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). 69 consequences, as the new states of Central and Eastern Europe arose from the formally quasi self-sufficient economic entity of the Austro-Hungarian Empire (Berend/Ránki 1982: 94; János 1982: 205). The successor states inherited an economic structure, which was originally designed along the previously described Centre-Periphery division of economic tasks within the Habsburg Empire. Consequently, the individual fortunes of the newly independent Central European states depended on the inherited structures, which were in disproportion to the respective size of both territory and population. Whilst some countries, such as Austria and Czechoslovakia, received the Empire’s industrial capacities, in return they lacked sufficient agricultural resources. Others became dominated by large primary sectors. Hence, the economic development of these new states was severely constrained through the imperial legacies, which in most cases left them with an economy ill-designed for their needs (Ránki 1969: 110-112). In the case of post-WWI Hungary, the country suffered from a distinct drop in economic output. In comparison to the Dual Monarchy, the country was statistically more industrialised than before WWI, as it inherited only 42% of the arable land (Berend 2001g: 147).43 In total, agricultural production in 1920 reached only 50- 60% of 1913 levels (Ránki 1969: 113). In contrast, independent Hungary retained almost 57% of all its pre-war industries, 82% of heavy industry and 70% of all financial institutions (János 1982: 206). However, the output of the remaining industrial sectors stood at 55% of pre-war levels (Berend/Ránki 1974: 95). The discrepancy between production capacity and output illustrates the problematic issue of overcapacities. The inherited industrial structure had previously produced for the larger imperial and domestic markets (Berend 2001g: 148). 44 Nevertheless, expanding or even attaining pre-war levels of industrial production was exceedingly difficult. The dissolution of the Dual Monarchy also decapitated Hungarian industry from its supply of raw materials and intermediaries, which now had to be imported.45 Hungary’s chief export sectors either lost their markets due to the break up of the former Empire or they were unable to produce the required levels in order to finance imports. Moreover, despite the continuous inflow of displaced and evicted Magyars from neighbouring countries, domestic demand was too low to take up the slack in export demand due to the low level of incomes. As a result, post-WWI Hungary was heavily reliant on foreign markets, constraining both autonomy and capacity (Berend/Ránki 1974: 96). 43 Rump Hungary retained 48.6% of wheat, 64.6% of its rye and 35.8% of its corn producing areas (János 1982: 206). 44 The proportion of the population employed in industry rose from 17% (1910) to 21% (1921), whilst agricultural employment fell from 65% to 56%. Subsequently, the per capita share of industrial production increased by 60% (Berend 2001g: ibid.). 45 Only 11% of iron ore, less than 16% of forestry and 50% of black coal deposits remained in post-Trianon Hungary (Berend 2001g: 147). 70 Post-WWI Reconstruction Regime Following textbook economics, in view of the inherited economic structures, mere economic necessity would have stipulated a close cooperation between the countries in the region. However, the post-WWI zeitgeist of economic and political nationalism further exacerbated the situation (Berend/Ránki 1974: 100). Economic policy became a pivotal instrument in the quest for national reassertion. Obviously, the inherited economic structure was an obstacle to this goal. Following the premises of economic nationalism, the newly independent states set about to dismantle all economic ties to their regional neighbours. Economic independence was seen as the main fundament to guarantee independent national statehood. Accordingly, a strict course of economic autarky was followed in the region with the aim of attaining self-sufficiency (Ránki 1969: 115-116). The Hungarian government attempted to square this developmental circle by effectively continuing with the previous development regime, encompassing national industrial and agricultural capital as the main development agents. The economic policies followed the premise of import-substituted industrialisation, whereby economic expansion would result from industrial growth stemming from internal demand for previously imported industrial and consumer goods. Trade tariffs would reduce the historic barriers of entry for Hungarian firms to the internal market. Increased industrial incomes would then raise the demand for agricultural products, weakening the primary sector’s dependence on foreign market demand (Berend/Ránki 1974: 102-103; Berend 1998: 236). Initially, Hungarian independence implied that the state’s external autonomy was no longer infringed by a greater regional power. Internally, again the strategy sought to satisfy and win the consent of major socioeconomic actors, by leaving the system of Great Estates untouched and actively seeking export markets for agricultural products in Germany and Italy. It, therefore, ensured the support of conservative landed interests. Furthermore, the token gestures of the Land Reform Act of 1920 together with increased political representation of smallholding and peasant interests in parliament pacified rural discontent (Berend 2001h: 190). 46 Additionally, the persecution of the communist party as well as a compromise struck with trade unions took the wind out of the sails of leftwing militancy (János 1982: 234). By reducing the level of anti-Semitism, the moderate government managed to calm the fears ensuring the incorporation of the most vital section of entrepreneurial capital into the development regime: Hungarian Jews (János 1982: 223- 224). Furthermore, the administration continued to be a powerful instrument to coopt, accommodate and combat dissent. This implied fine-tuning the electoral system 46 A small land reform was initiated, whereby 399,000 ha. were distributed to 412,000 applicants, leaving them with tiny holdings of less than 1 ha (Berend 2001g: 152). 71 to guarantee sound majorities for the incumbent parties.47 The administration was opened to include not only déclassé members of nobility, but also the propertyless classes. This measure especially entailed the pacification of the reactionary free corps and army members (János 1982: 213). In terms of capacity, the government continued with the wide ranging industrial policies of the pre-war era. Aside from actively seeking agricultural export markets, the Industrial Act of 1907 remained in place, guaranteeing subsidies and protection for light industries (János 1982: 220). Additionally, the government also regulated trade in accordance with its industrialisation provisions. From 1921 onwards the government expanded the list of prohibited import goods. The majority of these were light industrial products and consumer goods (Csató 2001b: 185).48 The proceeds were then used to subsidise new industries, especially the textile industry via exemptions from tariffs, taxes and licensing fees (János 1982: 220; Berend 1998: 236). In a second step, the Bethlen government resorted to financing its consolidation and development plans via inflation incitation and international loans. With the economy in tatters following WWI, the government lacked a financial base to implement its development strategy. (János 1982: 209). Furthermore, the development regime’s reliance on import-substituted industrialisation within a protectionist international trade environment meant that domestic capital accumulation could not rely on the generation of sufficient incomes through export sales. However, domestic capital accumulation had to overcome the heavy indebtedness of the principle economic actors, the agricultural estates, the state and domestic capital, which had accumulated during the Era of Dualism and WWI. Inflation was seen as an option to access cheap loans and to free the landed estates from indebtedness (Berend/Ránki 1974: 103-104). International loans, however, served primarily political reasons aimed at consolidating the state’s internal autonomy. A third of the loans went towards landed property (Berend/Ránki 1974: 108). Figuratively speaking, the agricultural credits acted as a reimbursement for the income losses of the great estates. The protectionist policies had greatly increased the costs of machinery and manufacturing imports for the primary sector (János 1982: 220). However, only a tenth of the loans for agriculture were spent on productive investment, the majority was spent on luxury consumption by the aristocratic estate owners. Furthermore, a quarter of the foreign loans were used directly by the state for its own expansion in its quest to accommodate and coopt possible dissent. Only a fraction went directly to industry and was used to establish and support productive purposes (Berend/Ránki 1974: ibid). Hence, Hungary’s 47 The pre-WWI franchise law was reintroduced and amended to widen the electorate from 6.5% to 29.5%. As a result, the ruling government was returned to office with a majority of 64% in four elections between 1922 and 1935 (János 1982: 213). 48 Duties on consumer goods were increased, exceeding up to 40% of pre-WWI tariffs, with an average levy of 50% ad valorem for imported consumer articles (Ránki 1969: 115). 72 rising foreign indebtedness was the cost of attaining political stability (János 1982: 209). 49 Nevertheless, the large inflows of foreign capital were the main source of investment. Foreign capital inflows equalled total domestic capital accumulation. However, despite some large scale foreign investments, of which the most noteworthy were the location of Austrian and Czech textile mills and US lamp factories as well as German investments in the bauxite industry, the role of FDI decreased in comparison to the previous development regime (Berend/Ránki 1974: 109-110). The results of Count Bethlen’s 10 year premiership were mixed. The economy grew by a yearly average of six percent (János 1982: 238). Most of the economic growth stemmed from the strong increase in industrial production, reflecting the initial success of the protectionist policies. Hungarian firms were able to reap benefits from the “easy” stage of import-substitution by meeting the internal demand for light industrial goods.50 Accordingly, industrial employment and its share of the national GVA rose from 23% to 31%. In contrast, agriculture’s share declined, reflecting on the ongoing demise of the primary sector and its inability to return to pre-war output levels (János 1982: ibid). Contrastingly, heavy industry and the traditional manufacturing and engineering sectors continued to suffer from the loss in raw material supply, low internal and external demand and continued agricultural demise. New industries, such as electrical engineering were established. However, they were too small to absorb the slack created by the traditional industrial sectors (Csató 2001c: 198-200). The Rise of the Right and Revisionist Consent The tentative economic recovery in Hungary was cut short once again by global economic repercussions in form of the Great Depression of 1929. Although the process had already been under way in 1928, the stock market crash on Wall Street created a reactionary snowball effect. Repeated drops in stock prices provoked a retraction in capital supply in the US and then in Europe, culminating in a decrease in worldwide demand. Not unlike the previous era of large scale borrowing, initially indebted enterprises and then states were faced with extreme capital shortages, as short term loans were called in (Landes 1969: 372-373; Berend 1998: 250). For Hungary, the global economic events translated into a dramatic loss in external demand for agricultural products. The drop in world demand provoked a sharp fall in world prices for agricultural products due to excess production (Bernd/Ránki 49 By 1931, the last year of Count Bethlen’s premiership, government debt had risen to 70% of the Hungary’s GNP, with debt servicing amounting to 34% of GNP (János 1982: 209). 50 As a result of the industrial policies, which designated a third of industrial investments to textiles (Berend 1998: 238), textiles managed meet 98% of home market demand compared to 30% before WWI by 1929. Accordingly industrial employment grew by 100,000 (Ránki 1969: 117). 73 1974: 111).51 The loss of export markets caused the collapse of the agricultural economy crippling the state’s capacity (János 1982: 220). As exports declined, incomes deteriorated and production fell, as the majority of producers retreated from the market, concentrating on subsistence farming (János 1982: 245).52 Decline in world agricultural prices obviously meant a decline in the Hungary’s terms of trade.53 In comparison to pre-war levels, Berend (1998: 256) calculates that the figure for 1933 was 30% lower, meaning that Hungary had to increase its agricultural exports by a third in order to import the same value of industrial goods. A balance of payments crisis ensued. The collapse of the primary sector had severe implications for the rest of the economy. The demise of agriculture produced a serious drop in internal demand for industrial goods, resulting in lower industrial production and rising unemployment.54 Furthermore, in 1931 foreign creditors called in their loans to a number of large industrial firms and Hungarian banks, bringing the country on the verge of insolvency (János 1982: 245). The government was under immense pressure to act in order to avert the total economic collapse of the country and Hungary defaulting on its debts (Berend/Ránki 1974: 113). Rising dissent led by agricultural aristocratic interests, fearing the loss of their social and economic standing, led to a new government coalition, comprising smallholders and aristocratic landowners. It paved the way for the ascent of the extreme right to power (János 1982: 247). The new Premier, Gömbös, left the development regime in tact. However, the government undertook measures aimed at regaining the capacity to steer the economy and augment external autonomy. They implied reducing the influence of volatility of market forces on the world market and at the same time finding sizeable export markets for Hungarian agricultural products and affordable imports of raw materials and industrial goods. Simultaneously, Hungarian industry had to be further protected in order to continue the strategy of ISI. However, the policies had to overcome several contradictions in form of the continued deterioration of Hungarian terms of trade by falling agricultural prices, the lack of foreign capital and foreign exchange reserves (Berend/Ránki 1974: 114). 51 A free fall in export prices began, out-pricing Hungarian producers on international markets. International prices for livestock fell by 50%, vegetables by more than 50% and wheat by 65% (Bernd/Ránki 1974: 111). 52 As a result, Hungarian agricultural exports measured in 1929 prices fell by over 27% (Bernd/Ranki 1974: 112). By 1932, 57% of Hungarian farmers experienced a net loss in income. The agricultural production index was 40% lower in 1931 than in 1929 and dropped again to almost 60% of 1929 levels in 1932 (János 1982: 245). 53 Compared to the 1925 levels, the terms of trade fell by 8% in 1929, by 15% in 1931 and in 1933 they were 19% lower (Berend 1998: 256). 54 Despite a drop in industrial prices by over 25%, sales of basic industrial goods fell by over 80% and capital goods (iron, steel, building materials, machinery etc.) purchases dropped by over 50% (Berend/Ránki 1974: ibid). Industrial production therefore fell by over 40% between 1929 and 1933. By 1933, over 27% of the industrial labour force was unemployed and wages for those in employment were 20% lower than in 1929 (János 1982: 245). 74 Consequently, the government implemented a number of wide-ranging measures, substantially widening its capacity. First, foreign trade was centrally administered. All finished industrial product imports were banned (Berend 1998: 267). Secondly, the foreign exchange controls were extensively widened through the quota system. A centralised clearing board system was established, eventually leading to the establishment of barter trade. This instrument enabled the government to centrally administer both trade and exchange flows independently from world prices (Csató 2001b: 188). Moreover, close economic ties with the newly rising economic and political regional revisionist powers, Fascist Italy and Nazi Germany, were forged in view of regaining Hungary’s lost territory and accessing important agricultural export markets. After Hitler’s ascent to power in 1933, previous bilateral trade agreements were extended in line with his strategy of Grossraumwirtschaft, whereby the German National Socialists strived to form an economic bloc in Central and Eastern Europe in preparation for WWII. Hungary was awarded large import quotas for agricultural goods in return for manufacturing imports from Austria, Germany and Italy (Berend/Ránki 1974: 119). Finally, the Hungarian government implemented a vast public investment programme in preparation for possible hostilities with Czechoslovakia in 1938. Essentially, the government transformed the economy into a fully-fledged centrally administered war economy. It introduced production plans for industry and agriculture. Prices were administratively controlled to thwart the inflationary affects of its spending programme, which was financed through additional currency circulation (Berend/Ránki 1974: 168). Initially, these measures enabled the Hungarian state to regain and strengthen both its internal autonomy and capacity. Obviously, the strong level of state intervention greatly increased the capacity of the state to implement its economic and industrial policies, which led to a strong increase in industrial production.55 The turn away from the exigencies of the world market and closer economic ties to Nazi Germany, opened valuable foreign markets for agricultural products in return for raw materials required by Hungarian industry (Berend/Ránki 1974: 122). Internally, state autonomy was augmented by right wing populism and the rearmament programme. By pointing to the “National Tragedy of Trianon”, the blame for the dismal economic situation was placed upon the “enemies of Hungary”, which were defined as the Jews, the socialists, the neighbouring countries and the entente victors of WWI. The revision of Trianon through the reclamation of Hungary’s annexed territories was made a priority. It also served to bridge the divide between the alarmed aristocratic landowning “historic classes” and the impoverished masses (Fischer/Gündisch: 1999: 186-187). The policies secured the internal legitimacy of the development regime. Social conflicts were reduced by forging class unity 55 As a result of the state’s industrialisation drive, industry’s contribution to the national income grew from 30% to 36% between 1920 and 1941. Subsequently, the share of industrially employed labour rose from 21% to 25% (Berend/Ránki 1974: 150). 75 through the prospects of territorial revision, the repression of dissent and securing incomes of the landed nobility as well as full employment, resulting from the preparations for war after 1938 (János 1982: 301). The landowning nobility were content with these policies, as increased cooperation with Hitler served their interests. Agricultural exports to the Axis secured their incomes. The suppression of dissent banished the issues of land reform and social change from the agenda, thus securing their socioeconomic positions (János 1982: 301). With regards to the lower classes, the social situation during the 1930s was exceedingly bleak. Agricultural demise coupled with inequality of landownership led to an estimated 3 million impoverished peasants and agricultural labourers. Industrial labour was confronted by rising unemployment and severe wage decreases (Berend/Ránki 1974: 155, 159). Nevertheless, instead of grievances supporting the labour movement, social dissent paved the way for increasing right wing extremism and secured the position of the government. Berend and Ránki (1974: 150) explain this phenomenon with Hungary’s industrialisation path. Whilst heavy industry was in decline, post-WWI industrial growth was attributable to large increases in production in light industry, prominently in textiles and paper. Light industries required mainly unskilled labour, which was met by the country’s agricultural proletariat. They were more inclined to support chiliastic movements and the extreme right than the labour movement, which had been traditionally the domain of skilled labour employed in heavy industry (Berend/Ránki 1974: 165; Ránki 1969: 119). However, the gains in increased external autonomy and capacity attained by these policies only proved to be premature. Hungary’s Faustian pact with Germany gradually drew the country ever deeper into the belligerent plans of Nazi Germany. The price for economic recovery and territorial revision was growing German influence over Hungary, thereby reducing the country’s external autonomy. Hungary became one of Hitler’s vassals in his bloody quest for Lebensraum (Berend 1998: 402; János 1982: ibid). German influence had primarily an economic nature, as one of the results was the eventual complete economic dependence of Hungary upon German demand (Berend 1998: 402).56 Despite this clearly one-sided relationship, adherence continued, as the prime Hungarian goal of territorial revision was only possible through ever closer ties with Germany. The possibility of regaining lost territory eventually caused Hungary to renounce its official non-belligerent status and enter WWII on the side 56 The value of Hungary’s total exports between 1933 and 1938 more than trebled, with Germany being the principle destination for Hungarian goods. Similarly, imports doubled with the share of German import goods rising from just under 20% to over 30% (Berend/Ránki 1974: 120). Following the annexation of the Czech Sudetenland and Anschluss (Accession) of Austria to the Third Reich in 1938, Germany attained a monopoly position in Hungarian foreign trade, accounting for 53% of imports and exports combined (Berend/Ránki 1974: 122). 76 of the Axis in the Yugoslavian Campaign and participate in the attack on the USSR in 1941 (Berend/Ránki 1974: 168; Fischer/Gündisch 1999: 195-196).57 Hence, the quest for economic recovery and growth following WWI failed. Overdependence on agricultural exports together with an industrial structure highly dependent on imports of capital goods, intermediaries and raw materials in an international environment hostile to trade severely constrained the autonomy and capacity of the state to fulfil its developmental aims. The quest to regain its autonomy and capacity was led by an undemocratic and revisionist political elite interested in upholding the “historic social order”. Consequently, it sought its salvation not in social and economic reforms, but in the horrific logic of ever closer ties with Nazi Germany. In the end the opposite occurred, as Hungary was drawn into WWII, destroying the “historic elite” and resulting in the Soviet occupation of Hungary. 2.2.3 Hungarian Socialism (1948-1990) Rising hostilities between the USSR and the USA over the degree of Soviet influence in the European countries under Soviet control caused the break up of the WWII alliance during 1947 and 1948 (Link 1988: 106-109). In the case of Hungary, these events led the Communists in 1947 to openly take over political institutions and the country was firmly embedded in the Soviet-led Eastern Bloc. The “Sovietisation of Hungary” (Berend 2001i: 273) commenced and a state-socialist modernisation strategy was unleashed, based on the Soviet model of development (Berend/Ránki 1974: 193). The Communist Party, MDP, had to tackle the simultaneous challenge of economic reconstruction and meeting its reparation obligations. The aftermath of WWII was particularly severe for Hungary. Having not only actively participated in the conflict on the side of Nazi Germany, the country also became a theatre of war. An estimated 6% of the population perished (Berend 2001i: 253). Total war damages stood at approximately twice the level of the country’s national income in 1938 (Berend 2001i: 256).58 Furthermore, Hungary was committed by the ceasefire agreement to pay extensive reparations to its neighbours and the USSR for its role in 57 The so-called 1st Vienna Award in November 1938 returned the Magyar-dominated southern part of Slovakia. In March 1939, the Carpatho-Ukraine and in April East Slovakia were granted to Hungary following the complete occupation of the Czechoslovakia by Germany. The 2nd Vienna Award in April 1940 returned Northern Transylvania. Hungary’s role in the Yugoslavia Campaign led to the annexation of the Bákcsa Region (Berend/Ránki 1974: 168; Fischer/Gündisch 1999: 194-195). 58 Damages to agriculture stood at 20% of the national income (Berend/Ránki 1974: 181). Industry lost 24% of its 1938 capacity, with 50% of its factory buildings and 75% of its machinery ruined (Berend/Ránki 1974: 182). The destruction of Hungary’s transport system had thrown its level of development back by 100 years (Berend 2001i: 255). Between 1945 and 1946, reparations amounting to 17% of the national income were made. 10% in the following year and then reparations reached an annual average of 7% until 1952 (Berend 2001i: 258).