28 1. Defective Capitalism The rationale behind the eventual initiation of the FDI-attraction strategies was to overcome the historic and specific determinants of underdevelopment in both Hungary and Ireland. On the one hand, observers point to the role of internal factors in constraining social and economic modernisation. The majority of these assessments develop the assumption of cultural backwardness of peripheral societies as inhibiting the process of economic development. János (1982) for Hungary as well as Foster (1989), Garvin (2005) and Lee (1989) for Ireland underline the role of internal factors, as being responsible for the creation of modernisation deficits. On the other hand, authors such as O’Hearn (2001, 1998, 1990) and Bairoch (1997) emphasise the role of exogenous constraints in form of both countries’ insertion into the imperial division of labour as being responsible for the modernisation deficits. The following analysis proposes an alternative interpretation of the factors, which led to the underdevelopment of both countries. Unsuccessful modernisation in Hungary and Ireland was the result of a culmination of internal and external factors. These factors reinforced each other and led to a situation of peripheral growth. Imperial incorporation resulted in a classic process of underdevelopment. The capitalist penetration and subsequent deformation of non-capitalist societies and economies created defective capitalism (Elsenhans 1987a: 35-36). Indeed, non-capitalist structures were rendered a capitalist logic. The ensuing imperial division of labour led to a dependency on labour-extensive agricultural exports. Consequently, in difference to the economic centre or core, industrialisation was inhibited, as the development of dynamic internal markets built on rising internal demand based on rising incomes was constrained (Elsenhans 1987a: 37-38). Hence, peripheral growth in form of uneven development ensued, manifesting itself in increased dependency on exports and rising unemployment and marginalisation. Even though the individual factors in the respective countries differ from each other, the results were similar. A distinct socioeconomic situation evolved impeding the development of indigenous industrial capacities. Re-feudalisation in Hungary upheld the system of great estates. The country’s later imperial economic incorporation as the Habsburg Empire’s chief grain producer ensured the dominant aristocratic classes ample incomes and political power. British subjugation of Ireland unleashed a process of deindustrialisation and resulted in the specialisation on live cattle exports. The resulting marginalisation of the population fuelled emigration and crippled the industrial development of the country. In both countries political counter forces failed to evolve, which could have challenged the ensuing socioeconomic situation. 29 1.1 Hungary: Re-feudalisation, Unequal Specialisation, Backwardness Beginning with Hungary, the endogenous constraints were determined by the internal socioeconomic structures of the country. Contrary to Western Europe, Hungary experienced a process of re-feudalisation. The recentralisation of rent appropriation resulted in the constrained development of rural markets and demand, thereby impeding industrial growth and the development of respective indigenous capabilities. Exogenous constraints were defined through Hungary’s insertion into the Habsburg Empire. Imperial economic policy affirmed the non-capitalist feudal structures, through the insertion of Hungary into the imperial division of labour, whereby Hungary became the agricultural hinterland of the Habsburg Empire. As a result, a specialisation on labour extensive agricultural exports to the imperial core evolved. Consequently, this specialisation pattern not only limited possibilities for further industrialisation, but also ensured the socioeconomic predominance of anti-capitalist and undemocratic conservative elites. 1.1.1 Re-feudalisation Whilst capitalist modes of production spread throughout Western Europe as a result of the gradual abolition of feudal structures, Central and Eastern Europe in general and Hungary in particular experienced the opposite (Berend 2001b: 6-7). A long process of social emancipation and of political and economic reforms, culminating in the Dual Revolutions of the Industrial and French Revolutions, led to the evolution of capitalism and modern industrial societies in the West (Hobsbawm 1996: 13- 16). Although this process was by no means a simultaneous and linear event throughout Europe. Eastern Europe, however, diverged considerably from the pattern of Western European development. The region was characterised by a distinct tightening of feudal powers and the failure to create a unitary state. Instead of following Western developments of decentralising rent appropriation, economic surplus allocation was recentralised throughout Eastern Europe and Hungary (Elsenhans 1983: 10-12).3 Re-feudalisation and its legacies had implicit social and economic consequences for Hungary reaching well into the 20th Century (Berend/Ránki 1974: 14). 3 The experiences of Scandinavian countries show that a recentralisation of economic power does not necessarily lead to re-feudalisation. The example of Sweden, another late developer, illustrates that the recentralisation process was pivotal to the later success of successive socioeconomic reforms initiated by the ancien regime (Berend/Ránki 1982: 30-31; Katzenstein 1985: 155- 157). 30 Divergent Development Re-feudalisation in Hungary was the result of two historic events. First, the implementation of the “Blood Laws” in 1514 in the aftermath of the peasant uprisings is seen as the turning point in Hungarian socioeconomic development (János 1982: 27). The peasant uprisings were a reaction to attempts of the landed nobility to tighten feudal controls following the death of King Corvinus in 1490, who had repeatedly made efforts to curtail the worst forms of feudal exploitation of the peasantry in a bid to create a unitary state (Fischer/Gündisch 1999: 50). However, the event can also be regarded as a manifestation of a longer term development of social and economic divergence in Hungary as a result of the demise of traditional medieval overland trade (Berend 2003: 22). The enactment of the “Blood Laws” in Hungary unleashed a process of refeudalisation in form of the “Second Serfdom”, binding the peasants once more firmly to the furrow. Previous emancipatory developments were curtailed. Feudal relations replaced money rents and the peasant economy was replaced by the aristocratic great landed estates (Elsenhans 1983: 9). A socioeconomic system similar to the Spanish and Latin-American Latifundia arose. Pre-capitalist forms of feudal production prevailed, whereby serf labour was subject to extra-economic exploitation by the landlord, who continued to preside alone over the economic surplus (Berend 2003: 18-19). Secondly, the establishment of the Second Serfdom in Hungary coincided with the end of the boom in prices for agricultural products throughout Europe in the 17th Century (János 1982: 28-29). During the period preceding the slump in agricultural export prices, noble land owners had aimed at displacing free peasant farmers and burghers in an attempt to gain market share in the increasingly profitable cattle trade, which was the main source of Hungarian exports to the West. The decree of 1608 restricted the mobility of serfs and allowed the exploitation of serf labour by the nobility, thereby essentially ending free peasant cattle trading (Pach 1994: XII 146-147, X 261-263). Thus, the exploitation of serf labour allowed the great estates to participate in the developing pattern of modern trade of agricultural exports to the West in exchange for consumer and industrial goods from the West. As a result, re-feudalisation ensured adequate incomes for the landed nobility in the event of falling terms of trade for agricultural products. Consequently, the pre-capitalist feudal system of great estates were a rendered a distinct capitalist logic (Berend 2003: 22). Restitution of Noble Privileges Furthermore, in contrast to the rise of the unitary nation state in 16th and 17th Centuries in Western Europe, many countries in Eastern Europe experienced the collapse of national statehood. The Habsburg succession to the Hungarian throne by Ferdinand I in 1526 simultaneously ended Hungarian independence and statehood. The 31 society and the economy of the country were ravaged by more than 160 years of continuous bloodshed caused by hereditary disputes and the Turk Wars. The Ottoman conquest led to Hungary’s division into three entities in 1541, with the west and north remaining under Habsburg control, southern and central Hungary falling into Ottoman possession and the eastern region gaining independence (Transylvania) (Fischer/Gündisch 1999: 75-80). Although Hungary was officially incorporated into the Habsburg Empire in 1687 with the foundation of Austria-Hungary, the reunification of the country was attained only in 1711 with the Treaty of Szatmár (Berend 2003: 19; Pach 1994: XII 148). The Treaty of Szatmár was essentially a compromise between the Hungarian landed aristocracy and the House of Habsburg. It secured the restitution of aristocratic privileges of 1514 and hence ensured the continuation of feudal structures in Hungary with its latifundia system of great estates and exploitation of serf labour. The Hungarian parliament was promised legislative autonomy in return for its acceptance of Habsburg sovereignty. However, the real extent of parliamentary decision making was limited to fiscal issues. Military and foreign policy concerns were conducted by the Vienna administration, which with its absolutionist principles increasingly determined Hungarian affairs without Hungarian legislative consent. The Hungarian aristocracy, nevertheless, was content with this arrangement. Its wide-ranging privileges, which also contained absolute tax exemption, were guarantied by the House of Habsburg and secured by its military presence. As a result, Hungarian elites were willing to accept and actively support Habsburg rule. Hence Hungarian subordination to Austria cannot be described as a colonial relationship (Fischer/Gündisch 1999: 80-81). The restitution of aristocratic feudal privileges following 1711 is not only important in terms of the establishment of the Habsburg Empire, but it has also been frequently used to illustrate the continued divergence of the Hungarian development from the Western model (Berend 2003: 20). In contrast, the evolution of capitalism in Great Britain was built upon the lower aristocratic classes, the gentry and middleclass farmers. Following strong increases in property prices as a result of the investment of profits made abroad by the monopolistic trading companies and increased competition by more productive estates, the rural middleclass sold their estates to find employment or to invest in increasingly profitable industrial production (Elsenhans 1987a: 31; Elsenhans 1983: 10-11). The restitution of noble privileges following the reunification of Hungary and its incorporation into the Habsburg Empire, however, did not produce an incentive for nobility to change its ways. Their incomes were guaranteed by the continued unlimited exploitation of serf labour. Their political and social status was ensured by Habsburg troops (Fischer/Gündisch 1999: 87). The Second Serfdom effectively hindered the modernisation of nobility through their eventual embourgeoisement and consequently the development of a broad entrepreneurial middleclass. Similar to the Spanish aristocracy, Hungarian nobility developed an anti-mercantilist attitude, which persisted well into the 20th Century (Pach 1994: XII 137). 32 As opposed to the era of the boom in agricultural product prices, when the nobility increasingly engaged in cattle trading, the majority of the landed elite abstained from any capitalist endeavour whatsoever. An attitude of dérogeance ensued. Capitalist know-how was imported. Greek, Armenian and Jewish merchants were given concessions to trade the agricultural goods produced on the estates. On the spot trading evolved as the produce was rarely transported into commercial centres. As a result, absenteeism prevailed, with the landed noble spending the majority of his time away from his estate and “concerned with living from his feudal dues in lavish extravagance in Vienna” (Pach 1994: X 148). Constrained Development The recentralisation of economic power constrained the establishment of mass markets and mass demand as well as the later development of an industrial sector. Thus the reverse of the “Brenner Argument” took place in Hungary. As Brenner (1976: 63-65) observed in England, the agricultural transformation was linked to the evolution of a symbiotic relationship between tenant and landlord leading to the prevalence of individual profit maximisation strategies over mere rent appropriation through feudal exploitation. This symbiotic class relationship also entailed the system of enclosures, enabling the redistribution of farming land and thus increasing the amount of arable land beyond subsistence levels. Furthermore, it allowed the individual tenant farmer to develop the initiative to innovate via increased capital investments in order to maximise his profit. The result was improved agricultural production leading to surplus creation exceeding subsistence levels. Rural marginality was consequently overcome as agricultural production boosted rural incomes, thereby creating the basis for increased demand and the evolution of rural markets. Increased spending power enabled not only further investments into agriculture, but also the eventual development of cottage industries. In contrast to Hungary, proto-industrialisation in the form of cottage industries was a process visible in the industrial development of Habsburg Provinces of Bohemia and Moravia (Berend 2003: 142-148; Bairoch 1997: 249-250). Peasant households created additional income sources by selling textiles and hardware made in home production, thereby creating close commercial ties between urban and rural communities, eventually leading to village industries. Putting-out industries were then superseded by the factory system established in the industrial centres. These used superior mechanised technology for mass production of the same products to cater for rising demand (Landes 1965: 283; Elsenhans 1987a: 27-32). In Hungary, re-feudalisation centralised capital accumulation with the landed nobility. Profits were used for the sole purpose of luxury consumption. The distribution of land was highly concentrated, as production increases were attained via the expansion of land and greater exploitation of serf labour and were not the result of improved productivity via increased innovative investments (Fischer/Gündisch 33 1999: 88).4 The feudal serf economy was based on self-sufficiency and subsistence farming, whereby traditional consumption patterns prevailed. As a result, rural and urban markets were small due to low demand. The continued existence of the guild system additionally monopolised the production of consumption goods and the spread of technological innovation. The room for proto-industrialization was correspondingly narrow. The ensuing lack of demand, markets and hence innovation essentially inhibited the establishment of putting-out industries in rural areas (Berend 2003: 27-30). Consequently, the linkages between rural and urban development were low, creating a negative reciprocal relationship. Peasant self-sufficiency meant that cloth and tools, the hallmarks of cottage industry, were generally not traded. Instead, they were consumed by their peasant producers. The guilds served only the small urban markets with their products. Furthermore, investment in innovation was impeded through a lack of capital. Non-aristocrats were prohibited to buy land. Labour was bound to the land of its landlord (Fischer/Gündish 1999: 96). This hindered the mobility of labour, leading to shortages in manual and qualified labour. The feudal structures prohibited the encumbering of estates, which were additionally indivisible in the event of mortgage redemption. This restricted the availability of sufficient funds for investment in agricultural production as well as for industrial expansion (Berend/Ránki 1974: 15). The consequence was the relative backwardness of Hungarian society and economy. Berend and Ránki (1974: 14) note that in early 19th Century Hungary, “industry stagnated within its guild limitations; the cities retained their medieval appearance”. Low urbanisation further limited the development of agriculture. The primary sector was deprived of expanding urban and rural markets as a potent demand factor. As a result, Hungary retained its traditional rural and agrarian character. In the 1840s, only one in twenty people lived in towns. Only 5% of the population worked in industry, which comprised around 450 “large” works employing 20 to 40 workers and predominately in the field of agricultural processing (milling, sugar refinery, brewing) (Berend/Ránki 1974: 49). 1.1.2 Agricultural Specialisation A further factor, closely related to the process of re-feudalisation, was Hungary’s unequal specialisation in modern trade. Similar to other Eastern European countries, Hungary participated in modern forms of trade at a very early stage. The rise of capitalism in the West led to the substitution of medieval type trade with modern forms of trade. Modern trade developed from the end of the 15th Century and originated from the evolution of commodity production and the social division of labour as a result of economic growth. It provided increasing quantities of mass- 4 Most land and hence economic and political power in the first half of the 19th Century lay in the hands of between 10 and 20 aristocratic families (Fischer/Gündisch 1999: ibid.).