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The economics and politics of reform in Hungary

Published online by Cambridge University Press:  22 May 2009

Ellen Comisso  and
Paul Marer
Ellen Comisso
Affiliation:
Associate Professor of Political Science at the University of California, San Diego.
Paul Marer
Affiliation:
Professor of International Business at the School of Business, Indiana University, Bloomington.
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Abstract

Reform of the domestic economic system is the distinctive element of Hungary's foreign economic strategy in the 1980s. The need for systemic economic reform stems from Hungary's status as a small country, heavily dependent on foreign trade, many of whose imports can no longer be met within the Council for Mutual Economic Assistance alone. The many obstacles to economic reform lie in a heritage of policy choices that responded to domestic and CMEA supply constraints rather than to principles of comparative advantage. Such policies undercut the initial economic reform in 1968 and contributed to a major economic crisis in 1979–82. The subsequent changes in policy priorities and institutional mechanisms prompted by this crisis aimed to reduce Hungary's insulation from the larger international economy and make the economy more efficient. Politically, economic reform is possible in Hungary largely because of the impact of the 1956 revolt on both the subsequent composition of the political elite and the norms and features of collective leadership that guided its decision making afterwards. Nevertheless, the political and economic structures on which collective leadership rests weaken reform advocates and obstruct consistent implementation of their policy preferences. Yet Hungary's economic situation in the late 1970s altered the political balance offerees in favor of reformists, permitting them to alter both economic structures and policies.

Type
3. Economic Strategy inside the CMEA
Information
International Organization , Volume 40 , Issue 2 , Spring 1986 , pp. 421 - 454
Copyright
Copyright © The IO Foundation 1986

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References

1. Accounts of the pre-1956 period include Vali, Ferenc, Rift and Revolt in Hungary (Cambridge: Harvard University Press, 1961)Google Scholar; Zinner, Paul, Revolution in Hungary (New York: Columbia University Press, 1962)Google Scholar; Irving, David, Insurrection! Budapest 1956 (Paris: Albin & Michel, 1981)Google Scholar; and Kovrig, Bennet, Communism in Hungary (Stanford: Hoover Institution Press, 1979)Google Scholar. On the economic system see Kornai, János, Overcentralization in Economic Administration (Oxford: Oxford University Press, 1959)Google Scholar and Balassa, Bela, The Hungarian Experience in Economic Planning (New Haven: Yale University Press, 1959)Google Scholar.

2. Descriptions of the measures contained in the NEM are numerous. See Friss, István, ed., Reform of the Economic Mechanism in Hungary (Budapest: Akadémiai Kiadó, 1969)Google Scholar; Marer, Paul, “Economic Reform in Hungary: From Central Planning to Regulated Market,” in Joint Economic Committee, East European Economies: Slow Growth in the 1980s (Washington, D.C.: GPO, 1986)Google Scholar.

3. See Brown, Alan A. and Tardos, Márton, “Transmission and Response to External Economic Disturbances: Hungary,” in Neuberger, Egon and Tyson, Laura D'Andrea, eds., The Impact of International Economic Disturbances on the Soviet Union and Eastern Europe (Elmsford, N. Y.: Pergamon, 1980)Google Scholar.

4. See Hewett, Edward A., “The Hungarian Economy: Lessons of the 1970s and Prospects for the 1980s,” in Joint Economic Committee, East European Economic Assessment, vol. 1 (Washington, D.C.: GPO, 1981)Google Scholar.

5. See World Bank, Hungary: Economic Developments and Reform (Washington, D.C.: World Bank, 1984)Google Scholar, Table 3.3.

6. Ibid., Table 7.

7. See Paul Marer, “Hungary's Balance-of-Payments Crisis and Response, 1978–84,” in East European Economies: Slow Growth in the 1980's.

8. See Ron Miller and Dennis Barclay, “The East European Financial Situation and Debt,” in ibid.

9. The party's analysis of the 1956 revolt reveals the coexistence of “reformist” and “conservative” tendencies at the highest levels of the HSWP. Although the capture of reform initiatives by “counterrevolutionary” forces and the stalemate it provoked in the party were criticized, neither economic reform nor even the Nagy reform program per se were condemned. Nor was the traditional CPE rejected; rather only the “excesses” and “distortions” “subjectivism” in economic decision making had imposed upon it were condemned. These, in turn, were attributed to the politics of the “cult of personality” and not the CPE itself. Consequently advocacy of both the wider use of market mechanisms or central planning became acceptable stances within the HSWP. See Kovrig, , Communism, pp. 300–350Google Scholar; Robinson, William, The Pattern of Reform in Hungary (New York: Praeger, 1973), pp. 30–50Google Scholar.

10. On the police see Szász, Béla, Volunteers for the Gallows (London: Chatto & Windus, 1971)Google Scholar. In fact, the entire state administration was riddled with citadels of personal power often used to get rid of enemies and satisfy individual ambitions.

11. Interviews by Ellen Comisso, 1981–82, Hungary. See also “Milliárdos Fejlesztés—Gondokkal,” Figyelö, 4 March 1979, pp. 1, 3.

12. The literature on exceptionalism in Hungary is extensive. See Huszár, I., “Reflections on the 1979 National Economic Plan (Some Experiences of 1978),” Acta Oeconomica 22, nos. 1–2 (1979), pp. 1–9Google Scholar; Antal, László, Fejlődis-Kitérővel (Budapest: Penzügyi Kutatási Intézet, 1979)Google Scholar; Laky, Teréz, “Enterprises in Bargaining Position,” Acta Oeconomica 22, nos. 3–4 (1979), pp. 227–46Google Scholar; and Granick, David, Enterprise Guidance in Eastern Europe (Princeton: Princeton University Press, 1975), pp. 234–323Google Scholar.

13. Known political dissidents, however, do not find their rights so automatically protected—a sign that the “rule of law” in Hungary still does not rest so much on constitutional guarantees as on the political will of the HSWP to uphold it. See Szulc, Tad, “Hungary between Two Worlds,” New Republic, 16 10 1979, pp. 11–13Google Scholar.

14. “Previous activity” need not even be in the mass organization itself. The present head of the national trade union federation is the ex-minister of industry; the president of the Metalworkers' Union is the retired director of the Danube Steelworks.

15. For such a view see Portes, Richard, “Hungary: Economic Performance, Policy and Prospects,” in Joint Economic Committee, East European Economies Post-Helsinki, 95th Cong., 1st sess., 1977, p. 786Google Scholar; Robinson, , Reform in Hungary, pp. 310–45Google Scholar.

16. In “Hungary's Long-Term Social Evolution,” New Hungarian Quarterly 20 (1975), p. 88Google Scholar, Rudolf Andorka estimates that in 1975 half of the working class lived in villages. Labor turnover rose from 20% to 25% to 41% in 1970. See Rezler, Julius, “Recent Developments on the Hungarian Labor Market,” East European Quarterly (Summer 1976), pp. 255—67Google Scholar; and Révész, Gábor, “Enterprise and Plant Size of the Hungarian Industry,” Acta Oeconomica 22, nos. 1–2 (1974), pp. 47–68Google Scholar.

17. For example, while workers can affect their individual earnings by bargaining informally over norms, absenteeism, turnover, and the like, their impact on wage policy is slight. Problems in controlling aggregate demand in Hungary have not been caused by excessive personal incomes, which by and large have followed plan projections, but by overinvestment. See Hewett, , “Hungarian Economy,” p. 491Google Scholar.

18. On the party see Volgyes, Ivan and Toma, Peter, Politics in Hungary (San Francisco: Freeman, 1977)Google Scholar; Molnar, M., “The Communist Party of Hungary,” in Fischer-Galati, Stephen, ed., The Communist Parties of Eastern Europe (New York: Columbia University Press, 1979)Google Scholar; Robinson, Reform in Hungary;, Kovrig, Communism. We have also relied on Hough, Jerry F., The Soviet Prefects (Cambridge: Harvard University Press, 1969)Google Scholar, and the various editions of Pártmunkások kézikönyve put out by the Kossuth Press in Budapest.

19. For example, the rise of a Jimmy Carter or a Green party started with the creation of an independent organization, funded initially by personal contributions from candidates and activists. A popular constituency was formed and enlarged as information was disseminated by both the independent organizations and the national media.

20. Examples include the decision to complete the Danube Steelworks, recollectivizing agriculture, the enterprise-ministry reorganization of 1963–64, and the textile modernization program. See, for example, Berend, Iván T., “Continuity and Changes of Industrialization in Hungary after the Turn of 1956–7,” Acta Oeconomica 27, nos. 3–4 (1981), pp. 221–51.Google Scholar

21. Quotations are from Shepsle, Kenneth and Humes, Brian, “Legislative Leadership: Organizational Entrepreneurs as Agents” (Paper presented at the Conference on Adaptive Institutions, Stanford University, 8–9 N11 1984)Google Scholar.

22. On early reform proposals see Berend, “Continuity and Changes”; Antal, László, “Historical Development of the Hungarian System of Economic Control and Management,” Acta Oeconomica 27, nos. 3–4 (1981), pp. 251–67Google Scholar; Számuely, László, “The First Wave of the Mechanism Debate in Hungary (1954–1957),” Acta Oeconomica 29, nos. 1–2 (1982), pp. 1–24Google Scholar.

23. The reform did not give county party organizations greater autonomy to formulate their own objectives in their regions. Nor did it give them resources for such purposes: no fiscal decentralization accompanied the change. Local revenues continued to depend on centrally set formulas and not on the income generated within the local economy. What regional elites gained was increased influence over the activities and management of firms headquartered in their area. See Robinson, , Reform in Hungary, pp. 91 and 195–205Google Scholar.

24. The literature on the administrative and practical contradictions of the NEM is vast. See Kornai, János, Economics of Shortages, vol. 2 (Amsterdam: North Holland, 1981)Google Scholar; Bauer, Tamás, “The Contradictory Position of the Enterprise under the New Hungarian Economic Mechanism,” Eastern European Economics 15 (Fall 1976), pp. 3–24Google Scholar; Tardos, Márton, “Enterprise Independence and Central Control,” Eastern European Economics 15 (Fall 1976), pp. 24–45Google Scholar; Deák, Andrea, “On the Possibility of Enterprise Decisions on Investment,” Eastern European Economics 14 (Winter 1975–1976), pp. 14–25Google Scholar. Case studies appear in Tardos, Márton, ed., Vállalati Magatartás— Vállalati Környezet (Budapest: Közgazdasági és Jogi Könyvkiadó, 1980)Google Scholar, and Granick, Enterprise Guidance.

25. See Marer, Paul, East-West Technology Transfer: A Study of Hungary, 1968–1984 (Paris: OECD, 1986)Google Scholar, and Tardos, Márton, “Importing Western Technology into Hungary,” in Bornstein, M., Gitelman, Z., and Zimmerman, W., eds., East-West Relations and the Future of Eastern Europe (London: Allen & Unwin, 1981), pp. 221–42Google Scholar.

26. For more detail see Marer, East-West Technology Transfer.

27. Cited by Toma, and Volgyes, , Politics in Hungary, p. 32Google Scholar.

28. See Dawisha, Karen, “The 1968 Invasion of Czechoslovakia: Causes, Consequences, and Lessons for the Future,” in Dawisha, and Hanson, Philip, eds., Soviet-East European Dilemmas (New York: Holmes & Meier, 1981), pp. 9–26Google Scholar.

29. For details of the recent reforms see Marer, “Economic Reform in Hungary.”

30. Interviews conducted by Ellen Comisso, 1983, Hungary. See Fazekas, K. et al. , “Kereseti és Bérviszonyaink,” MTA Közgazdaságtudományi Intézet Közléminyei 29 (Budapest: MTA Közgazdaságtudományi Intézet, 1983)Google Scholar.

31. For example, a director of the Danube Steelworks has achieved some renown for being the local expert on the organization of ECWAs and small entrepreneurship. In serious trouble after the collapse of the world steel market, the enterprise found ECW As to be an essential mechanism for integrating forward and moving labor out of less profitable basic steel operations.

32. For a more detailed analysis see Marer, “Economic Reform in Hungary.”

33. See Szalai, E., “The New Stage of the Reform Process in Hungary and the Large Enterprises,” Acta Oeconomica 29, no. 102 (1982), pp. 41–42Google Scholar.