997 is yet another example.

In this broader perspective one may well be content with the Hungarian growth rate of four per cent for 1997 and the foreseeable 4.5 to five per cent for 1998-99. This growth could, in theory, be accelerated if, for instance, the rate of investments actually reaches 27 per cent or more as forecast by the fiscal authority by the end of the 1990s. However, it is unlikely that, following a decade of stagnation, domestic demand could or should remain frozen.

Among other things, Hungary's suitability as an investment spot may depend on the expansion of the small and medium-sized business, both as sub-contractors and providers of services of various sorts. The latter may expand only if domestic demand also recovers, ie, if a part of the newly generated income trickles down to local producers and consumers. Furthermore, in this period of austerity, several elements of physical infrastructure and public service have suffered from under-investment. These need to be recovered, even at the cost of limiting productive investments in order to prevent the emergence of the bottlenecks witnessed in the overheated 'tiger economies' of Asia.

One of the positive features of Hungary's boom in 1997 was that, for the first time in 40 years, it has not led to the deterioration of the current account. In fact, the deficit of US$987 million was less than half of the $2.5 billion in foreign investments. Exports, registering an increase of more than 20 per cent for the third year running, reached $19.6 billion, more than three times the 1980s average. Forty-four per cent of these sales stemmed from the engineering sector, which is about twice the corresponding Czech and Polish figure and is actually above the Spanish and Portuguese levels.

This figure is important for two reasons. First, it reflects the very big leaps microeconomic restructuring has made during the decade. This is a more relevant indicator than the plan-overfulfillment reports on privatisation, where the precise business meaning of private property is often less than trivial. Second, it is a reflection of the microeconomic integration that is already well underway. Making use of the gradual but sustaining market opening provided by the European Agreements, Hungarian producers made enormous advances into European Union (EU) markets. Moreover, they are doing it not out of their own initiative, but as part of international business networks. In other words, from a business perspective, in many sectors Hungary is already a de facto member of the EU. Conversely, the strong presence of the EU banks in the Hungarian banking and insurance sector is a guarantee against any possible statistic distortion of resource allocation at the macroeconomic level. Therefore, the necessary institutional conditions for a continuation of the 1997-1998 growth seem guaranteed. The country's growth prospects are not at all dependent on the outcome of the 1998 parliamentary election and this is probably the best news for any investor.

Does this mean that public policy in general is irrelevant for assessing growth prospects? Certainly not.

Hungary is still struggling with a notorious general government deficit, which (except for 1995) has never been close to the magic three per cent. Moreover, it cannot detect any progress in convergence towards the Maastricht criteria. This is bad news, even if the 1998 figure of 4.9 per cent implies only a moderate softening of the fiscal stance (by a declining primary surplus), which is anything but surprising in an election year.

However, if prosperous years are not used for fiscal adjustment, difficult years will be even less suitable. Furthermore, inflation stood at an unacceptably high 18.4 per cent in 1997. At the end of the year, producer price indices exceeded those of consumer prices. Interest rates have stopped declining since November. Inflation may well remain at palpably higher levels than the ones envisaged by monetary and fiscal policy guidelines, as both wage settlements and pension promises remain above the levels underlying the 13 per cent target. Bringing inflation down is a pre-condition for decreasing the pre-announced crawling-peg. Attempts to do it the other way around are poorly founded, as inflation is not an independent variable to be calibrated by a central fiscal or planning agency. The same is true of widening rather than narrowing the forint's fluctuation range, which would cushion the exchange rate from fluctuations and short-term speculative effects.

Another weak point of the fiscal stance is the high implicit commitments, primarily in the health and pension schemes. Furthermore, the state administration is nowhere near as lean as it should be; one million people are employed in the civil service, whereas as much as a decade ago 1.5 million jobs were lost in the competitive sector. In other words, a continuation of vigorous further reforms are required even if the purpose of this exercise is not to produce immediate fiscal relief, as was the case in the 1995 adjustment package.

These reforms which affect the public sector will certainly not be fully offset by the promising trends on the labour market. The rate of unemployment, calculated by the Central Statistical Office according to internationally standardised methodology, stood at 8.7 per cent in December 1997. More important than the number itself is the deceleration in this indicator. In other words, even with a moderately recovering economic activity, Hungary, as one of the very few remaining textbook economies, has been able to create more jobs. In contrast to the Spanish, French or Finnish experience, this is truly remarkable.

In Hungary the labour market is fully flexible, which demonstrates that the nexus between growth and employment has not been broken. According to recent studies by the Institute of Economics, foreign investments figure high among those creating employment. In reality employment may well be under-reported, as the very high public dues on the payroll (a consolidated tax burden of 70 per cent) have pushed much of the new employment into the irregular sector or into irregular and other tax-saving forms.

Under this angle the macro-sustainability of the Hungarian boom seems to be secured. Unemployment is much more of a regional and retraining problem than an overall social threat.

The advent of the single currency in the EU may provide the necessary lure and educational incentive for those sound policies to survive. How much of these projections will actually materialise, only time will tell. But the road that would lead to sustainable growth is open and public policy faces no immediate obstacles to it. The major danger is reform fatigue or complacency, which may well emerge after a landslide victory at the polls.