Hungary ECONOMIC POLICY AND PERFORMANCE, 1945-85
Váci utca, main shopping district, Budapest
Courtesy Scott Edelman
Shops in Zalaegerszeg
Courtesy John Tarafas
After 1949 Hungary's communist government under Matyas
Rakosi
applied the Soviet model for economic development
(see Postwar Hungary
, ch. 1). The government used coercion and
brutality to
collectivize agriculture, and it squeezed profits from the
country's farms to finance rapid expansion of heavy
industry,
which attracted more than 90 percent of total industrial
investment. At first Hungary concentrated on producing
primarily
the same assortment of goods it had produced before the
war,
including locomotives and railroad cars. Despite its poor
resource base and its favorable opportunities to
specialize in
other forms of production, Hungary developed new heavy
industry
in order to bolster further domestic growth and produce
exports
to pay for raw-material imports (see
table 14, Appendix).
The
Soviet Union became Hungary's principal trade partner,
supplying
crude oil, iron ore, and much of the capital for Hungary's
iron
and steel industry. Heavy Soviet demand also led Hungary
to
develop shipbuilding and textile industries. Trade with
the West
declined considerably. Soviet pressure, a Western trade
embargo,
and Hungarian policies favoring domestic and regional
autarky
combined to reduce the flow of goods between Hungary and
the West
to a trickle during the Cold War period.
Rakosi's regime also established wage controls and a
two-tier
price system made up of producer and consumer prices,
which the
government controlled separately. In the early 1950s, the
authorities used these new controls to limit domestic
demand and
cut relative labor costs by tripling consumer prices and
holding
back wages. Popular dissatisfaction mounted as the economy
suffered from material shortages, export difficulties, and
mounting foreign debt. Agricultural growth also stagnated,
and
the area of cultivated land actually decreased.
During the thaw after Soviet dictator Joseph Stalin
died in
1953, Imre Nagy became Hungary's prime minister and,
following
the Soviet example, implemented an economic policy known
as the
New Course. Nagy's administration halted the
collectivization
drive, allowed farmers to leave collective farms,
abolished
compulsory production quotas, raised procurement prices
for farm
products, and increased investment in agriculture. Nagy
also
shifted investment from heavy industry to consumer-goods
production. The economic system itself, however, remained
unchanged, and plan fulfillment actually worsened after
1953.
Hard-line party members soon undermined Nagy, and
Rakosi
regained control in 1955. The collectivization drive began
anew,
and the government redirected investment back to heavy
industry
before the cataclysmic Revolution of 1956 brought the
country's
economy to a standstill. According to official statistics,
the
economy registered an 11-percent negative growth in 1956.
After
the revolution, Janos Kadar and others in the new
leadership
understood that they had to gear their economic policies
toward
improving the population's living standard, and they
recognized
that practical considerations had to temper their
commitment to
the tenets of Marxism-Leninism as defined by the Soviet
Union.
From 1957 to 1960, consumption grew more rapidly than
national
income as the government tried to assuage popular
discontent. Per
capita real income was 54 percent higher in 1960 than it
had been
in 1950.
In 1959 the Kadar government began a second major
collectivization drive. Instead of using coercion,
however, the
government offered peasants incentives to join cooperative
or
collective farms. The campaign ended in 1962 after more
than 95
percent of agricultural land had come under the socialist
sector's control. During the 1960s and 1970s, the
Hungarian
government made significant investments in agriculture and
raised
farm prices in an effort to make the sector viable.
Agricultural
mechanization also expanded by 50 percent.
During the 1960s, the government gave high priority to
expanding the industrial sector's engineering and chemical
branches. Production of buses, machine tools, precision
instruments, and telecommunications equipment received the
most
attention in the engineering sector. The chemical sector
focused
on artificial-fertilizer, plastic, and synthetic-fiber
production. The Hungarian and Comecon markets were the
government's primary targets, and the policies resulted in
increased imports of energy, raw materials, and
semifinished
goods.
By the mid-1960s, the government realized that the
policy for
industrial expansion it had followed since 1949 was no
longer
viable. Although the economy was growing steadily and the
population's living standard was improving, key factors
limited
further growth. Returns from mining were diminishing, and
Hungary
had exhausted untapped manpower reserves. The government
recognized that the efficiency of Hungary's industries
lagged
well behind that of Western industries and that its
communication
and transportation infrastructures were so inadequate that
they
retarded further economic growth. The Comecon countries
were
unable to supply Hungary with sufficient energy, raw
materials,
and technology to achieve further growth, and Hungary's
leaders
realized that the country would have to seek these
critical
inputs from the West. The government introduced the NEM in
1968
in order to improve enterprise efficiency and make its
goods more
competitive on world markets.
From 1968 to 1972, the NEM and a favorable economic
environment contributed to good economic performance. The
economy
grew steadily, neither unemployment nor inflation was
apparent;
and the country's convertible-currency balance of payments
was in
equilibrium as exports to Western markets grew more
rapidly than
its imports. Cooperative farms and factories rapidly
increased
production of goods and services that were lacking before
the
reform. By about 1970, Hungary had reached the status of a
medium-developed country. Its industry was producing 40 to
50
percent of gross domestic product, while agriculture was
contributing less than 20 percent.
In 1973 and 1974, in the midst of the Fourth Five-Year
Plan
(1971-75) world oil prices skyrocketed. Hungary's terms of
trade,
that is, the ratio of the prices Hungary received for its
exports
to the prices it had to pay for its imports, deteriorated
considerably. The leadership responded to the new
conditions with
several major policy errors, which reversed the changes
that had
taken place under NEM. First, policy makers assumed world
oil
prices would soon return to earlier levels and concluded
that the
economy could be shielded from the capitalist world's
crisis. The
government did this shielding by subsidizing enterprises
hard hit
by rising energy costs and taxing the profits of
enterprises that
benefited from the high world prices. Second, the
authorities
chose to accelerate economic growth to deal with Hungary's
deteriorating terms of trade. The Fifth Five-Year Plan
(1976-80)
emphasized industrial expansion and modernization and
provided
for a significant increase in investment. The share of
gross
investment in gross domestic product climbed from 34
percent in
1970 to 41 percent in 1978. Third, the government used
pre-1974
price and demand figures to justify launching major
projects that
the economy at that time could not carry out efficiently.
Finally, planners earmarked significant investment
resources to
increase the country's capacity to produce energy, basic
materials, and simple semifinished goods in order to meet
domestic demand and increase exports to the Comecon
markets.
However, Hungary's investments did not spawn a modern
manufacturing capacity, which is the kind of industrial
capacity
needed to produce output for sale on the
convertible-currency
market.
Decision makers discovered to their chagrin that they
could
not protect the economy from the world price increases.
Because
the economy depended on energy and raw-material imports,
accelerated economic growth required increased imports of
raw
materials and energy that Hungary could not obtain from
the
Comecon countries. Thus, Hungary had to turn to the
convertible-currency market to obtain a greater proportion
of its
inputs. In the 1970s, Hungary's spending on consumption
and
investment outstripped what its economy produced by an
annual
average of 2.2 percent; in 1978 alone it spent 5 percent
more.
The export earnings did not cover the cost of imports,
convertible-currency trade deficits quickly piled up, and
the
government used foreign credits to finance the deficits.
In
addition, the government's efforts to shield the country's
enterprises from Western price increases backfired as
Hungary's
structure of production and investment never adjusted to
world
demand. Antireform politicians and managers of large
enterprises
won partial reinstatement of the command economy by the
mid-
1970s. This recentralization exacerbated Hungary's
economic woes
by further isolating Hungary's enterprises from market
forces and
prompting managers to show inadequate concern for
efficiency,
waste, and the competitiveness of their products on world
markets.
Hungary's economic policy makers realized by 1978 that
if the
economy continued to run trade deficits, the country would
soon
be unable to honor its debt obligations. In 1978 the HSWP
decided
to revive the NEM. A year later, the government
implemented a
stabilization program aimed at, among other things,
redirecting
the economy away from heavy industry, improving the
convertible-currency trade balance, and shrinking the
country's
foreign debt. The program's architects planned to maintain
current levels of material consumption for several years
in order
to maximize convertible-currency exports; at the same
time, they
planned to cut spending by reducing investment.
New external shock waves rocked the economy in the late
1970s, further eroding Hungary's terms of trade and
undercutting
the country's creditworthiness despite the reduction in
investment. Oil prices rose dramatically and precipitated
a world
recession. Soon interest rates rose, and Western banks
reduced
the flow of credits to the East European countries in 1982
as a
result of Poland's debt moratorium, Romania's insolvency,
and the
economic sanctions levied by the United States against
Poland
after the declaration of martial law in December 1981. The
interest-rate increases helped to increase Hungary's hard-
currency debt (see
table 15, Appendix). Before the rates
rose,
Hungary relied heavily on floating-rate, short-term loans
whose
maturities were poorly staggered. In 1981 more than 80
percent of
Hungary's US$8.7 billion convertible-currency debt was due
within
five years, and debt-servicing costs consumed about 33
percent of
Hungary's convertible-currency earnings. In 1982 a
liquidity
crisis in Hungary shook the confidence of Western bankers,
and
for several months the country was unable to negotiate new
credits from the West.
Eager to avoid debt rescheduling, Hungary joined the
IMF and
the World Bank in 1982 and received from them about US$2
billion
in loans. In addition, Hungary introduced a stricter
stabilization program and obtained bridge financing from
the Bank
for International Settlements. The leadership also renewed
its
support for economic reforms, which creditors viewed as a
positive step toward more efficient use of resources and
improvement of the country's balance of payments.
Under the new stabilization program, spending on
investment
and consumption, which had outstripped the amount the
economy had
produced by 6.9 percent from 1974 to 1978, fell to 1
percent less
than production from 1979 to 1983. By 1985 Hungary had
slashed
its investment spending to about US$5.2 billion, 21.8
percent
less than in 1981. The government also increased prices
steeply.
Hungary's Sixth Five-Year Plan (1981-85) called for
greater
austerity, efficiency, and profitability, and it forecast
growth
of 14 percent to 17 percent over the previous plan period.
The
economy, however, grew by only 7 percent. Industrial
production
rose only 12 percent, far below the planned growth of 19
to 22
percent. Agricultural output rose 12 percent over the
previous
plan period, while the Hungarians' real per capita income
increased 7 to 8 percent. Planners targeted exports to
increase
by 37 to 39 percent and imports by 18 to 19 percent;
exports,
however, rose only 27 percent, while imports increased
merely 6
percent.
Data as of September 1989
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