A FTER the crushing of the Hun-
garian Revolution in 1956 and the subsequent repression, the Hungarian leadership felt compelled to seek to strike a compromise with the population. A limited political relaxation was undertaken, expressed in the famous formula of Party general sec retary Janos Kadar: "whoever is not against us, is with us."
Nonetheless the single party retained its monopoly. The terms of the compromise were the maintenance of the political system on the one side and better living conditions than in the rest of the Soviet bloc on the other • - "goulash communism."
prises concerning matters of production. In the framework of overall planned long-term objectives and government policy, the enterprises took production decisions according to "regulators" that is to say norms concerning financial matters, prices, wages and foreign trade. Investment remained under the control of the centre. Furthermore the NEM did not affect state property. There was no talk of privatization, even if private activities were to be progressively permitted, and the country's membership of Comecon was not questioned, despite an effort to insert Hungary more into the world capitalist market.
Steps back from these pro-market policies took place between 1972 and 1978, but after this period market mechanisms gained a greater and greater place in the economy. Pricing policy was modified and liberalized, increased wage differentiation was brought in, and the proportion of investments determined by the centre decreased. The branch ministries responsible for controlling enterprises producing the same types of products in Soviet-style planned economies were effectively abolished, while the big state enterprises were split up into much smaller units. 17
The private sector was authorized and April 1, 1991 • #203 International Viewpoint
HUNGARY even encouraged in commerce and crafts. bureaucracy continued to exercise some elements of control over the economy; in 1985 the election of enterprise managers by the employees was introduced, more with the aim of reinforcing the autonomy of these managers than from an interest in self-management. prise councils have practically no autonomy in relation to the leaders.
During this period, the main reference for Hungarian economists was a theoretical schema according to which any rational economic policy had to be based on the model of general equilibrium, according to which prices and quantities of goods adjust harmoniously and freely on the property relations upstream and the division of the revenues downstream are social and political questions that each state decides according to its own nature.
In Kadar's Hungary this schema posed the question of the continuing, if lessened, power of the single party in political life and overall economic decisions. Any serious balance-sheet of the "New Economic Mechanism" has to take into account the articulation of all its dimensions: the market, the role of the central bureaucracy in the economy and the maintenance of the monopoly of the single party.
The results of this policy on the economic level were not spectacular and on the social level they were extremely negative. Industrial investment declined in the state sector, and there were also cases — in the extractive and energy sectors — of waste and misdirected investment. The guaranteed markets in the USSR permitted some enterprises to continue to produce below standard goods, but in some sectors Hungarian industry was by no means without successes. There was a more or less satisfactory situation in agriculture, and Hungary escaped the serious food supply problems of other countries wastefulness of decentralized bureaucratic management and the political concern to maintain higher living standards than in other bloc countries led to a sharp increase in the country's indebted-
18 is the highest of all the Eastern European ness; it now stands at around $20bn, and
International Viewpoint #203 • April 1, 1991 countries by head of population.
Inflation set in as a result of the reduction in subsidies and freeing of prices. The consequence was a sharp reduction in purchasing power; in many households only private activities and often a second job allowed consumption to go on increasing. The rise in the average standard of living was accompanied by a deterioration in living conditions — self-exploitation by doing two jobs, a housing crisis, a rise in the suicide rate and poor health. Leaving aside averages, there was a sharp rise in poverty: in 1989 a million people, that is 10% of the population, lived below the poverty line, and 1.5 million others hovered around it.
Among the poor are the unemployed (unemployment reforms, but only to a limited extent, since the 1986 bankruptcy law was used cautiously) and pensioners. Between 1980 and 1987 the average purchasing power of pensions has fallen by more than 25% and many pensioners are compelled to take on underpaid jobs, resort to emergency social assistance (a quarter of them in 1988), or even steal (in 1987 a half of robberies committed by elderly people were of primary necessities). During this time, the privileged of the regime and the new rich of the private sector were building sumptuous mansions in the residential quarters of Budapest.
### Popular discontent
Starting in 1987/1988, the dominant circles of the bureaucratic regime made a series of choices which would lead the country towards the restoration of capitalism. This development was determined by a combination of popular discontent growing economic difficulties. Movements were already beginning to develop on ecology and poverty. With the Soviet glasnost in the background, the desire for an end to the party apparatus' monopoly control of the main levers of power came together with the reaffirmation of national identity. Important mass demonstrations took place in March and June 1988 (commemorating, respectively, the national holiday and the 30th anniversary of the execution of Imre Nagy, the government during the 1956 insurrection). Opposition political groups began to form. The post-1956 compromise began to come apart.
At the same time, the economic situation began to deteriorate after 1985. The only subsequent year of positive growth has been 1987. Otherwise growth has been zero or negative. The weight of the debt has become ever heavier and now eats up more than half of export income. Government policy more and more takes its cue from the recommendations of the International Monetary Fund: the 1987 austerity plan led to a new deterioration in the living conditions of the population.
Divisions in the leadership widened. In
Janos Kadar went on the offensive against the reformers, but the May 1988 party conference replaced him with the prime minister, Karoly Grosz. From September onwards, open struggle recommenced, with Imre Pozgay and Rezso Nyers at the head of the reformers.
Under their pressure, and with popular discontent seething in the background, the Communist Party decided to recognize that the 1956 insurrection was indeed a popular uprising, accept political pluralism and take part from June to September 1989 in negotiations with the opposition with the aim of setting up a parliamentary regime. A new constitution was proclaimed in October 1989.
Communist Party disintegrates
All these measures could not however save the former CP from disintegration. At the October 1989 congress the reformSocialist Party (HSP) while a minority headed by Karoly Grosz retained the old name of Hungarian Socialist Workers Party (HSWP). In the March and April 1990 elections, the HSP came in well behind the two winning parties, with 8.5%, while the Democratic Forum got 42.3% and the Alliance of Free Democrats got 23.8%. These two latter organizations are openly in favour of capitalist restoration. Democratic Forum however envisages the change taking place more slowly and its propaganda has populist and nationalist
The political events had their economic concomitants, and the "Communist" leaders still in power also veered in a restorationist direction. The banking system was reformed to bring some elements of a financial market were established. Freeing of prices and of forremoved the obstacles to the creation of private enterprises (with less than 500 workers), and established the possibility of setting up mixed ventures with foreign capital, which opened the way for "spontaneous privatizations" of national enterprises under the direction and to the profit of their existing management. In January announced its intention to privatize 51 state firms, representing around a quarter of industrial production.
Thus, the conservative coalition which came to power in the elections inherited a Hungary already equipped with the main elements of a legal framework for capitalist restoration. The main problems of economic policy henceforth reside in the privatization of the state sector and the day to day management of the transition. The oscillations of bear witness however that this is no easy
From the beginning, in fact, differences
emerged inside the government on the rhythms and methods for the liberalization of the economy. By the end of 1990 these divisions had led to the resignation of the Minister of Finance, Ferenc Rabar, a supporter of speeding up of the changes and a drastic reduction in subsidies, policies which the rest of the government was not prepared to follow in drawing up the budget for 1991. In the background of this debate are fears about the sentiments of the population.
Bus and taxi strike
The strike by taxi and bus drivers which paralyzed Budapest last November, and which forced the government to make a partial retreat on the rise in fuel prices, was a warning. The regime continues to be cautious when it comes to declaring loss-making enterprises bankrupt if it would mean massive job losses. However seven over-indebted steel firms are being shut down and sackings are taking place.
But there are not only risks of popular reaction. There are also real doubts on what is the best way to go to get back to capitalism. The issue of privatizations is one example of a basic problem — how to go back to capitalism when there is almost
In September 1990 a law on the privatization of the retail trade was passed, affecting some 10,000 enterprises. Private business has, furthermore, been authorized in Hungary for several years: in 1988 almost 30% of shops were private. The privatization of agricultural land will be harder, given that one of the parties in the ruling coalition is insisting on the restitution of land to its pre-Communist owners.
But the most complex question is obviously that of the 2,000 big enterprises; around three quarters of them are managed by enterprise councils, while the others are attached to ministries. There are two connected matters of controversy here: the opening up to foreign capital, when Hungarian savings can only cover some 10% of these privatizations (and the addition of the resources of the parallel private sector would still leave a huge shortfall); on the other hand, there is the issue of the role of the existing managers in this process.
This question brings us back to a politi-
00 cal and theoretical debate that divides Hungarian economists and politicians: should the existing managers be left to turn into capitalist managers? That is to say, should they be given the room to manage the enterprises along with Hungarian or foreign partners and even change their enterprise's statute? According to its supporters, this would allow the rapid adoption of classic capitalist patterns by Hungarian enterprises. This position is opposed from various angles. Some denounce its immorality - the privileged of the old regime are to be allowed to turn the new situation to their advantage - while others, such as the economist Janos Kornai, point out that a capitalist economy presupposes the existence of a real bourgeoisie, and that this will not be created by the touch of a magic wand.
It is thus not a good idea to make a present of the public sector to the existing managers, but to encourage, with the aid of credit, the development of a real private sector capable of buying the state enterprises.
Spontaneous privatizations
At first the enterprise managers played an essential role. The 1989 law on companies gives the enterprise councils, controlled by the leading cadres, the power to turn their enterprises into commercial companies, and sets out the conditions for foreign investment. opened the way for "spontaneous privatizations." The first operations took place in a very underhand way, often involving the undervaluing of the enterprises concerned, and the efforts of the managers to exploit the situation to their own best advantage.
Protests led to the creation in March 1990 of a State Property Agency intended to oversee privatizations. from privatization was to be shared: 20% stays in the enterprise's budget and 80% goes to the state. There are three possible ways to undertake a privatization: the initiative can come from the State Property
Agency itself ("active privatization"'), the enterprise itself ("spontaneous privatization") and from the potential buyer. In all these cases the decision is referred to the
Agency. The latter publishes lists of enterprises that it is proposing for privatization. On the whole the listed enterprises are in a favourable situation. Afterwards will come the turn of the more vulnerable
It seems that we are seeing a new swing of the pendulum. The new finance minister, Mihaly Kupa recently demanded an acceleration of privatization and criticized the Agency's attitude - accusing it of being more preoccupied with safeguarding state interests that getting on with the selling. This seems to suggest that the existing managers are going to be given increased scope. *
HUNGARY
The case
of
Videoton
THE VIDEOTON enterprise is one of the flagships of Hungarian industry. As such it has been targeted for restructuring and for developing an export drive. This firm is involved in three main areas: domestic electrical goods, information technology and military radio technology. Since 1968 it has produced colour televisions, and since 1970 word processors under licence from the French Bull company. Of all the Soviet bloc countries, Hungary has been the most adept at "pirating" information technology, and Videoton has considerable experience in this field. Some 80% of its production is exported, and, until last year 80% of these exports were to other Comecon countries. MAXINE DURAND H OWEVER in the mid-1980s the firm's technological lag began to become apparent. There were problems with productivity, notably owing to a level of training that was not improving fast enough. Confronted with these difficulties, the firm was gradually transformed into a holding company with 22 components, while the share of foreign capital increased from 25 to 49%. Agreements were reached with groups such as Thomson, Alcatel, Bull, Akaï or Phillips. More recently the reduction of exports to the Soviet Union, which is a political priority for the government, has increased Videoton's problems, which have been further aggravated by the reduction in credit and the rise in interest rates. Fo, Videon was or erie years, there. 19 fore, Videoton has been living with the April 1, 1991 • #203 International Viewpoint
HUNGARY prospect of being restructured. In 1990 alone, the workforce was cut from 17,000 to 15,000. The only real opposition has come from a small, recently formed trade union, tied to the Democratic League of Independent Unions. The official union, which organizes the majority, steered clear of the strike that broke out on September 21, 1990. After the movement ended, the government forced most of the management to resign and installed a government Commissar. Nonetheless, it was the plan of the former management that was finally put into effect in November 1990: 170 people are to take early retirement and 900 are to be fired in exchange for a payment of 120,000 forints (less than a specific product would not be the main aim of this partnership. Thus the group could well end up reduced to manufacturing printers and terminals for American and perhaps Japanese firms on a subcontracting basis.
It may be necessary to wait some time to see any positive economic benefits. On the contrary, in the short term there will be a rise in unemployment and a growing disorganization of the Hungarian productive apparatus. And this will be true even despite the relative competitiveness of such Hungarian firms as Videoton, Ikarus and Tungsram compared to the rest of the former Soviet bloc.
The population is thus gripped by anxiety about the future. Some 60% of Videoton's workers are women. 35% are unskilled workers, 30% skilled, 10% with college qualifications, 18% are employees with secondary education, while the rest are involved in the administration. There are going to be substantial layoffs in Videoton. Many of those who do not lose their jobs are to be "reconverted". But, as another unionist remarked: "reconversion into what?" *
Privatization and
£1,000, but 15 months average wages).
A debate that we attended between the director of personnel, a survivor of the old workers councils leadership, and the local union leader, throws light on the paradoxes of the situation. The unionist was proud of his responsible behaviour in not going on strike, being influenced by a union tied to Interview with Tamas Krausz the right-wing opposition favourable to swift privatization. This pirouette was answered by that of the director of personnel who accused the trade unionist of failing to assist the management by picking out the workers who ought to be got rid of and favouring a more arbitrary system. In the end some 1,700 workers got their redundancy money, but not, protested the personnel director, those who really deserved it.
Reinventing unemployment
The big innovation is thus unemploy-
Székesfehérvar district, where the main Videoton factory is located, the number of unemployed has risen from 172 at the start of the 1990 to 1,860 at the beginning of this year - a local unemployment rate of 2.6%. The number of those receiving unemployment benefit has risen from 47 to 719. The district has, furthermore, been designated a "critical zone" and thus entitled to government aid.
The enterprise is in the hands of the experts, and the accounts are being done by the British firm James Capel, who are due to produce a restructuring plan. Probably the plan will only see room for 5 to 6,000 employees - from 15,000 today — and will envisage the creation of a sales company and several small enterprises, which should make it possible to attract foreign capital into the hard core of the enterprise. This is a typical example in Hungary today. The aim is to separate out the wheat from the chaff in the most efficient enterprises, and thus form a competitive entity that can attract foreign capital.
In the case of Videoton for example, the French Bull group is showing an interest in the information technology branch, not in itself, but because Videoton has a sales network in the Soviet Union employing 202 people. Videoton would thus be used as a transmission belt: the development of International Viewpoint #203 • April 1, 1991