Development of capitalism in Hungary after 1990


Development of capitalism in Hungary after 1990

the “type” of capitalism in Hungary today and its most important contradictions

System change

There was a system change in Hungary at the end of the 1980s. The leaders of the socialist regime chose a path of liberalisation in 1985 instead of totalitarian dictatorship. The democratic opposition became more and more active, organised and influential and after 1987 even began to work openly. The opposition held meetings and produced publications, and many people joined them. Thus, the opposition became more and more powerful and in 1989 was able to force an agreement, namely the National Roundtable Agreement (NRA) with the Hungarian Socialist Workers Party (HSWP). The HSWP leaders came to the conclusion that the only way to survive would be to share power. The agreement stipulated that no one would be punished because of her or his communist past. Equally, no one would lose her or his money and no one would be excluded from the political life of the country. In the second part of the agreement, it was decided that parties could be founded without any restrictions and free elections would be held. Consequently, in 1988–1989 many parties were founded, and in 1990 free elections finally took place in Hungary.

The political changes in the Central and Eastern European (CEE) countries were caused by a combination of factors. The state socialist system gradually fell into crisis; the political and economic crisis strengthened each other. Reserves of the centrally planned economy exhausted. Since the 1970s onwards the difference between the East and the West became increasingly apparent – especially in terms of standard of living and quality of life. This led to the erosion, sometimes to the collapse of the socialist system. Other factors also contributed to the inherent imperfections of the system, e.g. the Cold War, the Soviet Union’s military adventures, exhaustion of its resources, loss of popularity, and the decline of world oil price in the 1980s. More or less the same scenario of the system change prevailed everywhere in the CEE region, namely: the termination of one party system, dominance of private property, opening to the world economy, markets based on comptetiton and market oriented institutions (businesses, banks and stock exchanges).

After the end of the Cold War the peoples of the ex-socialist countries were suddenly confronted with the phenomenon of globalization. West European companies pushed into the CEE market and contributed to the creation of a savage capitalism. The weak anti-capitalist forces were unable to put up any resistance to this process. At the same time the preparations for EU integration were pushed through. It is little wonder that many people experienced globalization as an invasion or siege, and integration as dictates, colonization or at best the simple exchange of the Soviet Union for the European Union. Many people now see themselves in the role of the victim.

The fall of the so called „communist” regimes in CEE left an ideological vacuum. A seething ideological mix came to the fore in many countries, made up of anti-Semitic, anti-Roma and racist stereotypes, nationalist prejudices and elements such as militant anti-communism, revisionist ambitions and a vengeful fundamentalism. The advance of right wing extremism recently is closely connected to the crises of CEE „new capitalism”. In this region under the banner of freedom and democracy the neofascist political groups and parties are legally marching. Neofascism is financed by the domestic and foreign capitalist groups and individuals, representatives of local powers.

The nation-state arrangements of the new power elite of CEE countries are the more extreme: the more the idea and the praxis of the independent nation state are linked with the fascist, anti-communist tradition, the more they are nationalist-fascist. In this respect Ukraine, the Baltic region, Hungary and Croatia are the most frightening, i.e. where the Nazi collaborators played an important role during the second World War (e.g. in Latvia – the glorification of Ulmani’s regime).

Hungary’s institutional transition and socioeconomic transformation have been interactive parts of an elite-led long-term process of institutional adaptation, economic modernization, social differentiation and value change. The road from institutional protopluralism to parliamentary democracy, from the symbiote of the first and second economy to a market economy, from a new middle class to an emerging civil society, and from the homo Kadaricus of the “jolliest barrack” to frustrated window shoppers of the “saddest shopping center,” is still under construction in Hungary.

Political changes in the past 45 years were ushered in by cathartic events, such as the 1956 revolution/counter-revolution; by strategic leadership decisons, such as the inauguration of the New Economic Mechanism (NEM) in 1968; and by political pacts, such as the NRA of 1989. In each case, the elites sought to devise political contracts and new legitimating principles to shore up a new modus vivendi for the regime and the public. In each case it has been an institution-led escape from the past, as well as a process to recalibrate the economy, reshape the society, and restore systemic stability.

The main reason behind the system change is that the modernization of the state socialist experiments has lost social leverage and the upswing in the 1960s was not followed again by an independent, own development based on the possibilities. In the last decade of the socialist system the macroeconomic indicators clearly expressed the deteriorating economic performance, while after 1978 Hungary ran into the debt trap. The last decade are significantly worse in all indicators than the previous periods, while investment and per capita real wage has been negative. Thus, the legitimacy of the socialist system was undermined by the poor performance and was ready to be overthrown in order to start – not for the first time – the coveted task of catching up.

The most significant attempt to reform the centrally planned economy in Hungary was the introduction of the NEM in 1968. In this spirit, abolishing the mandatory plan indicators, and leaving ownership relations intact a certain degree of decentralization occurred. The period was characterized by the transition to agriculture in the backyard and spread of more intensive farming. In the economic policy emphasis was put on the development of the infrastructure, and trade relations with the West increased significantly.

The „second wave” of reforms were born in the 1980s in another situation of the world economy, mainly in the struggle against external debt. Due to Hungary’s strong energy dependence and previous indebtedness, the economy was at the edge of the abyss in 1981. To avoid bankruptcy the idea to join the International Monetry Fund (IMF) and the World Bank (WB) was raised at the highest political level and finally received the green light from the HSWP’s leadership. Hungary received IMF stand-by arrangements and WB-loans to survive. The country’s balance of payments crisis and the accession to IMF in May 1982 coincided with the first major changes of the period: establishment of small enterprises and decentralization of big state companies.

In 1987 the IMF imposed severe conditions on the signing of new arrangements, namely: to stop direct state economic intervention, to open the way for private markets, to distribute economic resources efficiently. In the spirit of the „Washington Consensus” the IMF and the WB recommended measures of decentralisation, deregulation, liberalisation and privatisation.

A new phase of reforms began with the introduction of the two-tier banking system, and the tax reform legislation, with the preparation of radical liberalization and deregulation, and passing laws to transform state owned companies into joint stock companies. These changes has led to a “socialist market economy” before the political collapse, so apart from the ownership, the market economy institutions have been established in almost all areas.

Hungary played an important role in accelerating the collapse of state socialism across CEE when it opened its border with Austria in 1989, allowing thousands of East Germans to escape to the West. Just a few months later the fall of Berlin Wall was a history.

Given the multitude of internal socioeconomic, psychological and external (mainly economic) constraints, rapid implementation of the Hungarian „new democracy’s” threefold strategic agenda of democratization, marketization, and the embedding of the rule of law, is not in the cards in the 1990s. Instead of a picture perfect democracy, smoothly working market economy, and contented citizenry, second best solutions will have to do for some time to come. The mismatch between the Kádárist institutional legacy and the new political architecture, between economic misdevelopment and the imperatives of the market, between moral decay and civic probity have not been overcome – nor will they be anytime soon. Withal, the glass is more than half full: institutional changes have become irreversible; free enterprise has taken deep roots and will soon dominate the economy; and the people became disillusioned and dissatisfied with inept politicians and clumsy policies. By today Hungary became half-built home of ten million discontented, disillusioned citizens.

The reason why the losers of system change until now have abstained from political protest is deeply rooted in the legacies of state socialism. In contrast to the South, large sectors of the population in the CEE region could avail themselves of relatively substantial reserves to survive hard times. This may have lessened the risk of violent and disruptive social response to economic stress in the East. Another legacy of state socialism has been the weakness of civil society. In accordance with the atomizing effect of socialism, citizens resorted to private action and escaped into the second economy instead of choosing collective action. The most important means that the citizens of postsocialist states used in expressing their dissatisfaction was the protest vote.

An early differentiation of political parties took place in Hungary. The parties that were able to get into the Parliament in the first free elections formed three different blocs: the conservatives, the liberals, and the socialists. In 1990 an oversized coalition of the conservative parties formed a government, led by Prime Minister József Antall that introduced important economic reforms.

The early Hungarian transition is usually characterized as a gradual process. That is true for macroeconomic stabilization, but it is untrue for the economic transition in general. The Antall-government introduced a radical marketization program, letting market selection enforce adaptation of the firms to a changing economic environment. Within 4 years nearly half of the country’s economic enterprises had been transferred to the private sector, and by 1998 Hungary was attracting nearly half of all foreign direct investment (FDI) in the CEE region.

In spite of the efforts of the conservative government to mitigate the negative economic consequences of the transformation, it suffered a humiliating defeat in 1994. Due to the protest vote of the citizens, the prevoiusly large MDF became a small party. In contrast, the socialist MSZP grew from a small party to a large one and won the parliamentary election.

The Socialist-liberal coalition government received further financial assistence from the IMF and the WB in order to counterbalance the devastating economic effect of liberalisation and privatisation and introduced a stabilisation package (the infamous „Bokros package”). The Horn-cabinet followed the predecessor conservative govenment’s policy of privatisation and sold the Hungarian trade and credit banking system to big foreign (mainly Austrian) banks.

The Bokros package was implemented to save Hungary from financial collapse and stabilise its economy. The package included some not well-elaborated and in many cases unnecessarily measures which hit the population as a shock therapy. With these draconian actions there was no need for IMF assistence for about a decade.

In 1998 the MSZP lost the election. Citizens again resorted to the protest vote, since the increase of wages still lagged behind the rate of economic growth, and a great number of voters did not perceive an increase in their own welfare. Another reason for the fall of Socialists was that the main rival, the right-wing FIDESZ, promised fast economic growth of about 8% as opposed to the 5% offered by the Socialists. The Orban-government changed the emphasis of economic policy using the rhetoric of economic nationalism and emphasizing the importance of domestic, Hungarian entrepreneurs in the economy. In the second half of its term, under the circumstances of an international economic recession, the government experimented with a domestic demand stimulus in order to maintain a relatively high rate of economic growth, doubling the minimum wage, introducing a new housing program for households and a loan scheme for small- and medium-sized domestic businesses with subsidized credits. However, FIDESZ lost the 2002 elections and was replaced by a socialist-liberal government.

After a bitter election campaign that questioned the credibility of the MSZP, the Medgyessy-government was forced to keep the promises the party had made in the campaign. As a result, real wages in Hungary increased by about 22% in 2002 and 2003, while the balance of payments and the state budget produced large deficits. The competitiveness of the economy was reduced and the inflow of FDI slowed down. Uncertainties were increased by the hectic changes in the exchange rate and the conflicts about the course of economic policy between the National Bank and the Ministry of Finance. As a consequence, the Medgyessy-government had to cope with the unpopular task of adjusting economic policies to economic exigencies. The government had to reduce the budget deficit, to slow wage increases, to stabilize the exchange rate at a level favourable for exporters, to speed up privatization, to give new incentives to foreign investors, and to carry on with the reform of the social security sector.

The transition was completed within 15 years, and as a result the Hungarian economy became an export oriented FDI-dependent open economy. The country went through a deep transformational and structural crisis during the transition at a price of serious social degradation. The transition came together with unnecessary sacrifices that the society, the majority of the people had to suffer, but in the same time these sacrifices did not create the long-run conditions for catching up. Among others instead of catching up in development to Western Europe, the possibility of improving living standards was not created, a goal of eliminating wide income gaps and wealth differences could not be set up, and the development of underprivileged regions could not be started.

The consequences of the system change were: 1.5 million unemployed, 20% drop of the GDP, the total opening of the internal market to Western goods and capital, a destroyed industrial and agricultural structure, a loss of national wealth estimated to be higher that that in the WWII and a strong dependence on foreign capital.

The transition produced millions of people who gave decades of their lives working for low wages, and who suffered all the problems of an economy in transition, and there was no straightforward way to make their lives easier.

The CEE region is an upwardly mobile formation striving towards the European core (centre) countries. In the CEE, especially in Hungary (but a little later also in the Czech Republic, Slovakia, Poland and the Baltic republics) the capitalism „was built from outside” and the foreign, especially the multinational capital played a decisive role. Hungary as an apt pupil during the years of transition has lost its leading role in the region by now. Double marginalization has taken place: its position weakened both in the EU and in the CEE region.

The „outside model” of the system change was implemented by the new political class in posession of the monopoly of legitimate violence: the change has been made „typically by the states from top-down” and its real socio-economic content was dressed in national and ethnic form.

In Hungary, the system change meant the victory of the „so-called late Kadar technocrats” that could become dominant actors within the elite groups managing the transition, because they worked closely together with the superstructure of global capitalism (i.e. IMF, WTO, World Bank, credit rating agencies, etc). In 1989 they found the catching up with the reconnection to the West. The concept of Central European region in the 1980s ideologically prepared for Hungary’s Western re-orientation.

Modernization strategy was based on following the outside examples, namely: de-etatization, deregulation, privatization, monetarism, launching and managing series of social, economic and political actions according to new individualism. Today it became clear to the majority of people that Hungarian society can not be converted and stimulated to catch up by imported ideas and institutions.

The successful modernization manifests itself in an economic and social structure, which is built on the possibilities of the country and is capable to operate according to the changing external and internal conditions as well as creating a social structure, which is a base – in all components – for further advancement of the modernization process.

Modernization of the state socialist experiments has lost social leverage and the upswing was not followed again by an independent, own development based on the possibilities. In the last decade of the socialist system the macroeconomic indicators clearly expressed the deteriorating economic performance, while after 1978 Hungary ran into the debt trap. The last decade are significantly worse in all indicators than the previous two periods, while investment and per capita real wage has been negative. Thus, the legitimacy of the socialist sytem was undermined by the poor performance and was ready to be overthrown in order to start – not for the first time – the coveted task of catching up.

Historically, however, based on GDP and GNP calculations, since the 1860s the performance of the Hungarian economy is more or less constant: Hungary stands at around 60% of the European core (centre) countries with 4% to 6% point difference (if the cyclical fluctuations are not considered and the weighing of the reference is taken into account).

If we take the performance of the early 21st century and compare it to the EU-15 (prior to 2004), Hungary stood at 57% – 58%. (The golden age of the Hungarian economy was between 1997 and 2001, when GDP grew by an average of 4.6%. This growth declined significantly between 2002 and 2007 and then turned into an open crisis). But if we compare Hungary’s performance in 2006 to the average of EU-27, the figure stood at 63%.

Hungary’s economic performance remained in the medium range, and since 1979 has so far been unable to escape from the movement of forms that after periods of rise a period of decline, loss of balance, reproducing fiscal deficit and growing external and internal indebtedness and dependence follow. Then comes the deep recession and the resulting crisis. The explanation of this movement of form – and also the negation of modernization theory – is the conceptual content of the semi-periphery. The problem of the relative backwardness and the semi-peripheral status does not depend either on governments and governmental measures or mostly even on a form of social-determination. The semi-peripheral CEE countries are in an intermediate position in the world economy, in the structure of the centre and the periphery. However, we cannot step out of the world economy, we cannot keep aloof, because the most important historical attempts failed in dozens of countries, including the former Soviet Union. The dilemma of the CEE countries, therefore, is only the degree of openness.

However, not only the openness dilemma of the semi-periphery is an important question, but also the phenomenon of the emerging new competitors that have often more capital power than Hungary’s whole economy.

In Hungary, the new capitalism is largely open. As a result, Hungary suffers the losses, which is caused by the semi-peripheral position, namely that – from the trade relations point of view – the main partners before 1989 (primarily the Soviet Union and the socialist countries) are now replaced by the European centre countries, first of all with Germany.

The existing problems of today’s Hungarian society is that the new system is only capable of a performance presented here above. Thus, the new capitalist system cannot cut through the Gordian knot, namely that at least one million people is missing from the active population (it was 4.8 million before 1989). Due to changes in class relations the domestic industrial reserve army (i.e. the unemployed) has enormously swollen. Essentially, the persistently low level of employment took shape by 1993. For this reason the needy are numerous and compared to them the taxpayers are few (the tax base is insufficient), so to spread the cost burden evenly to the public is very limited. Consequently taxes are high and willingness of savings and investment is low. The overall performance of the Hungarian new capitalism is approximately equal to the state socialist system, but the resources and income are allocated much more polarized. Oligarchic wealth of a few hundred thousand people was established, they are really caught up to the centre, while the ratio of people living below the poverty line is about 40% of the population (i.e. four million people).

In the past twenty five years massively disintegrated, under-class groups appeared, with a large number of Roma population in the lead, under the continuous pressure of welfare compensation (benefit). Thus, the poulation’s carrying capacity of public ownership was much higher than that of the private property created by original income transfers, privatization and restitution.

The impacts of the economic crisis in Hungary

Hungary is one of the biggest losers of the current crisis. Since 1989, foreign capital investment (FDI) has played a significant role in the renewal of Hungarian industry and in the formation of new industrial spaces. The economic has had a significant impact on the Hungarian economy, particularly for the globalized, export-oriented industry. Primarily those branches of the local economy suffered the most that are closely tied to the global economy (e.g. automobile industry and electronics). These industries and the impacts of the crisis are typically concentrated in the northern Transdanubia area of the country, so we can designate this region as the core of the crisis. Moreover, the crisis has brought into focus the spatial structural dichotomy of the Hungarian industry and has also contributed – even if only temporarily – to alleviating regional differences. However, the new, semi-post-Fordist pattern of Hungarian industry has not been reorganized. The sharp GDP decline in 2009 was linked with the construction and the contraction of the real estate market.

At the end of 2008 and early 2009 the Hungarian Currency (HUF) was depreciated by 15% to the Swiss Frank (CHF) and 17% to the Euro (EUR), which led to insolvency and to an emerging credit crunch. Indebtedness of the households in foreign currencies (CHF and EUR) has increased. As a result the financial conditions of the households deteriorated, the income and spending relations changed. The social composition by income and financial situation became polarized, the gap between the richest and the poorest widened, differences between the households sharpened, the quality of urban residents’ life decreased.

The crisis in Hungary has shown us clearly the low competitiveness, the scarce resources, the small size of domestic market, the unfavourable demographic trends, the quantitavie and structural problems of labour force as well.

Recent developments (2010-2014)

In 2010, Hungary elected the Fidesz party and its leader Viktor Orban into power. Since then the government has implemented a range of unorthodox economic reforms which have drawn criticism from economists and financial analysts alike. To break down the public debt the social benefits were abolished, private pensions funds were nationalized. Orban has introduced the biggest tax in Europe on banks and financial companies and imposed large levies upon energy, retail and telecommunications companies. VAT was raised to 27%, which is the highest in the EU. In addition Orban has announced plans to fix the exchange rate for loans taken by individuals in CHF. Further unorthodox policies included interfering with central bank independence, nationalizing USD 14 billion in assets from private pensions and a steep 18% hike in the minimum wage.

Prior to the 2014 parliamentary elections the Orban-government re-introduced social measures, among other things, launched the so-called „overhead-battle”, which forced the utility providers of gas, electricity and water to reduce their prices by 20% in two steps: 10% in January and 10% in October 2013.

After four years of Fidesz rule, Hungary in 2014 has not even reached the economic performance it had before the crisis. Cohesion is not moving forward either: in 2009 Hungary had about two thirds of the EU avarege purchasing parity, and the gap has been growing each year. After four years of unorthodox economic policy Hungary’s potential economic growth has shrunk from 3% to 0-1%.

However, recent statistical reports indicate that the Hungarian economy may have finally exited of negative growth. The GDP of Hungary increased by 3.5% in the first quarter of 2014 compared to the corresponding period of the previous year. According to the first release of Eurostat, the total GDP of EU-28 increased only by 0.3% and the GDP of Germany was up by 0.8% in the first quarter of 2014 compared to the previous quarter.

Despite GDP-growth the recent IMF report warns the Fidesz government: „Based on current policies, the medium term growth prospects––although somewhat improving––remain subdued and below that of Hungary’s peers. While the drag from the private sector’s deleveraging is projected to gradually diminish over the medium term, policy unpredictability and persistent interventionist government policies are likely to continue depress private investment. At the same time, labor market performance, while gradually improving, is held back by the low participation rate, weak labor productivity, and skill mismatches. Although estimations are subject to high uncertainty, they suggest that, under current policies, potential output growth is likely to accelerate modestly to 0.9 –1.7 percent in 2019 from just above zero in 2013.”

Regarding the expansion of public works program IMF is on the opinion that it is too expensive and resembles rather a traditional social program, as well as it does not focus on the retraining and it is inefficient. Only 13% of the participants in the program was able to get jobs in the labour market after exiting the public works program.

In the general election on 6 April 2014, voters said „yes” to the Orban-government’s new economic policy, whose goal is to build an economy on the foundations of „labour rather than speculation”. Orban has promised a continuation of his economic policies, which include boosting industrialization, lowering energy prices – and more controversially, increasing the level of Hungarian ownership in the agriculture and banking sectors. Orban and Hungary’s central bank governor György Matolcsy want to see more than 50% of bank assets held by Hungarian institutions, up from the current 42%. Taxes have also been increased on sectors dominated by foreign investors. The officialy declared goal is that the multinationals should not acquire „intermediate illegal profit”. „Hungary and the Hungarian land are for the Hungarian people”.

Domestic critics say that Fidesz’s reforms benefit local businesses close to the party, while liberals say that Fidesz is actually implementing socialist measures. Hungary’s currency has come under serious pressure in the past few months as investors have backed away from emerging markets. Hungary was dubbed one of “shaky six” developing economies particularly vulnerable to capital flight.

The main problem we are facing now is that – as a result of a dysfunctional economic model – the greater part of Europe, including Hungary reached an impasse. Unfortunately, many policymakers still believe that combining foreign capital and cheap labor is equal to catching up, which is a serious mistake. It is also a big problem that among the proponents of this erroneous economic idea – with a slight difference – we can find both major parties of Hungary. The neo-liberal economic policies are spiced on the right by Fidesz with runic, Turul bird elements and by MSZP on the left with uncritical adoration of Europe. It goes without saying that there might be a constructive role of the capital, but it has already crossed the borders, leaving behind a socially unacceptable situation. In addition to the classical bargains and fights between the antagonistic labour and capital, the knowledge as a third factor also entered into the productive scene. However, the Hungarian leadership of the last 25 years has been ignoring this change and deteriorated Hungary into a low productivity. It will be interesting to observe whether Fidesz economic policies will pay off in the long run. If so, it would be interesting to see how the economic community accounts for the success of a number of policies which have aimed to boost consumption at the expense of inward investment.

Budapest, 8 June 2014.

Matyas Benyik


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