New Economic Mechanism

Hungary Table of Contents

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. Even after a second electoral law in 1970 made it legal for other groups to nominate individuals, few multiple candidacies actually arose. 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. 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.

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Source: U.S. Library of Congress