Hungary-Chapter 3 - The Economy

Large Kitchen for farm workers' meals, 1924

DESPITE WAR, DEPRESSION, revolution, foreign occupation, and periods of near chaos, Hungary's economy has advanced in the twentieth century from a near-feudal state to a middle-level stage of industrial development. The economic system has undergone dramatic change since 1968, evolving from a Soviet-type "command" economy, in which government planners in Budapest dictated much of the country's economic behavior, into a hybrid that combined social ownership of the means of production with a stock exchange, central planning with aspects of a free market, and government intervention with a measure of enterprise autonomy and some private enterprise. After Hungary's failed popular revolution against communist rule in 1956, the government opted to foster domestic tranquility and legitimize control by the Hungarian Socialist Workers' Party by steadily improving the Hungarians' standard of living through economic growth.

For several reasons, the Hungarian economy can grow only if its factories and farms become more efficient and competitive. First, except for excess workers in existing enterprises, Hungary no longer has an untapped labor pool, such as the one that existed after World War II in the female and peasant populations. Second, the country has a paucity of natural resources, and imports of raw materials have become more costly for Hungary on both Western and Council for Mutual Economic Assistance markets. Third, Hungary can pay for imports of raw materials and efficiency-improving Western technology only by exporting goods whose quality and price are competitive in the world market.

Since 1968 the government has launched two rounds of economic reform, seeking to boost efficiency and competitiveness. The first was the New Economic Mechanism, introduced in 1968, in which the government abolished universal compulsory planning, granted enterprises greater autonomy, and unleashed some market forces. The program stalled within four years, but a burgeoning balance of trade deficit, slumping performance, deteriorating terms of trade, and other problems prompted the leadership to start the reform process anew in the late 1970s. Since then the government has streamlined its ministries, dismantled some huge enterprises and trusts, stimulated the growth of small and private firms, implemented a competitive pricing system, decentralized foreign trade, created small stock and bond markets, enacted a bankruptcy law, carried out banking reform, and levied value-added (see Glossary) and personal-income taxes.

In the late 1980s, a burdensome foreign debt, inefficient enterprises, raw-material supply problems, and stiffer competition in the world market were just a few of the problems facing the economy. The country's leaders had to improve Hungary's convertible-currency trade balance significantly in order to import the technology and raw materials necessary for further growth. At the same time, they had to maintain or improve domestic living standards and hold down unemployment and domestic inflation. The conjunction of Soviet leader Mikhail S. Gorbachev's program of restructuring in the Soviet Union and Janos Kadar's replacement as party general secretary by Karoly Grosz in Hungary greatly enhanced the chances that the government would try to achieve further economic progress by implementing even more dramatic reforms.

Although Western observers agreed that Hungary had the most accurate and open reporting of economic statistics in the communist world, they warned against accepting those data at face value. Economists in communist and noncommunist countries used different statistical concepts and procedures that produced differing images of Hungary's economic system. Hungarian and foreign analysts also complained that political expedience had sometimes tainted Hungary's official statistics.

Data as of September 1989