The inevitable end of 'goulash communism'

May 8, 1991

The ruling Hungarian Socialist Workers Party (HSWP) voluntarily relinquished power in 1990 after 40 years of centralised state-socialist rule. In the first of a series of articles, LASZLO ANDOR and PETER ANNEAR trace the early origins of this remarkable transformation.

While the changes in economic power and policy towards private ownership came suddenly in the other East European countries at the end of the 1980s, in Hungary the transition to capitalism was a logical consequence of the particular form of "goulash communism" introduced two decades earlier.

Launched officially with central committee resolutions in 1966 and 1968, Hungary's economic liberalisation was a product of the social pact made in the wake of the 1956 popular uprising. The HSWP pledged to deliver higher public standards of living in order to hose down the seething discontent which led to the revolt.

Virtually all industry had been nationalised in the late 1940s: the mines in 1946, the banks and all companies with more than 100 employees in 1948; all companies with more than 10 employees in 1949. Consequently, outside agriculture, there were no small enterprises in the 1950s and 1960s except for handicraft and similar activities using self-employed labour under licence and tightly controlled by local administrators.

The first industrial reforms were directed mainly towards decentralisation of decision making within the existing system, giving greater autonomy to existing enterprises to define their own targets based on an iterative process of "plan bargaining" between the enterprises and the central authorities.

However, the 1965-66 agricultural reforms broached the question of ownership, and created two economic layers in the agricultural sector: state-owned property remained primary, but a secondary layer of small private household production took on much greater importance, especially in the intensive sectors of agriculture.

Producing for the private market on land rented from the cooperatives or state farms, the household "tenant farmers" proved to be efficient, while the output of the cooperatives was also maintained. Agriculture emerged as the only real success of the late 1960s reforms.

Agriculture had been collectivised in two steps: after only limited successes in 1949-52, many of the cooperatives were abolished, especially during 1956; but the process was renewed with the post-1958 political consolidation so that by 1961-62 collectivisation or nationalisation was the near universal.

As the earlier reforms were bedded in, no new reforms were adopted in the 1970s. At this time, the reform amounted to a liberalisation of regulations, not a change of the economic structure, while the government limited the reforms to the use of market tools, such as financial regulation, taxation and price enterprise and farm management to better achieve plan targets.

The reformers derived many of their ideas from Wlodzimierz Brus, a somewhat dissident Polish economist who also influenced the policies of the Gomulka regime, though the Polish government was careful to allow only reforms which did not compromise the underlying state-run system. Along with another Polish economist, Oscar Lange, Brus argued that the use of market mechanisms in planned systems would lead to stimulation of the economy, better quality of output and an end to inefficient methods of command.

The late 1970s world economic crisis invaded this process of internal reform with momentous consequences. In particular, oil price rises caused a serious deficit in the Hungarian foreign account from 1978. But the final blow was struck by rising US interest rates after 1979: Hungary had secured loans at low but variable interest rates; later interest rates rose dramatically with catastrophic effects.

A huge deterioration in the terms of trade and a mounting foreign debt forced Hungarian administrators to cut economic growth and deflate the economy through both planning and financial mechanisms (including restrictions on credit) in order to stem further imports. Moreover, the events stimulated a further rethinking of the economic reform process, this time related to industry and to the question of property ownership.

In 1982, Hungary turned, fatefully, to the IMF, thus taking one more step down the road to privatisation. Yet as the government turned towards the market and further economic liberalisation, and to the encouragement of small entrepreneurship through renting state property to private users, it did not yet consciously consider the transformation of property ownership.

But success was elusive and soon after, in 1984, the government relaunched the economic reform as, in the words of the reform ideologists, "an amendment to the previous reforms in the field of organisation". While retaining a definite group of enterprises under state control, the small and medium parts by-and-large became "self-governed" by assemblies of employees with elected leadership.

Crucial to this ambiguous process of decentralisation was severing enterprise links with the ministries, the reasoning for which came not, as some thought, from Yugoslavia, but from Hungarian economist Tamas Sarkozy. Sarkozy authored a book summarising the economic reorganisation of 1984-85 which was approved officially by Miklos Nemeth, then a deputy head of department of the central committee, later the prime minister heading privatisation, and by Ivan Berend.

When the book was published, Berend, who wrote all the economic history of the socialist period, became president of the Academy of Sciences in 1985 and one of the major reform ideologists.

Overwhelmingly, the government was driven to further market reforms in the 1980s by the need for economic improvement, and by the apparent success of the earlier agricultural reforms. Key to ilent division of power between the party leadership and the managerial sector. When the hunger for the market openly emerged, it was obvious the managerial layer could become the owners of privatised enterprises.

Though many reform ideologists claimed the state and party leaders obstructed the reforms by refusing to close down "inefficient" enterprises, the government stand made some sense because going much further at that time was clearly risky in the shadow of Soviet influence.

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