Content

Philipp Fink, Hungarian Socialism (1948-1990) in:

Philipp Fink

Late Development in Hungary and Ireland, page 76 - 90

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8 https://doi.org/10.5771/9783845217208

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
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). 77 WWII. These were to be paid in kind through goods and the dismantlement of remaining production facilities (Berend 2001i: 258). The State-Socialist Development Regime Essentially this development regime comprised a single actor: the state. In a sense, this development regime can be described as an extreme form of economic nationalism, whereby industrialisation was to be attained via strict import substitution and ubiquitous state intervention (Berend 2000: 48). The nationalisation process was completed, bringing the remainder of private productive capital into state ownership (Berend 2001i: 274-275).59 Hence, state capital became the sole developmental agent. State capital formed the tool with which the developmental goals of the state were to be met. State capacity was greatly enlarged by supplementing market mechanisms by centrally administered prices and wages. These were set in complete disregard to their real values. Instead of relying on the individual initiatives and incentives of market actors, the prices followed the goals of economic development, as stipulated by the all encompassing imperative development plans. The plan substituted the market by regulating the exchange of goods between the state-owned enterprises, the distribution of resources for production, consumption and investment (Berend 2001j: 280). A “seller’s market” (Kornai 1993: 2) was essentially established, whereby economic actors were compelled to buy the products offered as designated by the development plan. Hence, ubiquitous institutions were created to ensure the fulfilment of the planning directives. The most important of which was the National Planning Office. This body was responsible for translating the economic goals into economic development plans, as defined by the highest economic planning unit, the MDP’s People’s Economic Council (Berend 2006: 159). The directives were disaggregated into smaller timeframes and broken down for the various sectors, branches and, finally, enterprises. Ministerial branches were established to oversee the performance of specific industries and branches. They devised and implemented individual enterprise plans, performed price-control functions, controlled and directed production and procurement (Berend 2001j: 287). Consequently, a barter system was put in place, whereby an exact amount of material inputs and outputs for individual enterprise plans were devised via a quota system. Interlocking plans had to completely match one another from the national level (“national material balance”) down to the individual firm and production unit. 59 In March 1949 all firms employing more than 100 employees were expropriated. By December, all enterprises with more than 10 employees were nationalised. By the early 1950s, foreign-owned firms had bee nationalised. By 1953, independent productive entities ceased to exist (Berend 2001i: ibid). Smallholders were forcibly collectivised by the introduction of the Soviet-style Kolkhoz system from 1948 onwards (Berend 2001j: 286). 78 Hence, productive relations between firms were defined by the central system of distribution of goods using the quota system. Only consumer prices expressed their production costs. Prices for investment goods were artificially set and were subsidised by the state in accordance to the directives as prescribed by the “national material balance” (Berend 2001j: 288-289). Similarly wages were centrally set and were kept low in order to decrease production costs as well as to inhibit alterations to the plan directives through excessive consumption. The success of the system rested upon the fulfilment of the centrally fixed quotas. They were obligatory and any failure to comply was met with harsh punishment. Furthermore, a scrupulous reporting system was devised in order for the administration to be fully informed on the fulfilment of the set quotas in some cases on a daily basis (Berend 2001j: 288-289, 291). A meticulous centrally administered price system, therefore, supplanted market prices. The described instruments and institutions followed the single aim of centrally mobilising and distributing the national resources towards the fulfilment of the core element of the state-socialist development regime: the 5-Year-Plan. State ownership of the productive structure ensured not only the state’s capacity to implement its development strategy. It also contributed to the high degree of internal autonomy, as the formulation of the development strategy was not obstructed by possible opposition through private industrial or agricultural interests. A radical land reform together with a denazification process had finally dissolved the “Historic Social Order”. As a result, the system of Great Estates and consequently nobility ceased to exist (Berend 2001i: 261). The collectivisation of agriculture abolished smallholding, not only leading to state ownership, but also transferring peasant labour into the rapidly growing industrial workforce (Berend 2001j: 286).60 Internal autonomy was guaranteed by an omnipresent party system controlling all areas of social, economic and political life with the aim of ensuring popular compliance to the socialist development regime. The nomenclatura ensured obedience and popular consent to the party line. In effect, the old historic order was replaced with new socioeconomic elites. Relevant party organisations decided over the appointment of trustworthy party members in all relevant political, social and economic institutions. Labour was organised into the official party trade union organisation, SZOT (Berend 1996: 53). Dissent was crushed by the initiation of successive waves of purges against possible dissenters within the MDP and against opponents of the regime with Soviet support. A harsh Stalinist dictatorship evolved and a paranoid regime of terror under the MDP General Secretary Mátyás Rákosi ensued, ensuring a high degree of internal autonomy. Consent of the population to the harsh social and economic policies of reconstruction and industrialisation was attained by forced (Fischer/Gündisch 1999: 208). 60 The aim to eliminate private farming forced almost 150,000 peasants to work in industry and construction (Berend 2001j: 286). 79 In contrast, Hungary’s external autonomy was low. Socialist Hungary was firmly inserted into the Soviet-led Eastern Bloc with the country following Moscow’s political and economic prescriptions. Hungary joined Stalin’s “socialist world market” through its membership in the Council for Mutual Economic Assistance (CMEA) in 1949 (Berend 1996: 82). This regional trading block comprised all socialist-led countries in the Soviet sphere of influence. The CMEA was designed to substitute international trade by serving as a trade mechanism between the countries of the socialist bloc. Currency exchange was eliminated and the members of trade bloc exchanged their products using barter trade (Berend 1996: ibid). On the outside, the step towards economic autarchy seemed to be logical. The adherence to a strictly imperative planning process could not allow for price fluctuations, stemming from international price movements, to cause constant adjustments in the plan directives (Berend 2001j: 289). Furthermore, the emergence of the Cold War led to a trade embargo of the socialist bloc by the West in 1949. The so-called COCOM-list61 was introduced, banning the export of strategically important goods to the socialist camp (Link 1988: 111). The socialist countries were subsequently cut-off from Western technological developments (Berend 2006: 173). Consequently, the CMEA designated final product specialisation and fixed the volume of trade between its members. In effect, the USSR assured ample supplies of raw materials and energy exports in exchange for manufacturing imports.62 Furthermore, joint cooperation between the members in areas of technology development and energy supply and production took place. This constellation was to prove to be a vital initial asset, allowing the rapid industrialisation of the mostly agrarian countries in the region (Berend 2006: 167-168). National development plans were devised according to the terms dictated by the CMEA agreements, which stated the area of specialisation. Industrial modernisation was therefore externally induced. However, no division of labour between the member states took place. Instead, the production of the final products was allocated to individual member countries.63 Even though the member states benefited from cheap energy supplies, the terms of the accords were designed to cater for primarily Soviet needs. Consequently, the CMEA ensured “Soviet economic domination of the bloc countries for four decades” (Berend 2006: 169). Hungarian dependence on Soviet raw material and energy supplies coupled with the presence of Soviet troops severely infringed the country’s sovereignty, reducing Hungary to a mere Soviet satellite. The presence of so-called Soviet “Advisors” 61 COCOM: Coordinating Committee for Multilateral Export Controls was founded by NATO in 1949 and was designed to monitor and regulate trade between the capitalist and socialist blocs (Berend 2001m: 341). 62 As a result the amount of trade from the US with the Eastern Bloc fell from US$ 335.3 million in 1947 to US$ 0.5 million in 1952. In contrast, the share of trade between the USSR and its allies rose to 89% in 1952, illustrating the increasing bipolarisation of international relations (Link 1988: 111). 63 Consequently, Hungary became the world’s sixth largest bus manufacturer (Berend 2006: 168). 80 ensured the compliance of its vassals towards the demands from Moscow. The ruling party was under direct Soviet control. Prominent positions had to be sanctioned with the Soviet Politburo. Hungary’s economic development plan had to be agreed to by Moscow and the country’s security agencies and the military were put under the tutelage of respective Soviet organisations (Berend 2001i: 277). The Results of Forced Capital Accumulation The overriding aim of the first 5-year-plan (1951-1954) was to attain a fundamental transformation of the country from an agricultural to an industrial society. Hence, a 210% growth rate for the secondary sector was envisaged (Berend/Ránki 1974: 199). According to this premise as well as following defence considerations during a period of growing East-West hostilities, economic growth was to be primarily attained from heavy industry following military considerations.64 In contrast, the prescribed investment rates for the remaining sectors were far lower. Agriculture received 13% of total investments and so-called “non-productive” infrastructure investments were limited to a third of total investment (Berend/Ránki 1974: ibid). Resource allocation, distribution, investment and consumption were centrally administered. Consequently, the development regime was able to attain historic levels of capital accumulation and capital formation in a country renowned for its low accumulation levels. Whilst pre-WWII GDP growth in Hungary had averaged 6% with a maximum capital accumulation rate of 8%, by contrast state-socialist capital accumulation grew by 30% between 1950 and 1954 (Berend 2001j: 281). These growth rates were reached by forced savings through the exploitation of the workforce and general deflationary measures aimed to increase general levels of capital formation at the cost of living standards and consumption (János 2000: 249).65 Accordingly, annual industrial output grew by 20% between 1951 and 1954. However, the overall economic annual growth target of 26% as prescribed by the plan was underscored (Berend 2001j: 286). It was also becoming clear that the vast investment sums had overstretched the material productive possibilities of the country. On the one hand sums were channelled into many large investment projects that lay idle due to the lack of material resources. On the other, the quality of production was substandard. Draconic measures to enforce compliance with the prescribed 64 Defence expenditure totalled an estimated 50% of investment sums for civilian purposes (Berend 2001j: 284). 65 Although wages initially rose by 20%, consumption was deterred through the introduction of taxes, such as the “Plan Loan”, whereby 3% to 5% of the wages were siphoned off by the state. Furthermore, the peasantry was forced to compel to increasing production quotas and were paid minimal prices for their products. Simultaneously, the state made ample use of its pricing powers. Consumer prices were increased by 50% to 100%, leading prices to reach twice their 1950 levels by 1953. Hence, the average real wage in 1953 was 22% lower than in 1950 (Berend 2001j: 282). 81 quotas led to a disregard of product quality in favour of quantity, leaving many goods either unsold or unusable.66 Furthermore, economic growth was attained with the total neglect of energy and raw material consumption (Berend/Ránki 1974: 221). Raw material and energy shortages, but also the need for increased capital goods for the rapidly expanding industrial sector led to a rapid increase in imports, increasing by 76% between 1950 and 1955. This however implied raising the amount of exports in order to finance the imports following the CMEA statutes. Accordingly, more industrial products were exported leading to an 85% increase in exports. Consequently, despite the rhetoric of autarchy, the dependence on foreign trade for economic growth increased.67 Rising dependence on foreign trade put additional strain on the economy, as increased amounts of produced goods were diverted from the internal market and exported in order to cover vital imports (Berend/Ránki 1974: 239). Additionally, the neglect of consumer goods production and agriculture resulted in the poor performance of these sectors. Agricultural production severely suffered due to the effects of forced collectivisation.68 The results were acute shortages, leading to the reintroduction of wartime rationing in 1951 and kindling popular dissent. Fearing a loss in its legitimacy caused by a malfunctioning of the economic system, popular consent was coerced in order to secure the state’s internal autonomy (Fischer/Gündisch 1999: 209).69 The Revolution of 1956 and the Ascent of Kádárism The harsh realties of enforced modernisation were growing a liability in all Socialist satellite states. Following Stalin’s death in March 1953, the USSR under Malenkov turned towards tentative reforms by announcing the New Course. Essentially, it was an attempt to roll back the totalitarian nature of Stalinist state-socialism in a bid to diffuse growing social and economic tensions (Berend 1996: 99-100). In Hungary, Soviet pressure forced the Hungarian Stalinist dictator, Rákosi, to relinquish some of his power. The reformist Imre Nagy was appointed Premier in the spring of 1953; however, Rákosi remained General Secretary of MDP (Fischer/Gündisch 1999: 210). Nevertheless, the country was swept into political turmoil for three consecutive years, as Hungary was paralysed by repeated conflicts between reformist and conservative factions within the MDP, leading to Nagy’s dismissal as Premier in 1956 (János 2000: 294). 66 An estimated 20% of national income was lost due to resource waste (Berend 2001k: 294). 67 For every 1% of national income growth, foreign trade had to rise by 1.25% between 1950 and 1955 (Berend/Ránki 1974: 239). 68 By 1956, 1.7 million ha. of arable land was left unattended. Additionally, failed harvests contributed to total agricultural production to fall 8% below 1938 levels (Berend 2001l: 346). 69 Around 1/9th of the population were suspected of economic sabotage (Bernd 2001k: 293). 82 Public patience finally came to an end. A spontaneous demonstration by students exclaiming support for the Polish uprising, citing the March 1848 declaration of independence and demanding economic, democratic reforms as well as an end to Soviet occupation soon turned into a violent uprising against the socialist regime on 23rd October, 1956 (Tischler 2006: 16-17; Kramer 2006: 13). Popular consent to the harsh industrialisation regime had broken down severely, reducing the state’s internal autonomy. Following the defection of parts of the armed forces and police to the demonstrators, the conservative leadership of the MDP was replaced by János Kádár and the figurehead of the reformist movement, Imre Nagy, was reinstated as Premier. Democratic and economic reforms were promised (Fischer/Gündisch 1999: 12). However, the subsequent events illustrate the lack of external autonomy, as the regional hegemonic power moved to prevent a possible Hungarian defection from the socialist camp. After repeated anti-socialist uprisings throughout the Eastern Block (GDR 1953, Poland 1956), the Soviets were not prepared to allow the success of a Hungarian precedence within their own backyard (Fischer/Gündisch 1999: 213). They subsequently bloodily quashed the reform movement and instated the pro-Soviet government under the leadership of the previously defected General Secretary of the newly christened Hungarian Socialist Worker’s Party (MSZMP), János Kádár (János 2000: ibid). Kádár quickly moved to regain the internal autonomy of the socialist regime by restoring public order through brute force. The ruling MSZMP legitimised its actions by publicly portraying the revolution as a counterrevolutionary and revisionist act. This justification was to be the official interpretation of the 1956 uprising until the end of the socialist regime in 1990 (János 2000: 295). With the removal of the revolution’s main perpetrators and the restoration of public order by 1962, Kádár set about to reconsolidate the primary power position of the MSZMP.70 Kádár’s policy concentrated on the reconstruction of public consent towards one-party-rule in Hungary by instigating a soft dictatorship also known as Kádárism (Kornai 2000a: 130). Fischer and Gündisch (1999: 216-217) summarise the four main points of Kádárism, which were derived from the lessons of 1956. First, the destabilisation of political power and political institutions had to be averted at all costs. This implied the adapting the MSZMP’s political organs to react earlier to problematic signs of social and political unrest. Second, the example of previous Stalinist terror system and dogmatic party ideology had illustrated that public consent to the socialist regime could not be attained by brute force. Third, this implied that power stabilisation should only occur through the use of political measures. Hence, systemic openness in economic, political and social affairs was required. Finally, the fundamentals of the socialist system were nevertheless unchangeable. This encompassed espe- 70 An estimated 400 people were executed and 20,000 people were jailed for their participation in the Hungarian Revolution of 1956 (Fischer/Gündisch 1999: 216). An estimated 200,000 people fled the country (Berend 1996: 126). 83 cially the socialist property order and the continued power monopoly of the MSZMP. These lessons required the attainment of three interrelated goals. First, economic modernisation; second, an increase in living standards; and thirdly, the attainment of popular legitimacy of the socialist system (Fischer/Gündisch 1999: 217). Legitimacy of the system was not ideologically defined. Rather it meant popular consent towards one-party socialist rule with the aim of regaining the state’s internal autonomy and capacity. Hence, the measures were centred on increasing the degree of personal freedom and material well-being to the highest possible degree without the questioning the MSZMP’s power monopoly. The aim was to depoliticise the population through the establishment of a consumer society (Fischer/Gündisch 1999: 218). Accordingly, the priority of industrial investment was weakened to the benefit of consumer goods and agricultural production. An adequate supply of labour stood in the forefront of these measures. This also implied the establishment of a universal welfare system (Berend 1996: 146, 176). Essentially, a social contract was established, whereby the population consented to one-party-rule and enjoyed personal freedoms unseen of within the socialist bloc (Brunner 1993: 72). However, internal autonomy could only be attained and more importantly upheld through an increased and stabilised external autonomy. This implied Soviet tolerance of Hungarian reform socialism through Hungary’s strict adherence to Soviet foreign policy. Nevertheless, the chosen path was never free of external pressure from Moscow, which readily intervened together with diehard conservatives in the MSZMP whenever the Hungarian reform course seemed to be too bold. Hence, Hungarian external autonomy remained low (Fischer/Gündisch 1999: 220). Consequently, internal autonomy and capacity were compromised by the existence of two factions within the state apparatus: reformers favouring market reforms and conservatives adhering to the Soviet development model. Furthermore, the conservatives could be sure of support from Moscow, as the Soviets watched with Argus eyes to ensure that Hungary remained loyal to the Eastern bloc. Kádár became to be known as the “great chess player” (Berend 1996: 152), squaring the circle by attaining the highest degree of individual freedom within the socialist bloc and simultaneously following Moscow’s pipe tune. The Era of Continuous Reforms Kádár’s reforms focused on the problems created by the state-socialist industrialisation drive of the 1950s. Ironically, the malfunctioning of the economic system resulted from the state’s over-capacity. The centrally administered economy proved too complex to steer, effectively reducing the state’s capacity to fulfil the developmental goals. The reform measures repeatedly focused on price reforms and the decentralisation of economic actors in an attempt to improve efficiency incentives to augment the performance of the developmental agent (Berend 2001k: 299). Hence, the policies were aimed at regaining the state capacity to ensure that the party’s 84 power monopoly remained uncontested, thereby guaranteeing the state’s internal autonomy. The reforms centred on the problems of deriving from the socialist “shortage economy” (Kornai 2000b: 29-30). Following Kornai’s (1986: 1715) definition, overcentralisation and the defunct price-value relations created a situation defined by a chronic shortage problem inherent to the economic system and resulting from the evolution of a sellers’ market. Both excess demand and unnecessary surplus surfaced. The lack of price-value relations in production created detrimental incentives for economic actors, leading to waste as well as to supply shortages. Productive quota compliance led to over investment, as plan directives prescribed a certain output growth regardless of the momentary needs. Hence, the incentives called for the production of quantity and not quality. In addition, the system in which plan directives replaced individual incentives was inherently inflexible. It was unable to react to short-term demand and supply fluctuations, resulting in excess production or in excess demand (Kornai 1986: 1717). The existence of so-called “soft budget” constraints additionally amplified the problem of inefficiency. Direct state subsidies of SOEs allowed management decisions to be made independently of the firm’s budgetary situation. Firm losses were neutralised by state transfers, prompting their unresponsiveness to price changes (Kornai 1986: 1698). Hence, neither were investment failures nor erroneous management decisions penalized, nor the borrowers compelled through the price of credit to use capital effectively and efficiently (Kornai 1986: 1716). The main elements of the subsequent reforms had been already formulated in the secret re-evaluation of the first 5-year-plan in 1953. The study proposed to cease with compulsory plan directives, decentralise economic actors and to abolish centrally administered prices and price subsidies, except for certain basic and strategically important goods. Enterprises would then produce for profits. Furthermore, the proposals called for an institutional reform by abolishing the branch ministries and introducing a two-tier banking system. The role of the state would be reduced to govern the economy by an indicative plan and using economic incentives to guarantee its fulfilment (Berend 2001k: 301-302). Berend (1990: 292) identifies a total of three reform phases from 1962 until the end of socialism in 1990. The constrained external autonomy by repeated Soviet interventions resulted in the reform process to be a compromise between Soviet interests and the rival factions within the party. Owing to the internal and external constraints on policy making, the reforms constantly remained half-way measures resembling a zigzag between the two poles of reformism and conservatism and dependent on Soviet leeway. The first phase adversely embarked on a further centralisation of the economic system in order to reduce the administrative burden and the complexity of the planning process. Economic actors were amalgamated into vast horizontally and vertically integrated conglomerates. Investment emphasis was shifted from heavy industry to consumer goods productions and agriculture, allowing for more balanced growth and enabling real wage growth. More attention was paid to technological 85 modernisation. Large investment sums were allocated for certain engineering sectors and the chemical sector (Berend 2001k: 304-305). Agricultural reforms, which abolished compulsory supply quotas and turned the primary sector into a hybrid system of state and private ownership proved to be a success (János 2000: 297). 71 Moreover the plan directives were largely fulfilled. Industrial growth increased by 47%, agricultural production increased 10% and incomes grew by 9% between 1960 and 1965 (Berend 2001k: 304). The second reform phase was introduced with the announcement of the so-called New Economic Mechanism (NEM) in 1968 in the aftermath of the Prague Spring. It was becoming increasingly clear that the main input factor for economic growth, constantly growing labour mobilisation, was reaching its limits. The resulting output stagnation would endanger the state’s developmental capacity (Csaba 1995: 214).72 The high level of industrial investment, rising incomes and consumerism caused a distinct increase in demand, which could not be met by the internal economy. Import demand especially for capital goods rose. However, the country did not have sufficient exports in order to finance the rising imports. The few exportable goods were too expensive and of poor quality (Fischer/Gündisch 1999: 222). Essentially, the NEM mirrored the dismissed proposals of 1950s. The focus was laid upon on decentralisation, price liberalisation and consumerism. 73 Economic planning and actors were decentralised in an attempt to further reduce the state’s over-capacity. Enterprise independence was increased in regards to investment and remuneration. The system of imperative centralised planning was abandoned. Plans were still made, but they resembled the French system of indicative planning (Berend 2001k: 312). The state resorted to regulating production to fulfil political goals via indirect measures such as taxes, credit sums, price policy and wage instruments as well as tariffs and charges (Fischer/Gündisch 1999: 223). Initially, it seemed that the policy of consumerism of was paying off. The Hungarian population enjoyed a general level of material well-being never experienced before. The wide ranging universal health and social security system guaranteed a level of welfare and security un- 71 Output doubled and towards the end of the 1960s, agricultural income per capita was two thirds of US levels and by the beginning of the 1980s, productivity was on par with US levels (Berend 2001l: 249). Hungary became the fifth largest grain exporter in the world. Private plots contributed to 36% of internal market supplies. Agricultural incomes exceeded those in industry by 7% in 1970 (János 2000: ibid). 72 For instance, 21% of the goods offered for trade in 1960 were considered to be obsolete stock, resulting from excess production or non-saleable produce due to low internal demand or poor quality (Berend 2001k: 306). 73 Eventually, 66% of producer prices were liberalised and followed free market prices, only 35% remained fixed and subsidised by the state. The proportion of liberalised consumer prices rose to 50% of all consumer goods. This figure was not changed in order not to jeopardise the policy of consumerism (Berend 2001k: 314). 86 known of before (Berend 1996: 152). 74 The effects of “Goulash-Communism” brought Kádár’s soft dictatorship to the height of his national and international popularity during the 1970s. However, the malfunctioning of the CMEA also added pressure to the production plans. Faced with similar constraints, the CMEA member states were unable to supply each other with the required goods and more importantly with the necessary technology (Berend 1996: 223). For lack of sufficient productive capacities, Hungary repeatedly was unable to fulfil its CMEA export obligations. Indebtedness ensued. The need for exports to pay for increased imports led to an incremental transformation of the development regime. Mere economic necessity prompted Hungary to deepen its trade relations with the capitalist West (Berend 1996: 224). The decision to open the import-dependent economy further to international markets increased the influence of external global events on an economy unable to adapt, thereby further reducing the country’s external autonomy (Berend 2001m: 373). The successive oil crises revealed a grave structural crisis in the Eastern Bloc and were to deliver the final blow the socialist development regime (Berend 2001b: 343). The oil price shocks of the 1970s unleashed an inflationary process through western imports. The prices of raw materials and energy soared, thus hitting the heavily import-dependent economy at its most vulnerable point (Berend 2001b: ibid).75 The high level of prescribed investment and the continuation of imperative economic growth policies culminated together with rising private consumption into a constant deterioration of trade balances, as the demand for costly imports rose (Berend 2001b: 374). Although the socialist regime saw the need for the increased generation of exports, in the light of the country’s constrained external autonomy, any drastic brake away from the prescriptions of the socialism would have enticed Soviet interference. However, the implementation of deflationary austerity measures would have seriously undermined popular consent to the development strategy eventually jeopardising the state’s internal autonomy. Hence, Kádár resorted to increased borrowing from international capital markets glutted by cheap petrodollars in the 1970s. However in similarity with other peripheral countries, Hungary was severely affected by interest rate rises in the 1980s, 74 Annual GDP growth between 1950 and 1973 stood at 3.5% (Berend 2000: 49). Living standards measured as GNP per capita attained 89% of the European average in 1973 (Berend 1996: 187) growing by over 50% between 1960 and 1970 (Berend 2001n: 362). 75 The oil price increase caused import prices to rise by 70% between 1973 and 1978. In contrast, Hungarian exports to the world market were only able to fetch 30% to 40% higher prices throughout the same period. As a result, Hungary’s terms of trade deteriorated by 20% during the 1970s. Hungary, therefore, had to increase its value of exports by 5 times in order to import the same value of goods as before the oil price hike (Berend 2001k: 317). 87 following a change in international monetary policy leading to the country’s heavy foreign indebtedness (Berend 1996: 231).76 Following the decision of the USSR to demand US$ for energy supplies (Csaba 1995: 215), acknowledging the dire state of the economic situation and fearing a loss in internal autonomy Kádár embarked on the third reform phase. The immediate reform measures focused on continuing the price reforms to reduce state expenditures and curb import dependent consumption as well as wide ranging institutional reforms to increase efficiency incentives (Berend 2001k: 319).77 Economic actors were decentralised and eventually privatised (Antal-Mokos 1998: 40; Berend 1990: 281-282). The supervisory and controlling powers of the state were reduced and transferred from the centre in favour of subsidiary state institutions (Czabán 1998: 228). However, export-drives under IMF tutelage between 1981 and 1984 based on devaluations and import liberalisation severely backfired, resulting in inflationary pressure in the Hungarian economy (Csaba 1995: 215-222). Import demand proved to be inelastic (Csató 2001d: 355) and Hungarian exports were shelf warmers on international markets. Furthermore, the subsidisation of exports had created a large budget deficit, increasing the need for foreign loans (Czabán 1998: 229; Berend 1996: 231). The failure of the export-drive illustrated that a change of economic incentives could not attain international export competitiveness alone. Instead, the continued underperformance of the developmental agent made it painfully clear that the productive structure was technologically antiquated (Berend 1996: 226; Nyitrai 2000: 550). The state-socialist drive for industrialisation was centred on “extensive” growth (Krugman 1994b: 68-69). Based upon increasing labour and capital inputs, the strategy disregarded “intensive” industrialisation in the form of increased labour productivity through technological innovation (Berend 1996: 223). Hungarian industrial production was considerably energy and material intensive due to its antiquated production technology.78 Hence, Hungary was unable to produce the goods demanded by international markets. Efforts to adapt to world market developments defined by the new technological regime of electronics in the 1970s and 1980s “may be compared to a situation of attempting to adjust to the nineteenth century Industrial Revolution without 76 In the first 5 years following the 1973 oil price shock, Hungary was able to obtain loans in excess of US $ 8 billion (Berend 2001n: 374).By 1989, the total sum of foreign debt rose to US $ 20.3 billion, leading to the region’s highest per capita debt of US $ 2,585 with debt servicing consuming 40% of its export earnings (Berend 2001n: ibid). 77 As a result of a cut in price subsidies, prices for fuel rose by 54%, 30% for chemical derivatives and materials, 10% for agricultural products, 10% to 20% for transport and housing services. Food subsidies were decreased by over 70%. Consumer prices rose by 6% in 1980 and ca. 50% of retail goods were covered by free prices Berend (2001k: 319). 78 In 1980, Hungarian industry used 1.6 times more steel and 1.8 times more energy per unit produced as Western industry. The average age of industrial equipment was 15 years and in some cases even older compared to an average of 10 years in the West (Berend 2001m: 339). 88 having railroads” (Berend 1996: 227). In order to catch-up to Western standards of production and innovation, huge financial investments had to be made, which were not at hand to the heavily indebted state (Berend 2001m: 339). The first pillar of Kádárism, economic modernisation, was crumbling. The Demise of Socialism Hence, the reforms created contradictory economic and political effects. They essentially reduced both the capacity and the autonomy of the state to formulate and implement its developmental goals, as excessive state borrowing deferred structural adjustment. As a result, the development regime malfunctioned and the ensuing contradictions led to the eventual downfall of the socialist regime in 1989. Bartlett (1997: 135-136) emphasises that the demise of the state-socialist regime was linked to the inherent contradiction of instigating market reforms within a communist institutional system. With the decentralisation of economic decision making, in effect the MSZMP gave up its power monopoly. The crisis of the 1980s had made it painfully clear to the MSZMP that macroeconomic stabilisation and structural adjustment could only be attained by forcefully recentralising control to impose deflationary measures. This was, however, totally out of the question. In a sense, the socialists reformed themselves out of power. Beginning with the external autonomy of Hungary, the demise of the Soviet hegemony over the region beckoned the ascent of the Western influence (János 2001: 231-232). The instigation of Soviet domestic reforms and the announcement of a new foreign policy course (Glasnost and Perestroika), led to a relaxation of Soviet interference (János 2000: 343). With the demise of external Soviet control on Hungarian internal affairs, the socialist one-party-state lost its coercive guarantor of last resort and hence its threat potential to enforce popular consent to the development regime. Consequently, reformers had more room to manoeuvre. Further economic deterioration throughout the 1980s allowed this group within the state apparatus to gain rising influence over the reform process (Czabán 1998: 229-230). As a result, the need of access to international credit involved the IMF and the World Bank in the economic reform process (Czabán 1998: 228). Second, a distinct dichotomy appeared, hollowing out the state and severely weakening its capacity and internal autonomy. On the one hand the beneficiaries of market reforms followed their individualistic strategies and exited to the private economy, where they were beyond direct state influence. On the other hand, the losers of the reform process, the large import-dependent and technologically antiquated industrial conglomerates, remained within the state sector. They were able to tap the financial resources and influence policy making in their favour (Bartlett 1997: 137). The institutional reforms had created new bargaining channels and coalitions. The increased importance of subsidiary state bodies weakened and fragmented central government, as the bargaining channels were used to counteract the spending con- 89 straints set by central government (Czabán 19998: 229). Labour organisations in collusion with managers bypassed central government to bargain with the various state bodies in charge of economic policy in order to extract exemptions from the central administration in regard to wage increases and subsidies (Czabán 1998: 228; Bartlett 1997: 62, 67). Hence, the state’s capacity to enforce fiscal constraint and to control consumption was weakened as the relevant economic actors were increasingly beyond state control. Consequently, new bargaining coalitions and actors emerged challenging central policy making, thereby effectively eroding the state’s internal autonomy. Third, the continuation of soft budget constraints in SOEs counteracted the aims of fiscal and financial reform additionally reducing the state’s capacity. The policy of supplementing SOE market earnings through state subsidies undermined the profit and loss-making awareness of SOE managers (Kornai 1986: 1697-1698). Not only did this practice hinder a rationalisation of production and restructuring. It also induced banks to value the largest ailing SOEs as particularly creditworthy due to their receipt of state transfers. Ironically, well performing SOEs found it difficult to obtain loans. They were additionally burdened by the very high corporate taxes, which were redistributed by the state towards ailing SOEs (Kornai 1986: 1696-1697). Credit therefore could not be used as a restructuring instrument, thus harming the state’s capacity to restructure the state sector of the economy (Bartlett 1997: ibid; Kornai 1999: 3-4). Finally, the lack of a democratic system of checks and balances made the policymaking and implementation process opaque and uncontrollable. Not only was the state vulnerable to particularistic bargaining. The true extent of the dire state of public finances was also left undisclosed (Csaba 1995: 221). Furthermore, the MSZMP intervened at will according to its political prerogatives without being held accountable or responsible. As a result, the state’s capacity to introduce fiscal discipline was further undermined (Bartlett 1997: 137-138). The reform wing of the MSZMP recognised the party’s growing political and socioeconomic impotence and instigated “a reform from above”, leading to the “negotiated” revolution of 1989 (Fischer/Gündisch 1999: 243). In the face of further economic deterioration and rising external pressure from international financial institutions as well as growing internal unrest due to the social costs of the austerity measures, the reform wing of the MSZMP toppled the remaining conservative hardliners within the party. Reformers, favouring a return to democracy and the introduction of a market economy took over control of the reform process (Berend 1996: 275; Fischer/Gündisch 1999: 239). The final blow to the Socialist system occurred when the MSZMP lost its popular support. The introduction of severe austerity measures in line with the IMF standby agreements in 1987 was directed at drastically lowering state expenditures. The second pillar of Kádárism, the Socialist welfare and consumer society had been undermined. Consequently, popular consent further deteriorated, when the party’s union, SZOT, declared its independence from the MSZMP. The party could no longer claim to represent workers’ interests (Bartlett 1997: 63) 90 One-party-rule was finally ended following the controversial publication of an internal re-evaluation of the 1956 Revolution by the MSZMP’s Central Committee in January 1989. By referring to the suppression of the 1956 Revolution as an unlawful act. The final pillar of Kádárism was demolished, as one party rule was without any official legitimacy (Berend 1996: 274). Consequently, a few days later in February the MSZMP renounced its power monopoly, legalised political parties and began negotiations with the opposition. The first democratic elections on 8th April 1990 officially concluded the era of Hungarian socialism (Fischer/Gündisch 1999: 239-241). To sum-up, state-socialist modernisation managed to propel Hungary towards an industrial society. Within a situation of compromised external autonomy, the oneparty-state and its ubiquitous bureaucracy guaranteed a high degree of internal autonomy and capacity to mobilise high levels of labour and capital. Over-capacity of the state ensued resulting in the technological backwardness. The economic system malfunctioned, detrimentally affecting the state’s capacity. Hence, the repeated economic reforms can be seen as an attempt of the state to fine tune the development regime. However, the reforms failed to tackle the underlying problem of technological backwardness and inefficiency, reducing the state’s capacity and internal autonomy. Ensuing economic demise resulted in rising dissent, leading to the erosion of internal autonomy and the eventual demise of the development regime. 2.2.4 Continued Hungarian Backwardness The “one and a half centuries of Hungarian economic modernisation” (Berend 2001a: 1) show surprising similarities, despite differing historical circumstances and ideologies. The three development regimes under scrutiny illustrate not only the existence of similar constraints to Hungarian development, but also portray similar reactions by the dominant socioeconomic elites. All development regimes failed to overcome Hungary’s inherent economic backwardness. In all cases, an internationally competitive indigenous industrial sector failed to evolve due to internal and external factors effectively reducing the state’s autonomy and capacity for modernisation. External autonomy in all cases was constrained. Hungary repeatedly found its autonomy compromised by the actions of regional hegemonic powers. Subsequently, the formulation of economic policies followed external hegemonic interests. Nevertheless, it would be naïve to conclude that Hungary was always subjugated. Rather, the dominant socioeconomic elites not only accepted the situation, but also collaborated with the respective hegemonic powers in order to ensure their socioeconomic predominance. Hence, economic policies were an expression of the respective elites’ interests. One can, therefore, conclude that effectively, Hungary experienced two development regimes, as in the cases of the Habsburg Era and the interwar period agricul-

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Zusammenfassung

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.