Philipp Fink, The Dual Monarchy (1867-1919) in:

Philipp Fink

Late Development in Hungary and Ireland, page 60 - 68

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
60 ment is restricted such as in the case of authoritarian Hungary until 1990, exit can also be seen as “going informal”. Individuals earn their livelihood in the grey or black economy (Greskovits/Bohle 2001: 13). Furthermore, voice in democracies obviously implies the voting out of the ruling government or protest voting. In the case of unreceptive political institutions or authoritarian systems, voice can also take on the extreme form of political violence, uprisings, revolts or even revolutions, as has been repeatedly shown in Hungarian history (Greskovits 1998: 76). Hence, popular consent/dissent influences the above mentioned variables of autonomy and capacity. Consent is closely related to the performance of the respective development regime and, therefore, to the state’s capacity to steer the development process. A decrease in state capacity resulting from the underperformance of the developmental agent can jeopardise the attainment of developmental goals, such as a rise in living standards, employment and economic growth. As a result, dissent can erode the internal autonomy of the state and eventually contribute to the development regime’s downfall by questioning its legitimacy (Greskovits 1998: 72-73). Consequently, the state has to devise strategies to attain popular consent to the development regime. Authoritarian political systems can simply suppress and crush dissent. Although as will be shown in the Hungarian case, this can only be a shortterm tactic of postponement, as dissent can erupt into violent revolution (Greskovits 1998: 76). Instead, the state’s internal autonomy can be embedded into a “set of social ties that bind the state to society and provide institutionalised channels for the continual negotiation and renegotiation of goals and policies” (Evans 2003: 128). Hence, dissent is accommodated and co-opted through a communicative platform by which consent can be attained by “providing concrete concessions to those included (and even to those exploited)” (Ó Riain 2004a: 169). Greskovits (1998: 137) shows how these concessions can be attained through “politics of compensation”. Compensation is strategically used to diffuse political tensions that could surface in case of a malfunctioning of the development strategy. Compensatory elements are directed at thwarting the evolution of possible oppositional coalitions. These could pose a threat to the developmental strategy and question the development regime by eroding the state’s internal autonomy (Greskovits 1998: 139). However, compensation follows political justification and is, hence, defined by political efficacy. This principle denotes that particular societal groups are compensated on the grounds of their relevance to the state and the development regime in terms of their threat potential or their importance to deliver the necessary developmental inputs (Greskovits 1998: 143-144). 2.2 Hungarian Development Regimes Beginning with the Hungarian experiences, three regimes prior to the current FDIled development strategy can be identified (Berend 2001a: 1-2). The first period (1867-1919) is situated in the era of the Double-Monarchy after the Compromise of 1867 prompted the renewal of Hungarian policy autonomy within the context of the 61 Austro-Hungarian Empire. The second period (1920-1944) was defined by the aftermath of WWI and the ensuing political turmoil in Hungary. The third period (1949-1990) refers to state-socialist attempts at modernisation. Common to all Hungarian development regimes was the constrained level of external autonomy. Greater regional powers exerted considerable influence on the formulation of the respective development regime’s policies, inducing external modernisation in accordance with their hegemonic goals. Repeated international economic crises detrimentally affected the performance of the prime developmental agent, illustrating further the limited external autonomy and therefore eroded the capacity of the state to fulfil the respective developmental goals. This led to a decline in social consent towards the regime, questioning its legitimacy, eroding the state’s internal autonomy and prompting the evolution of a new development regime. However, every development regime reacted by initiating a “backward exit” (Berend 2000: 50), thereby increasing the state’s internal autonomy and capacity through rising degrees of state interventionism and attempting to reduce the exogenous economic influences. 2.2.1 The Dual Monarchy (1867-1919) The Austro-Hungarian Compromise of 1867 led to the creation of monetary and economic union within the empire. The agreement that was attained gave wideranging autonomy to Hungary within the context of the Dual Monarchy, whereby Emperor Franz-Josef I was joint head of state of both Cisleithania (Hereditary Provinces) and Transleithania (Kingdom of Hungary, Bukovina and Galicia). The Compromise entailed complete autonomy for Hungary in all internal affairs with the exception of fiscal, external and defence issues, for which joint responsibility was taken (Fischer/Gündisch 1999: 124). The development regime during the age of Austro-Hungarian Dualism was based both on national agricultural capital and foreign investments in industry, finance and infrastructure. Economic policy can be distinguished by two periods, defined by a distinct increase in state interventionism and a turn away from external markets. The first period from 1867 to 1878 was defined by the initiation of laissez-faire-type policies built upon the export of agricultural products. The second phase of the development regime (1878-1914) was defined by a distinct increase in state interventionism and a turn towards import-substituted industrialisation (János 1982: 128). The First Phase: Export Orientation and Laissez-Faire The first phase of the development strategy (1867-1878) was defined by the post- Compromise economic boom, also known as the Hungarian Gründerzeit. The Hungarian government initiated a policy of economic liberalisation following the auspices of laissez-faire. High agricultural world market prices coincided with the 62 Austro-Hungarian accession to the Cobden-Chevalier Treaty. The Treaty essentially created free trade between the dominant European powers. The industrialisation concept expressed the interests of the ruling aristocratic class. It relied on the generation of sufficient spillovers stemming from agriculture in the form of food processing. Demand for industrial products was to be generated through infrastructure investments financed by foreign capital (Berend 2001d: 46; János 1982: 128). In terms of external autonomy, the Hungarian government initially enjoyed wideranging insulation from outside pressures within the imperial structure to make decisions on economic policies. The Compromise entailed wide-ranging political and administrative autonomy for the Hungarian government. However, Hungary continued to fulfil its role as the agricultural supplier to the Hereditary Provinces within the imperial division of labour. In return, manufactured products were imported from the industrial core of the Habsburg Empire (Berend 2001d: 46; János 1982: 128). Internally, state autonomy was high. Despite its democratic wrappings, the Hungarian political system had authoritarian leanings. Its political and administrative institutions were designed to support the interests of the country’s “historical classes”, i.e. the aristocracy. The electoral system restricted franchise to only six percent of population, barring members of the lower classes. The practices of electoral corruption, gerrymandering and parliamentary vote rigging were commonplace and more or less ensured the governing Liberal Party constant majorities throughout the period of Dualism. Dissent was closely monitored and opposition forces viewed sceptically and kept on leashes. These were invariably shortened and lengthened according to incumbent sensitivities and political needs, stipulating the preservation of the status quo in form of the nobility’s continued socioeconomic predominance (János 1982: 97, 101-105, 140; Fischer/Gündisch 1999: 130). Turning to the state’s capacity to implement the policies, again, on face value, the initial situation guaranteed a high level of capacity. The Compromise of 1867 enabled the creation of an independent and modern centralised administration. A powerful and almost ubiquitous state bureaucracy evolved. It served not only the administrative needs of the development strategy, but also was used as a powerful political instrument to forge consent for the development regime. Rapid industrial growth propelled the pre-modern Hungarian society towards modernity through increasing social differentiation. Old elites increasingly lost their social standing. The administration was therefore used to accommodate the “losers” and to co-opt the “winners” of the development process with the aim of upholding the “natural” position of Hungary’s “historic classes” (János 1982: 92). Nevertheless, the first phase of the development regime was characterised by a restrained economic capacity, as the government resorted to supply-side policies. Mercantilist restrictions protecting the producer were lifted. These included the final abolition of guilds, the granting of wage bargaining rights to labour and the dismantlement of the remaining feudal legacies on the sale of agricultural land, which allowed the transfer of land to the most efficient producer. The active role of the state 63 was confined to the augmentation of labour skills through the introduction of universal education in 1868 (János 1982: 128). In terms of industrial policy, the state acted as a facilitator for private investment. It placed a pivotal role on the attraction of foreign portfolio and direct investment in the construction of the rail network, the creation of the hitherto underdeveloped financial sector and the expansion of industrial production (János 1982: 128). The centre of attention was initially placed upon infrastructure investments and food processing. Until the 1880s over 70% of public expenditure was directed towards the development of the transport system via investment guarantees and subsidies (Berend/Ránki 1974: 36).29 Hence, foreign capital in form of FDI, portfolio investments and loans was to be the main source of financing for industrial investment (Berend 2001d: 46).30 FDI was most prominent in the area of heavy industry and mining. Complementary to the development of the transport sector, Austrian, German and French FDI was involved in meeting the demand for iron, steel and coal production. As a result, heavy industry was foreign-dominated and became increasingly concentrated (Csató 2001a: 82).31 Furthermore, 56% of shares in Hungarian banks were owned by foreign institutions (Berend 2003: 155). Nevertheless, banking activities concentrated on central and local government loans, railway financing and to a large extent on mortgage financing of agricultural property. The latter made up 50% to 60% of all loans. The volume of mortgage lending surpassed all other commercial and industrial banking activity throughout the whole of Era of Dualism (Berend 2001e: 41-42). Economic growth was therefore firmly based on the expansion of the agricultural sector. It tripled its production between 1867 and 1913 and was centred on cereal exports. The share of Hungarian agricultural output in the Empire rose from 42% in 1841 to 48% in 1913 (Lendvai 2001: 355). Hungary became one of the world’s largest wheat and, more importantly, flour exporters (Csató 2001a: 78).32 Accordingly, the most promising signs of Hungarian industrialisation were closely linked to the agricultural sector. The flour boom had enabled the continued rise of the food processing industry and related branches. The milling industry represented 44% of total Hungarian industrial production in 1870 (Berend 2003: 167). 29 The state guaranteed a 5% interest rate on private railway investments. The total sum awarded increased from 2 million Crowns in 1870 to almost 32 millions Crowns in 1874 (Berend/Ránki 1974: 36). 30 Foreign capital inflows of 1.6 billion Crowns contributed vastly to an estimated total domestic accumulation of 1.5 billion Crowns. In sum, 60% of the capital supply came from foreign sources (Berend 2001d: 46; János 1982: 128). 31 In total, 40% of all physical investments originated from either the Hereditary Provinces or from Western Europe between 1867 and 1914 (Berend 2003: 157).At the start of the 20th Century, 42% of Hungarian industry was owned by foreigners and a further 18% of industrial firms had foreign participation (Berend/Ránki 1974: 72). 32 Agricultural exports increased from US$ 30 million to US$ 381 million between 1850 and 1913 (In 1913 US$). The country exported 2.6% of the world’s wheat and 26% of the world’s flour, 70% of which was exported to western Europe by the end of the 19th Century (Csató 2001a: 78). 64 Nevertheless, the mentioned figures mask the process of agricultural demise in Hungary, which accelerated with the swamping of European markets with cheaper American grain coinciding with the Great Depression (1873-1879). The downturn in European economic growth resulted in a 50% decline in prices for Hungarian agricultural exports. As a result, the Hungarian economic growth process was interrupted, as the main developmental agent, the agricultural sector, lost important international export markets (János 1982: 129). This deterioration of economic performance severely compromised the capacity of the development regime. It marked a change in the development strategy, as the state resorted to measures to reduce its over-reliance on foreign markets to induce economic growth and increased its capacity by relinquishing its non-interventionist restraint. Whilst still relying on the developmental inputs from agrarian and foreign capital, the trajectory was changed. The general laissez-faire export-oriented strategy, based on agricultural exports, was gradually replaced by import-substituted industrialisation (János 1982: 129). The Second Phase: Industrial Protectionism The economic recession of the 1870s prompted a redefinition of the role of state in the development process, whereby the state sought to augment its capacity. The renewal of the economic compromise between Austria and Hungary in 1878 as well as Austria-Hungary’s departure from the Cobden-Chevalier Treaty in 1874 gave the Hungarian government more direct leverage in the development process. The state’s capacity was increased by the introduction of protectionist tariffs in Austria- Hungary, shielding agriculture and industry from foreign competition. Protectionism had the effect of increasing the level of the Habsburg Empire’s self-sufficiency (Bairoch 1997: 420). The Hungarian state resorted to subsidising industrial development through the enactment of several Industrial Development Acts. They considerably increased the scope of industrial branches eligible for state aid. Supports were initially centred on developing the agricultural industries, such as distilling, milling and canning. During the second phase, the state redirected its industrial policies towards supporting the development of light and consumer goods industries.33 The focus was placed on those industries, whose development was most constrained by imports from the further developed Hereditary Provinces (Berend 2001b: 18). Furthermore, the state nationalised the rail services and expanded the rail network mainly with international loans. The transport network became an important eco- 33 The various Industrialisation Acts of 1881, 1890, and 1899 gradually increased the branches eligible for aid as well as the instruments. Under the Act III/1907, the most far reaching Act, an annual total of 4.7 million Crowns were dispensed, supporting the creation of 121 firms and the expansion of 190 existing factories. 65% of the subsidies went to the textile industry and 18% to the iron and chemical industry (Berend 2001b: 18). 65 nomic policy tool not only to stimulate investment and production in industry and agriculture. The introduction of variable freight rates was used to protect Hungarian markets and producers from industrial imports from the imperial centre. Furthermore, the state engaged directly in heavy industry. The Hungarian Treasury owned iron and steelworks with the state becoming the second largest steel and iron producer in the country (Berend/Ránki 1974: 37, 55; János 1982: 133). Next to increasing its industrial support, the state also intervened heavily in agriculture not only to avert the demise of its main export sector, but also to sustain the incomes of the country’s aristocratic socioeconomic elite. Consequently, in a bid to calm fears over a further loss of export markets for agricultural products through increased protectionism, labour costs were targeted in agriculture by the introduction of very harsh labour laws. These forbade strikes and restricted the free movement of agricultural labour (János 1982: 131-132). Additionally, the largest landowners were allowed to apply for the entailment of their estates. Almost 17% of all arable land was turned into inalienable trusts. In a sense, agriculture was re-feudalised one again. Furthermore, external autonomy was augmented, as the Hungarian government turned away from European export markets by redirecting 98% of its grain exports towards the Hereditary Provinces. Agricultural producers benefited from increased economic dynamism in the western provinces of the Empire, as Austria-Hungary’s economy had become virtually selfsufficient. The introduction of tariffs for grain imports guaranteed high prices above world market levels (Berend 2003: 167; Berend/Ránki 1974: 67).34 Results of Dualism The period of the Dual Monarchy was one of unprecedented growth for Hungary. The economy grew fourfold between 1867 and 1913 (Berend 2001f: 121).35 GNP per capita was estimated to have grown by 65% between 1870 and 1913 (Berend 2001f: 122). Although general income levels were higher compared to pre- Compromise levels, economic growth in Hungary was slower than in the Hereditary Provinces. Hungarian incomes fell from 68% of Austria’s per capita GDP level in 1870 to only 60% in 1913. By 1914, Hungary attained an income level comparable to Southern Europe. Although Hungarian incomes exceeded Eastern European levels (Russia, Balkan states) by an estimated 25% to 30%, they remained only at 50% of Western and Northern European incomes (Berend 2001f: 121). Turning to the results of industrialisation, the specialisation of agriculture on cereal production had undoubtedly contributed to the continued rise of food processing and related branches. Accordingly spillovers were produced via push and pull effects through raw material supplies and growing demand for engineering products. 34 The 1892 tariff agreement raised the prices of agricultural products in Hungary to 22% above free market price levels (János 1982: 129). 35 The indexed value of GDP in 1913 was 429 compared to GDP in 1867 (Berend 2001f: 121). 66 Related supply branches equally benefited from the high demand for Hungarian flour in particular and agricultural production as well as railway investments in general. Engineering capacities were expanded as increased demand coupled with available capital allowed increased investment and the reaping of sufficient scale economies. As a result the high level of infrastructure investments, transport equipment made up two thirds of Hungarian machinery production, followed by engineering products for food processing and to a lesser degree by farming machinery. The role of domestic sources in accumulation, investment and financing had grown, reducing the importance of foreign capital in the Hungarian economy. 36 Consequently, industrial production grew by an annual average of 5% (Berend 2003: 172-173) and industry provided an increasing share of the national income, growing by almost 15% (Berend 2001f: 124). 37 Nevertheless, Hungary still remained a predominately agricultural country. Total industrial production continued to be dwarfed by agriculture. The wide-ranging industrialisation policies initiated in 1907 were prematurely terminated by the outbreak of WWI in 1914. The subsidised sectors were unable to realise their full potential. Textile imports from the Hereditary Provinces still accounted for 70% of internal Hungarian demand in 1913. The unabated inflow of superior products from the Hereditary Provinces continued to act as barriers to entry for Hungarian firms to the internal market. Similarly, the engineering sector, which had benefited from the boom in agricultural exports and food processing, remained too small to effectively supply internal demand and had only tentatively developed export niches (Berend 2003: 169; 2001f: 121). As a result of the turn away from international export markets, the Hungarian economy had deepened its dependence upon Cisleithanian demand and furthermore illustrated a pronounced duality, depicting its peripheral nature. Industry was split between highly productive modern foreign-owned heavy industry and small-sized indigenous light industry still based on handcraft and small work shops. Almost 50% of the industrial workforce was employed in small-sized industries (Csató 2001a: 97). Despite government spending 60% of available funds on industrial support of the development of light industry, it remained unable to compete with superior textile and consumer goods imports from Cisleithania (János 1982: 152). Food processing remained the only veritable export sector, based on agriculture with Hungarian manufacturing closely tied to the success of both, as well as to public demand through infrastructure investments. Furthermore, at the turn of the century modern industry became increasingly geographically concentrated in the west- 36 Between 1867 und 1913, domestic sources of financing increased from 40% to 75% (Berend/Ránki 1974: 58, 73). 37 As a result, by 1914, the proportion of the population employed in industry and related services (transport and trade) increased by 12%. Accordingly, the share of agricultural employment fell by more than 24% during the period and the share of agriculture’s contribution to GNP fell by 50% in value (Berend/Ránki 1974: 74-75; Berend 2001f: 124). 67 ern and central regions of the country (Csató 2001a: 97; János 1982: 151).38 Similarly, agriculture was defined by large differences in productivity and output. The inequality of landownership continued. More than 50% of the land remained in the hands of aristocratic landlords (Berend 2003: 159).39 Thus, highly modern great estates resided next to peasant plots barely large enough to guarantee the subsistence of their proprietors (Berend/Ránki 1974: 75; János 1982: 109, 159).40 The structure of Hungarian trade hardly changed. Although machinery and finished products made some headway, especially in the last decade before WWI as a result of the drive for industrialisation, over 66% of non-agricultural exports still stemmed from the food processing industry. Exports were still dominated by raw materials and agriculture of which 75% was destined for the Hereditary Provinces. Similarly, the resumption of economic growth after the 1880s increased the share of imported finished industrial goods from the Hereditary Provinces. As a result, the Hungarian balance of trade was constantly negative. The main impetus for economic growth rested on the demand originating from the Hereditary Provinces. Internal demand and the growth of the internal market were crippled by the marginalisation of the rural population and the introduction of a regressive tax system, which was biased towards large estates and high income groups (Berend/Ránki 1974: 66-67, 75; János 1982: 109, 159). Consequently, the industrial and service sectors were too small and technically backward to sufficiently absorb surplus unqualified rural labour, which had been displaced following agricultural investments. In contrast, their skills were too low for employment in heavy industry. As a result, rural unemployment was high causing rural and unskilled wages to remain low.41 In contrast, rapid industrialisation contributed to pronounced skill shortages in industry, prompting a large industrial wage drift (Berend/Ránki 1974: 85). Hence, on the eve of WWI, the Hungarian economy and society were propelled towards modernity with distinct socioeconomic repercussions. The dualistic nature of the economy and the narrowness of the path towards industrialisation remained despite rising incomes, which “turned Hungarian life into a peculiar conglomerate” (Berend/Ránki 1974: 75). The dualistic economy gave rise to a dualistic society, in which income and social inequalities were exacerbated. Industrial development 38 In heavy industry, 25% of the labour force was employed by 25 enterprises (Csató 2001a: 97). In the engineering and machinery sector, 50% of the employed worked in nine firms (János 1982: 151). 39 Over 32% of agricultural land was held by estates representing 0.2% of all farms in 1895 with an average size of over 1,400 acres (5,664,400 m2). In contrast, almost 54% of all farms cultivated a total of under 6% of arable land with an average size of between 0 and 7.5 acres (30,345 m2) (Berend/Ránki 1974: 41). 40 Only 10% of agrarian landowners produced for the market (János 1982: 159). 41 The average hired farm labourer was paid around 50% to 60% of industrial wage rates at a time when the average earnings per hour across all sectors in Hungary stood at only 30% of British hourly wages. Nevertheless, these figures mask the high level of intra-sectoral wage inequality as a result of the scarcity of skilled labour. Highly skilled industrial labour earned four to five times more than unskilled labour (Berend/Ránki 1974: 85) 68 initiated a process of structural transformation from an agrarian to the beginnings of an industrial society (Berend/Ránki 1974: 74-75; Berend 2001d: 124). To conclude the Era of Dualism, industrialisation was terminated by the outbreak of WWI. Despite tentative successes, Hungary still remained specialised in agricultural exports. The development regime relying on agricultural exports and foreign capital inflows did not resolve the country’s peripheral nature. On the contrary, productivity differences between economic sectors deepened. The dependency on agricultural exports to the industrialised Hereditary Provinces of the Habsburg Empire increased. This “backward exit” (Berend 2000: 50) option led to an increase in state capacity to implement its developmental policies and was aligned with an enlargement of state interventionism and protectionism. However, this response should be seen as a sign of the country’s inflexibility to adapt to international economic developments due to its internal structures, which remained defined by the interests of the Hungarian predominant socioeconomic classes of landed nobility. 2.2.2 Economic Nationalism (1921-1944) With the election of Premier Count Bethlen in 1921, a process of consolidation commenced with the aim of rebuilding the country and continuing the industrialisation process. Following the Armistice in 1918, Hungary had witnessed several revolutions. A democratic revolution was followed by a Bolshevik coup d’état. Essentially, the counterrevolution, headed by Admiral Horthy, was the backlash of the gentry. Despite the initiation of a token land reform, only redistributing 5% of the arable land, the aim was to restore the “historical” social order. As a result, the latifundia system of Great Estates was restored and continued to be sacrosanct (János 1982: 204). Changed Environment for Development The new post-WWI order in Europe significantly changed the polity in which development had to take place (Berend/Ránki 1974: 92-94). The harsh terms of the Treaty of Trianon (1920), which regulated the dissolution of the Habsburg Empire, had severe repercussions for both the state’s autonomy and capacity to fulfil its developmental goals. Due to the country’s incorporation into the Austro-Hungarian Empire and its belligerent role in WWI, Hungary was treated as an aggressor. Subsequently, the historic Greater Kingdom of Hungary was reduced to a third of its territory and 40% of its population.42 The territorial realignment had grave economic 42 Hungary ceded territory to the three newly created states of Austria, Czechoslovakia and Yugoslavia. Furthermore, Rumania annexed Transylvania, Poland incorporated Galicia and Italy was granted Trieste (János 1982: 205).

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Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.