Europe (with the exception of Yugoslavia). In the words of one early observer of this reform, it clearly represents the most radical postwar change, in the economic system of any Comecon country, which has been maintained over a period of years and gives promise of continuity.
Although the reform program in Hungary met with only partial success, the problems that have arisen (conflicts of objectives, for example, and difficulty in persuading participants to change their ways) are fundamental to the reform experience of planned socialist systems.
Hungary shares many features with other Eastern and Southeastern
European countries, such as Yugoslavia. It provides a refreshing contrast
to the Soviet Union, which in some important respects is atypical. Hungary
is a small country heavily dependent on foreign trade. The Hungarian
experience with reforming foreign trade, and in particular its efforts to
become integrated into the world economy both East and West, is
prototypical. The difficulties of reforming the foreign trade mechanism arc
crucial to the Hungarian economy as well as to the economies of many other
systems of Eastern Europe.
1) Hungary: The Setting
Hungary is located in central Europe. Its land area of approximately
36,000 square miles makes it roughly the same size as the state of Indiana.
Its population of about 11 million is comparable to that of the population
of Illinois. Although Hungary is not self-sufficient in energy, it docs
have supplies of coat, oil, and a number of minerals, including important
bauxite deposits.
Although it has some rolling hills and low mountains, Hungary is basically a flat country with good agricultural land and a favorable climate. As in other East European countries, the period since World War II has seen the population flow from rural to urban areas and a changing balance of industrial and agricultural activity. Today, approximately half the population lives in urban areas.
Hungary is not particularly prosperous. Most estimates of its gross
national product or per capita gross national product place Hungary in the
middle of the East European countries. It is generally wealthier than
Bulgaria and Yugoslavia and certainly wealthier than Albania; it ranks
behind East Germany and Czechoslovakia. Hungary's per capita income appears
to be close to that of Greece. In this sense, economic development remains
a key issue in Hungary. By the standards of Western Europe, Hungary remains
relatively poor; by the standards of the Third World, Hungary ranks among
the more affluent countries.
2) The Hungarian Economy: Prereform
The postwar reconstruction of the Hungarian economy began quite
modestly in 1945. Before the implementation of a three-year plan in 1947
(1947-1949), the main policies included stabilization of the currency,
changes in the nature of rural landholdings, and the beginnings of
nationalization. The first three-year plan was designed primarily to bring
the economy up to prewar levels of economic activity.
During this time, a planning mechanism was created and the share of national income going to investment increased sharply. The changes were not radical, however, and balanced development was envisioned.
The era of balanced development came to an end with the introduction of a five-year plan in 1950. The share of national income devoted to investment was increased substantially, and the bulk of new investment was directed toward heavy industry. This policy was partially reversed toward the end of the plan period, but it was reaffirmed in 1955-1956.
A number of economic trouble spots cried out for attention. There was an observed need to improve industrial labor productivity, especially through the development of a better incentive system to offset the declining supply of labor from rural areas. Supply-demand imbalances were growing increasingly severe. Waste and imbalance in the material-technical supply system created the need for a substantially modified coordinating mechanism among enterprises.
In addition, excess demand for investment led to substantial amounts of unfinished new construction and to the neglect of old facilities. Some mechanisms for the more rational allocation of capital investment had to be found. The adoption and diffusion of technological advances were seen as inadequate. Technological improvement was considered crucial for continued development of the economy.
This background seems familiar: a small country, the Soviet
(Stalinist) model of industrialization, overcentralization, emphasis on
extensive growth, rigidities of the plan mechanism, incentive problems, and
the resulting difficulties. Against this background, the New Economic
Mechanism first promulgated in a party resolution in 1966 was put into,
practice in 1968. Over twenty years later, it remains one of the most
important reform programs of planned socialist systems.
3) Intent of the New Economic Mechanism
There is disagreement about the importance and effect of the Hungarian reform program. The New Economic Mechanism (NEM) has generally been interpreted as leaving the power to control the main lines of economic activity (volume and direction of investment, consumption shares) with the central authorities, while relying on the market to execute the routine activities of the system. The NEM called for substantial decentralization of decision-making authority and responsibility from upper-level administrative agencies to the enterprise level. In a general way, NEM bears a close resemblance to the Lange model. Let us consider the original blueprint of NEM.
The objective of NEM was to combine the central manipulation of key
variables with local responsibility for the remaining decisions. The first
change was a significant reduction in the number and complexity of the
directives firms; for large state-owned firms, the traditional problems
remain. Valuation is difficult, especially in loss-making enterprises.
Moreover, it is hard to find buyers for these types of enterprises, let
alone to arbitrate the potential rights of past owners. And just as
elsewhere, privatization in Hungary is likely to become slower and more
difficult as the focus shifts to the less attractive, large enterprises.
In addition to privatization per se, Hungary has addressed the creation of infrastructure (for example, a stock market) and new rules designed to change the guidance of enterprises. Accounting procedures have been refined and bankruptcy laws strengthened so that state subsidies can be curtailed and hard budgets introduced into large state-owned enterprises.
Hungary has also pursued a variety of stabilization measures and has liberalized policies in the sphere of foreign trade, though to a lesser degree and certainly more gradually than Poland. Domestic price controls have been substantially removed, and enterprises are permitted to enter into and benefit from foreign trade transactions. Although there are limits on the holding of foreign exchange, the Hungarian forint is substantially convertible for business purposes. However, the Bank of Hungary has maintained controls such that it has access to foreign exchange earnings to serve as repayment of the Hungarian hard-currency debt. (Hungary has a per capita hard-currency debt roughly twice that of Poland). Hungary has followed a tight monetary policy designed to create a balanced budget and also to exert financial pressure on enterprises.
Hungary has very liberal laws regarding foreign investment, including the possibility of full foreign ownership with permission. Moreover, repatriation laws are liberal. Not surprisingly, Hungary has been considered a leader in the quest to attract foreign investment, though the magnitude of this investment and its overall impact on the Hungarian economy probably remain modest.
The initial results of the transition process in Hungary have generally been positive when judged against the sorts of expectations that we discussed earlier. At the same time, it is proving difficult to sustain popular support as the inevitable costs of the transition process take their toll.
4) The Hungarian Economy in the 1990s
In spite of a tendency to compare the processes of economic reform in
Poland and Hungary, there are important differences between the two
systems, and especially in the degree to which prior reform had taken
place. Although some would argue that the New Economic Mechanism was quite
limited compared to contemporary reforms, nevertheless the reform process
has a significant history in Hungary. The differences between the Hungarian
and Polish cases are important.
Inflation has been much less serious in Hungary than in Poland. The annual
rate of inflation for 1989 has been estimated at roughly 17 percent.
Although the inflation rate increased to about 29 percent in 1990, this
performance has been viewed as positive. In addition, wage increases have
generally been controlled. Largely because of a shift away from trade with
former CMEA trading partners, the volume of Hungarian trade has declined.
At the same time, the Hungarians have experienced growth in exports to
Western markets and a generally weak domestic demand for imports — both
important developments for the overall trade balance. The good news on the
exports side, however, tends to be sector-specific. Hard-currency debt
remains a serious problem, and the movement toward a convertible currency
has been much slower than in the Polish case. Finally, the Hungarian budget
deficit has increased.
The Hungarian economy was projected to shrink by approximately 3
percent in 1991, and associated declines in consumption and investment were
anticipated. The state property agency is moving ahead with privatization.
The overall relatively slow pace of reform in Hungary may well dictate less
sharp downturns and less severe fluctuations during the periods of downturn
but, at the same time, rather slower recoveries and a longer time in which
to achieve normalization. As with Poland, the effectiveness of the
macroeconomic policies being implemented, world market conditions (such as
the price of oil), and domestic structural change through privatization
will all affect both short-term and longer-term outcomes.
EASTERN EUROPE: THE REFORM SCENE
The transition from plan to market in Eastern Europe is important, not
only for those who live with and implement the transition, but also for
those interested in the subject of comparative economic systems. For a
variety of reasons, if the transition cannot succeed in countries such as
Poland and Hungary, it is unlikely to succeed elsewhere.
