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Hungary New Economic Mechanism
Khrushchev's ouster in October 1964 failed to weaken
Hungary's desire for reform. Kadar responded to the change
in the
Kremlin by affirming that "the political attitude of the
HSWP and
the government of the Hungarian People's Republic has not
changed
one iota, nor will it change." In December 1964, a Central
Committee plenum approved the basic concept of economic
reform
and formed a committee to provide fundamental guidelines.
Economic problems also continued to underscore the need
for
reform. Agricultural output fell by 5.5 percent. In
addition, the
government increased production quotas, cut wages, and
announced
price hikes. Popular discontent rose as a result.
In May 1966, the Central Committee approved a sweeping
reform
package known as the New Economic Mechanism (NEM).
Although many
of its elements could be phased in during a preparation
period,
the central features of the reform could be implemented
only with
the introduction of a new price system, which was set for
January
1, 1968. With the NEM, the government sought to overcome
the
inefficiencies of central planning, to motivate talented
and
skilled people to work harder and produce more, to make
Hungary's
products competitive in foreign markets, especially in the
West,
and, above all, to create the prosperity that would ensure
political stability.
The NEM decentralized decision making and made profit,
rather
than plan fulfillment, the enterprises' main goal. Instead
of
setting plan targets and allocating supplies, the
government was
to influence enterprise activity only through indirect
financial,
fiscal, and price instruments known as "economic
regulators." The
NEM introduced a profit tax and allowed enterprises to
make their
own decisions concerning output, marketing, and sales.
Subsidies
were eliminated for most goods except basic raw materials.
The
government decentralized allocation of capital and supply
and
partially decentralized foreign trade and investment
decision
making. The economy's focus moved away from heavy industry
to
light industry and modernization of the infrastructure.
Finally,
agricultural collectives gained the freedom to make
investment
decisions. The NEM's initial results were positive. In the
1968-70 period, plan fulfillment was more successful than
in
previous years. The standard of living rose as production
and
trade increased. Product variety broadened, sales
increased
faster than production, inventory backlogs declined, and
the
trade balance with both East and West improved. In
practice,
however, the reform was not as sweeping as planned.
Enterprises
continued to bargain with government authorities for
resources
from central funds and sought preferential treatment. The
reform
also failed to dismantle the highly concentrated
industrial
structure, which was originally established to facilitate
central
planning and which inhibited competition under the NEM.
The Kadar regime failed to understand that real
economic
decentralization required political reform to resolve
conflicts
that naturally arose between different interest groups.
The
government's problem was to expand "socialist democracy,"
that
is, to build a system that would simultaneously resolve
conflicts
and maintain the HSWP's political monopoly. In fact, the
government attempted some incremental changes. The courts
gained
greater independence in administering justice, and changes
were
introduced in parliament as deputies on committees of the
National Assembly were instructed to examine and debate
legislation more effectively. A 1966 electoral law created
single-representative constituencies and contained a
provision
for elections with multiple candidates. However, the
Patriotic
People's Front (PPF) retained control of nominations
(see Patriotic People's Front
, ch. 4). Even after a second
electoral
law in 1970 made it legal for other groups to nominate
individuals, few multiple candidacies actually arose
(see Elections to the National Assembly
, ch. 4). These minimal
changes
quickly encountered resistance from entrenched party
officials.
The 1968 Soviet invasion of Czechoslovakia and suppression
of the
reform program there had also discouraged the HSWP from
pursuing
further political changes. However, Kadar was able to work
out a
modus vivendi with the Soviet leadership. The Soviet Union
allowed Kadar leeway to implement economic reforms,
develop some
economic contacts with the West, and permit Hungarians to
travel
abroad as long as Budapest accepted Moscow's hegemony in
Eastern
Europe and adhered to Soviet foreign policy positions.
The Kadar regime gave serious attention to implementing
the
NEM from 1968 to 1972. In 1971, however, counterreform
forces
were gathering strength and calling for the return of
central
controls. The opposition arose from government and party
bureaucrats and was supported by large enterprises and
some
workers. The bureaucrats perceived the NEM as a threat to
their
privileged positions. The large enterprises saw their
income drop
after the introduction of the NEM and were troubled by
competition for materials and labor from smaller
enterprises.
Disaffected workers who were on the payrolls of outdated,
inefficient industries resented the higher incomes earned
by
workers in more modern firms. This opposition successfully
reversed the reform a few months after Moscow expressed
reservations about the NEM and concern about "petit
bourgeois
tendencies" in Hungary.
In November 1972, the Central Committee introduced a
package
of extraordinary measures to recentralize part of the
economy,
but the regime did not formally abandon the NEM. Fifty
large
enterprises, which produced about 50 percent of Hungary's
industrial output and 60 percent of its exports, came
under
direct ministerial supervision, supported by special
subsidies.
New restrictions applied to small enterprises and
agricultural
producers. Wages rose, prices came under central control,
and the
regime introduced price supports. In the following years,
the
government also merged many profitable small firms with
large
enterprises.
The 1973 world oil crisis and the subsequent recession
in the
West caused a drastic deterioration of Hungary's terms of
trade
and strengthened opposition to the reform. Inflation
threatened,
and counterreformers argued for protecting the living
standard of
the working class from an economic shock in the capitalist
world.
The government intervened by raising taxes on successful
firms
and increasing government purchases and subsidies.
Consumer
prices eventually fell below the level of producer prices,
and
Hungary accepted credits from Western banks. Centralized
material
allocation was reintroduced. After the oil crisis arose,
ideological opposition to the NEM and to "bourgeois
attitudes"
arose. A clampdown on intellectuals began, and Nyers lost
his
Politburo position in 1974.
By 1978 Hungary's dismal economic performance made it
clear
even to the counterreformers in the leadership that a
"reform of
the reform" was necessary. Return to central control had
only
rewarded inefficiency and stifled innovation and
initiative.
Enterprises ignored market signals, and shortages plagued
producers. Large amounts were invested in poorly conceived
projects, and a trade deficit accumulated. Hungary's
hard-currency debt reached US$7.5 billion by 1978 and had
jumped
to US$9.1 billion by 1980.
In 1978 the government admitted that its attempt to
shield
Hungary from world economic conditions could not be
continued.
Hoping to improve its trade balance with the West and
avoid
forced rescheduling of its debt, the government announced
its
intention to boost exports. This policy change marked the
beginning of a new wave of reforms. First, the price
system was
restructured to bring consumer prices gradually in line
with
world market prices and to ease the burden of subsidies on
the
state budget. Next, producer prices were reformed to bring
about
more rational use of energy and raw materials. Finally,
the
government overhauled exchange-rate and foreign-trade
regulations.
In 1979 and 1980, the government implemented a number
of
institutional reforms. The new reforms abolished branch
ministries and replaced them with a single Ministry of
Industry
intended to act as a policy-formulating body without
direct
authority over enterprises. Large enterprises were broken
up into
smaller firms. In 1982 the government legalized the
formation of
small private firms, including restaurants, small shops,
and
service companies, and it permitted workers to lease
enterprise
equipment, use it on their own time, and keep the earnings
from
their products. In 1984 the regime introduced new forms of
enterprise management, including supervisory councils that
would
include worker-elected representatives. New financial
institutions also emerged, and a 1983 government decree
allowed
enterprises, cooperatives, financial institutions, and
local
governments to issue bonds.
In the early and mid-1980s, Kadar had encouraged a
limited
amount of political liberalization. The HSWP maintained
its
monopoly on political power, but the norms of democratic
centralism were looser than in other countries of Eastern
Europe
(see Democratic Centralism
, ch. 4). County party
secretaries
acquired the freedom to make decisions of local
importance,
including control of personnel. The government again
exhorted
delegates of the National Assembly to scrutinize laws and
government policies more critically. In 1983 a new
electoral law
required a minimum of two candidates for each national and
local
constituency in general elections. Trade unions began to
defend
workers' interests more energetically. Journalists were
urged to
expose low- and mid-level corruption and abuse of power,
although
they could not criticize the regime's basic tenets. The
leadership also bolstered economic reforms of the early
1980s
with a foreign policy geared to a greater degree than
before on
trade with the West, and it maintained this course during
the
deterioration of superpower relations in the early 1980s.
Thus,
the economic reforms of the late 1960s had also come to
provoke a
measure of political reform and changes in foreign policy.
These
new departures were inspired in large measure by Hungarian
nationalism, a force that had long encouraged Hungarians
to
control their own destiny and to resist the hegemony of
their
larger, more powerful neighbors.
* * *
Two brief histories of Hungary are Denis Sinor's
History
of Hungary and C.A. Macartney's Hungary: A Short
History. Robert A. Kann discusses Hungary against the
backdrop of the Austrian empire in A History of the
Habsburg
Empire, 1526-1918. Erik Fugedi's Castle and Society
in
Medieval Hungary (1000-1437) provides an intriguing
analysis
of the impact of castle-building on Hungary's development.
For
further reading on Hungary in the nineteenth century,
George
Barany's Stephen Szechenyi and the Awakening of
Hungarian
Nationalism, 1791-1841 is an excellent account of the
reform
leader's early years; Andrew C. Janos's The Politics of
Backwardness in Hungary, 1825-1945 offers a detailed
analysis
of Hungary's economic, social, and political history; and
John
Paget's Hungary and Transylvania is an interesting
travelogue. Paul Kecskemeti's The Unexpected
Revolution
provides a compelling analysis of the Revolution of 1956,
and
Charles Gati's Hungary and the Soviet Bloc
describes the
communist takeover of Hungary and Hungary's relations with
the
Soviet Union. Detailed information on the origins and
development
of Hungary's economic reform programs is found in Judy
Batt's
Economic Reform and Political Change in Eastern
Europe and
Paul Marer's "Economic Reform in Hungary." (For further
information and complete citations,
see
Bibliography.)
Data as of September 1989
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