Hungary-Industrial Organization

In a centrally planned economy, only branch ministries and other government bodies can establish production and distribution enterprises, which are usually very large and have a regional or nationwide monopoly in their business activity. Enterprises carry on official economic relations through the ministerial bureaucracy rather than through a market. State organs appoint, evaluate, promote, and dismiss enterprise managers, whose main responsibility is to meet or exceed plan targets.

Industrial organization in Hungary followed the pattern of a command economy until 1968, when the government granted enterprises a modicum of autonomy. Reform advocates were not, however, powerful enough to force a restructuring of Hungary's industrial institutions. In the late 1970s, Hungary had the world's most concentrated industrial organization, with 699 state enterprises employing an average of 1,569 people each. The bureaucracy functioned in many ways as it did before the reform, supervising and directing large enterprises and trusts, thus stifling the development of true enterprise autonomy and a market mechanism.

On several occasions in the 1980s, the government adopted measures to decentralize Hungary's highly concentrated industrial organization in order to promote enterprise independence, flexibility, and efficiency. In 1981 the authorities eased restrictions on creating small- and medium-sized enterprises in the state, collective, and private sectors. The government merged three industrial ministries into the single Ministry of Industry in order to shrink the bureaucracy and cut the informal channels of influence that existed between the ministries and supposedly independent enterprises. Between 1979 and 1984, the authorities broke up 14 of the country's 28 trusts and divided a number of large enterprises into more than 300 smaller entities. However, despite the government's efforts, Hungary's industrial organization remained one of the world's most highly concentrated. This concentration led to the creation of monopolies that suffocated competition in many production areas. In the late 1980s, the central government also continued to expect the Ministry of Industry to ensure supplies, and both the government and the enterprises continued to expect the ministry to intervene to remedy imbalances.

Also in the 1980s, the government took steps to simplify the complicated and time-consuming process of starting a business. A minister, the head of a nationwide government body, or a local council with prior approval from the minister of finance could found a state-owned enterprise. The founder defined the enterprise's initial activity and supervised its operation, but other changes have eroded much of the control that founders once exercised. In 1985 most of Hungary's industrial enterprises introduced "democratic measures," under which the employees elected top managers directly or indirectly. The government also permitted enterprises to change their economic activities without prior consultation, provided that they informed their founder and the appropriate branch ministry of the change. Enterprise councils or collective management were managing 77 percent of the industrial enterprises by 1986, while the Ministry of Industry continued to supervise the remainder. Even under "industrial democracy," an enterprise's founder could veto candidates for director and dismiss elected directors, and ministries still exercised critical influence. As Janos Kornai, a leading Hungarian economist, has written, despite "industrial democracy" and the authorities' call for profitability and attention to the market, enterprise managers know that their "career, the firm's life and death, taxes, subsidies and credit, prices and wages, all financial 'regulators' affecting the firm's prosperity, depend more on the higher authorities than on market performance."

In 1982 the government provided for the creation of semiprivate and private industrial ventures, including economic work cooperatives (EWCs) and independent contract work associations (ICWAs), to encourage entrepreneurship and competition. EWCs were groups of no more than thirty workers employed by a state-owned enterprise who were allowed to use the enterprise's machinery outside normal working hours to produce goods under special contracts. The workers needed the enterprise's permission to establish an EWC, and the enterprise often entered into contracts with the EWC itself. The workers received far higher wages for this additional work than they did for their regular jobs. In 1982 approximately 25,000 workers participated in 2,775 EWCs; by the end of 1986, approximately 450,000 workers participated in 35,205 EWCs. ICWAs were self-organized and self-capitalized private groups that performed work under contract but had no affiliation to any single state-owned enterprise. About half of an ICWA's members worked for the group full time. In 1982 Hungary had 2,341 ICWAs; by October 1983, that number had climbed to 4,463.

Data as of September 1989