Versions of Economic Reform

...For a while the Kadar regime lulled itself into complacency by cashing in on its "liberal" reputation and securing large loans to relieve the growing debt...

...From this cursory overview of the economic debates, we may conclude: First, with the exception of the deregulationist models, there is, as yet, no viable and internally consistent vision to guide Hungary toward, or away from, a market economy...

...Although deregulationists do not subscribe to rapid denationalization, they are extremely skeptical about the ability of state-owned enterprises to become competitive...

...The fundamental tenet of the radical pragmatists' thinking is the desirability of an immediate, and preferably total, dismantling of state-owned enterprises...

...Like the hedgers, the Third roadists appear to lack a coherent blueprint of transformation...

...In addition, the Kornai model assumes that the injection of capital in the private sector can yield rapid results, a hypothesis deemed overly optimistic by many...

...Therefore, this "paradigm of entropy" argues that in the long run the government sector will wither away in the face of private sector competition...

...In the immediate post-war era this vision, as expounded by the social theorist Istvan Bib6, sought a democratic and independent model as an alternative to a Hapsburg- or a Soviet-style state...

...Locally they encourage grass-roots activism, such as the formation of tenant unions and homeless and unemployed coalitions, while at the state level they promise to implement a welfare system that would guarantee a minimum standard of "decent living" for the aged, handicapped, chronically ill and unemployed...

...In addition, the regime's inability to reform the incentive system, based on quantity rather than quality targets, coupled with the tendency to siphon off earnings of successful * Estimating Hungary's GNP is difficult...

...This prognosis is premature...

...First, a comprehensive legal reform to replace Hungary's motley laws, which do not extend legal protection to a variety of entrepreneurial activities...

...This mixture of radical short-term stabilization and long-run denationalization has its adherents, although enthusiasm for its shock therapy prescription is more muted than in Poland...

...Indeed, the salient feature of the Hungarian debates is the perplexing cluster of political alignments regarding the central issue of marketization...

...351 Economic Reform from the rest, coupled with the diversity within each camp, suggests that the concept of the "market" cannot be adequately captured by a straightforward association of promarketism with procapitalism...

...In the long run, though, the borrowing spree exacerbated the debt problem as the funds were squandered on politically expedient but economically irresponsible projects...

...Specifically, there is no reason to assume that an obsession with "markets" signifies the same thing for a Gdansk worker as for an American free-enterprise advocate, nor should one assume that intellectual flirtation with Thatcherism necessarily indicates a desire to transplant British policies to Eastern Europe...

...Consequently, the economic blueprint of the social democrats is hazily drawn with respect to short- and long-run economic reforms...

...Indeed, moderate growth coupled with imperfect markets (which would survive in the state sector) is likely to worsen income disparities...

...No doubt, many who favor the former do so in order to see unbridled capitalism take root in Hungary...

...The prognosis is thus confidently spelled out: provided the Soviet Union does not intervene, East Europeans should soon be blessed with an unfettered capitalist economy...

...This group, composed of social democrats spread among a handful of parties, is acutely aware of the dangers of further eroding living standards in a country where one in four lives below the poverty line...

...The radical pragmatists...

...Tackling the country's woes will be difficult because the crisis is traceable to a confluence of internal and external factors that squeezed, and subsequently reversed, Hungary's modest expansion precipitated by the 1968 economic reforms...

...The legacy of two decades of erratic experimentation has been disastrous: an antiquated manufacturing sector losing ground in world markets, soaring inflation (currently over 30 percent), worsening shortages, and a crushing international debt of $20 billion, which, on a per capita basis, exceeds even the Polish figures...

...Nor is this resentment a simple matter of envy, since it is well known that many of this elite ascended to their positions due to party * These include the sale of the light-electronics manufacturer, Tungstram, the country's twentieth largest corporation with an annual production value estimated at approximately $200 million, to General Electric for $150 million...

...Isolated pockets of opposition remain, primarily the orthodox Communist "apparatchiks" who refused to join the breakaway reform wing of their party that has become the Hungarian Socialist party...

...it can only be guessed at and hoped for...

...This basic cleavage separating third roadists SUMMER • 1990...

...Finally, the estimated $4 billion savings made by the elimination of subsidies is to be redistributed to the private sector in the form of tax credits and loans, complementing the substantial tax cuts in favor of that sector...

...It argues that a single ideology has emerged victorious, though even a cursory overview suggests the opposite...

...However, the opaqueness of economic propositions cannot simply be understood in terms of economics...

...This bold blueprint, proposed primarily by the managerial elite, small-business associations, and some factions of the Alliance of Free Democrats (the country's second largest party), is becoming more popular, though in urban centers opposition remains considerable...

...Yet, in spite of devising elaborate schemes of self-management, the actual steps taken by social democrats to pursue these objectives are surprisingly tepid...

...The attempt to turn over some three-quarters of government enterprises to self-management failed miserably, largely because the rights granted to such enterprises were immediately whittled away...

...Moreover, confusing regulations and high tax rates sent many of the newly legalized private enterprises underground, thus withholding sorely needed revenues from the state...

...In contrast, CIA estimates, as reported by the New York Times (January 7, 1990), are $92 billion and $8,660 per capita, or less than half...

...The concern with social welfare notwithstanding, the social democrats are also staunch defenders of the market model...

...Finally, it should be emphasized again, Hungary remains in a state of flux...

...for others, "market" contains no ideological message but has become an almost magical incantation, an "open sesame" password that is expected to bring instant gratification to the consumption urges...

...In contrast, under the canopy of Third roadism, populists and remnants of the Communists gather to form an uneasy alliance...

...However, the electoral clout of these hard-liners, as reflected in Hungary's first democratic election since 1948, is negligible...

...Finding themselves in no-man's land, rejecting the discredited command-economy model while remaining hostile to the market-oriented approach, their vision combines Southeast Asian models of development with populist slogans...

...But they also express concern about the impending repercussions and concoct piecemeal approaches to defend the economically worst-off groups...

...Second, considerable hostility exists toward the managerial elite who command large salaries—with the select executive group receiving annual bonuses ranging between three and six million forints ($50,000-100,000)—in contrast to the rapidly deteriorating living standards of most Hungarians...

...Their ranks are composed mainly of centerright populists (members of the Hungarian Democratic Forum, the largest party after the March election) with a sprinkling of reform Communists and some socialists...

...As Janos Kornai, Hungary's guru of this school of thought, warns, a command economy can be assembled overnight, but its disassembly, and the formation of an entrepreneurial class, is a more lengthy affair...

...Only by permitting anyone to snap up a bargain deal in the basement of busted firms can Hungary's swift—albeit painful—transformation into a highly competitive private enterprisebased economy be accomplished...

...Opposing the continuation of state ownership and displaying little enthusiasm for handing ownership to the managerial elite, these hedgers frequently examine the possibility of workers' ownership and self-management as an alternative to individual private property...

...Accordingly, two arguments will be elaborated below...

...To counter the threat of a polarization of 350 • DISSENT Economic Mono Hungarian society spurred by a free market, the social democrats propose a number of measures...

...What remains hotly debated, however, is the type of plans needed and the timing of their implementation...

...Accordingly, they oppose any attempt to salvage the public sector by additional investments and propose, instead, a policy of neglect to enable the fledgling private sector to carve out a progressively larger niche for itself...

...Who Wants to Do What and When Recognizing the severity of the economic crisis, the majority of Hungarians seem willing to undertake painful adjustments...

...352 • DISSENT...

...They echo the deregulationists by advocating freeing of markets, slashing the international debt and budget deficits, cutting taxes, eliminating subsidies, and fighting inflation...

...even more astonishingly, the GANZ railway yard (with annual production valued at approximately $100 million) was sold to a British consortium for $4 million cash...

...The newly elected coalition government is fully committed to a fundamental restructuring of the economy...

...348 • DISSENT Economic Reform industries to keep inefficient ones alive, nurtured a conservative investment strategy that further impeded economic development...

...The promarket forces, combining the radical pragmatists, deregulationists, and hedgers, represent a diverse spectrum, from Smallholders to social democrats, the latter clinging to the somewhat paradoxical position of pursuing deregulation while espousing some type of welfare state as their ideal...

...One prominent plan, for instance, envisages state enterprises converted to a limited number of holding companies that would compete with one another while remaining under ministerial control...

...The deregulationists would stimulate the private sector in four ways...

...Concurrently, the vote for marketization is an emphatic vote against third roadism, which, it is feared, could easily lead to the Third World...

...And yet, there are those for whom a vote for "the market" is nothing less, nor more, than an affirmation of the desire to join the community of Western European democracies...

...While espousing the long-term goal of eliminating, or severely restricting, the government sector, it eschews any dramatic denationalization...

...Furthermore, in the absence of a redistributive income policy favoring the less well-off (and the tax reform advanced here is socially regressive, benefiting the wealthier segments of the population), the deregulationist blueprint puts its faith in the "trickle-down" effects of economic expansion to improve the living standards of the poor...

...SUMMER • 1990 • 349 Economic Reform associations rather than on account of their administrative prowess or business acumen...

...With the exception of isolated socialists advocating the distribution of the state's assets among the population in the form of shares and stocks, the majority who march under this banner are defenders of state ownership or propose some type of institutionalized ownership subject to state regulation...

...While the radical pragmatists and deregulationists place their faith in the efficacy of the market to heal swiftly the country's economic woes, the hedgers' vision is based on enthusiasm for market reforms modified by a concern regarding their potentially divisive repercussions...

...Though the views on short-run stabilization and long-run restructuring are extremely diverse, supporters can be distilled into four groups, which, for lack of appropriate terminology, will be identified as "radical pragmatists," "deregulationists , " " hedgers , " and "third roadists...

...A number of well-publicized deals embracing this doctrine by selling factories to foreign consortiums for a pittance ignited passionate protests...

...The deregulationist position, subscribed to by the liberal wing of the Free Democrats, offers the clearest and internally most consistent economic vision...

...First, some argue that abandoning the strategy of "simulated competition," whereby state monopolies attempt to produce an output quantity at prices they believe would result under competitive conditions, could lead to permanent dualism rather than the gradual disappearance of the state sector...

...This should come as no surprise, given that the dismantling of a command society is a unique challenge, never before undertaken...

...Third road visions...

...Official figures (1989 Yearbook of Statistics) place the 1987 GNP at $200 billion or approximately $19,000 per capita...

...In turn, this overview will suggest that support for a market economy does not necessarily represent a vote for capitalism but is an expression of something else: a desire to become truly Westernized...

...Rather, the fundamental conflict appears to be, at this stage at least, between a vote for Westernization and a vote against it...

...Still, the power of the radical pragmatists remains potentially considerable...

...But the regime's refusal to initiate political reforms in conjunction with the economic measures was selfdefeating...

...The deregulationists...

...From the mid-seventies, demand for Hungarian exports, which make up nearly half of the national product (GNP), began to wane* due to the manufacturing sector's inability to accommodate the shifts in world demand away from heavy to light industrial products...

...The hedgers...

...Currently, however, third roadism has become the rallying call of disparate groups that, for a variety of reasons, find a market-oriented economy unpalatable or threatening...

...Third, a total deregulation, meaning that in the capital, labor, and finished-product markets of the private sector the forces of supply and demand, and only these forces, are to regulate prices...

...In conjunction with rapid denationalization, the "radical pragmatists" call for an immediate free-marketization, hoping that the convergence of absolute and relative price levels to those of Western Europe's economies would bring an immediate improvement in resource allocation and a concomitant spurt of economic expansion...

...The worsening economic situation did prod the leadership to engage in rounds of innovative reform, culminating in the much touted 1985 reform package, which legalized a limited range of private enterprises...

...Moreover, critics assail the model on three theoretical grounds...

...First, I will try to show the degree of complexity characterizing Eastern European debates about the future—with the focus on Hungarian discussions about economic reform...

...The unconventionality of these terms mirrors a Hungarian reality in which politics and economics make seemingly odd bedfellows, with politically progressive forces becoming wedded to free-enterprise positions while reformist Communists and center-right parties flirt with one another in expressing support for a strong state-led development...

...Elements of Debate on Economic Reform Among all Hungarians there is an overwhelming acceptance of the need for economic reform...

...Second, a counterinflationary package, including the termination of government subsidies of all kinds—from funding perennial money-losing factories to eliminating price support for housing, transportation, and food...

...The country is bankrupt and, befitting such a state, a national liquidation sale is called for...

...The specific nature of the economy and society that will eventually emerge cannot be foretold...

...Their weak urban base is counterbalanced by strength in the countryside, the bastion of the third largest party (the Independent Smallholders), whose platform calls for an immediate dismantling of state collectives and the return of the land to their pre-Communist owners...

...Third road approaches seeking a uniquely Hungarian model of economic development first became prominent in the interwar period when a populist-peasantist ideology challenged the conservative view advocating the transformation of the semifeudal latifundia into capitalist-style agrobusiness...

...This is a problematic assumption, since even rapid growth under perfectly competitive conditions (devoid of structural distortions favoring the affluent, such as monopolistic ownership of resources) need not lead to equitable income distribution...

...Stories of nascent entrepreneurial spirit sweeping the region saturate the press while free-market proselytizers report that Milton Friedman and Margaret Thatcher are the new idols of the intelligentsia...

...Critics, including prominent freemarketeers, pointed out that selling off the country's assets to multinational companies was likely to create, at best, an erratic prosperity of dependency...