Labor under central planning in Hungary
This essay will survey labor under the Soviet-type central planning system in Hungary from the pre-W.W.II period up to the start of the economic reforms of 1968. We will look at the economic impact of W.W.II on industry and labor, then survey the impact of the post-war reconstruction period, and finally conclude with the objectives and intentions of the Imre Nagy and Janos Kadar governments. The information contained herein was taken from the book entitled "Perestroika In Eastern Europe: Hungary's Economic Transformation, 1945-1988" by Gabor Revesz.
Before W.W.II, Hungary's labor force was employed roughly in two major areas: 50% in agriculture and the other 50% in service sectors. Seventy-five percent of those working in agriculture did not own their own land or did not own enough to support themselves and their families. "Twenty-two percent of all farmland belonged to big land owners, with estates of more than 600 hectares", and "another 23% had belonged to other landlords"(23).
The effects of W.W.II on Hungary were disastrous both in terms of life as well as in terms of its economy. As a result of the war, Hungary lost roughly 40% of its national wealth, and "Ninety percent of [Hungary's] industrial companies suffered substantial losses" (23). However, despite these heavy losses, most of the Hungarian people, and especially the peasants who owned no land, would later benefit from the post-war social and economic reforms.
Land reforms began in 1945, "...on the basis of laws enacted by the Provisional National Government" (23). As a result of these reforms, very large estates (600 hectares or more) "were entirely expropriated" (23). Owners of smaller estates were allowed to keep portions of the estates for themselves, and the size of those portions was determined relative to whether or not the owner would farm the land himself. (23). Overall, "The reform affected 35 percent of the country" (23). "The land reform", as Revesz states, "was a genuine revolution: first because it rearranged the structure of Hungarian society, and second because it was carried out by the people who worked the land" (24). People who were once peasants with no land suddenly acquired land, and "...worked hard once they took possession" (24). "In the final year of the war and the first half of 1946, the people suffered from cold and starvation" (24). However, "By 1948, despite several years of drought, the small farmers were able to produce about as much as the estate-based system had, on average, in the 1930s" (24) "Food became more plentiful in the cities, and people were eating well" (24).
The post- war reforms also had an effect on industry. The emergency distribution-type programs in place during the war carried on throughout the period after the war and eventually metamorphosed into the creation of a central planning system and property nationalization program (24). State ownership grew very rapidly in 1948 and '49. In 1945, mines were nationalized; in 1946, the five largest heavy industry companies and largest power plants were nationalized; and in 1947, large banks as well the companies they owned were all nationalized (25). By 1948, all companies with more than 100 employees were nationalized, and finally, in 1949, all companies with as little as 10 employees were nationalized. Newly nationalized firms were later consolidated into large dinosaur state firms, and were run by new managers selected by the communist party. These new managers were expected to act solely "on the basis of instructions from above" (25). By the end of the 1940s, the government had succeeded in "...the virtual elimination of capitalist property" (25).
Overall, the post- war period saw much growth. Manufacturing output doubled in 1947 and '48, due to the restoration/reconstruction of factories, power plants, etc. The labor supply also increased. "There had been 326,000 workers in manufacturing, including mining, in 1938; there were 300,000 in 1946; 350,000 in 1947; and 400,000 in 1949" (28). The main goal of the reconstruction period was to increase the role of heavy industry; and in that respect it was successful. In 1938, iron and engineering industries accounted for 23% of manufacturing output, and by 1949, that figure rose to 33% (28). During this period, the status (living standard) of skilled workers (professionals) declined, while that of less skilled workers increased (29). Real wages also rose; they were 10-20% higher in 1949 than they were in 1938 (29).
With the exception of agriculture and retail trade, virtually the entire Hungarian economy was under state ownership by 1950 (29). The next direction Hungary took was the adoption of the Stalinist model for its economy. Under the new centrally planned and administered system, industrialization would rapidly increase, and all farmland would be consolidated into "...large, mechanized cooperative farms" (33). This "...so- called socialist transformation of agriculture" would ultimately result in a portion of the agricultural work force being transferred into industry (33). Although this system was successful in "fostering rapid growth" and created jobs for unskilled labor, the industries in which these people worked were often "...mass producing out-of-date products" (33).
The effect on the labor force between 1949 and 1955 was significant. Within those six years, "...1.3 million people entered the labor force", which translated into a net increase of 15% in labor supply (36). As stated in Revesz, of that 1.3 million, 680,000 had just reached the working age, 120,000 had been unemployed in 1949, 200,000 were former housewives, and 300,000 had been agricultural workers. The agricultural workers who did not switch to industry, however, were forced to give up their land for consolidation and join newly formed large cooperatives. If they demonstrated any resistance, they were often harassed and humiliated into joining (36).
In 1953 Imre Nagy was appointed prime minister of Hungary. Nagy, tired of witnessing the injustices against the peasant farmers as well as realizing the fact that extreme emphasis should not be placed on heavy industry, announced "...a program under which economic decision making would respond to reality" (37). Under this new program, the Hungarian economy would move away from heavy industry, and invest more in light industry and agriculture (37). Farmers who were once persecuted and forced to join co-ops would no longer be, and "Economic planning would give more weight to the standard of living" (37). Soon, the conditions for workers in the country (namely the farmers) were better, and by 1954, "...real income had risen considerably, and the whole country felt relieved" (37).
Because of escalating internal "rivalries among its [Hungary's] leaders", Imre Nagy was removed from power in 1955, and later "expelled from the party itself" (37). Growing discord and discontent among the general population, leftist liberals, and members of the Communist Party that were in opposition to the old Stalinist-type system eventually culminated in its collapse and popular revolt in October 1956. Imre Nagy formed a "counter government", and soon afterwards regained power in the country (22).
Workers responded by spontaneously forming "workers' councils", and took control of factories, selecting their own managers in the process. The workers in Hungary wanted "to have factories managed according to their own interests", and "wanted a socialist model responsive to Hungarian conditions, not one copied from the Soviet Union" (39). The reinstated Imre Nagy regime aimed to give them just that.
But this was not what the Soviets wanted. Their tanks rolled in to restore the communist power. The new government headed by Janos Kadar was created and the centrally planned system reemerged once again in its original form. All of the systems which Nagy sought to change were reinstated by the Kadar regime. Emphasis was again placed on heavy industry, farmers were once again forced to join co-ops, the standard of living once again began to decline, and "The bullying and violence that had marked the old leadership reappeared" (37).
In the ten years that followed (1957- 1967) the Kadar administration made some changes in various aspects of the economy which affected the labor system quite significantly. One of the first major changes was the government legalization of higher wages in 1957; which raised wages by 20%. "Real wages were 14% higher in 1957 than in 1955, and real income per capita was about 40% higher than in 1953" (42). The Kadar regime also eliminated mandatory compliance by farmers with co-ops, and allowed them to be created on a voluntary basis. Large state farms were still created, but not at the expense of persecuting and stripping peasants' land. Some of the "industrial building capacity" was also converted during this time period into producing more state housing.
Another change involved the adoption of a new wage system as well a new target/ planning system. Under this new system, firms were advised as to what the workers' average salary should be, "...but they were otherwise free to determine pay levels and the forms and terms of wage payment" (44). A ceiling was however placed on the firms' wage budgets, the size of which "...hinged on its success in fulfilling the production plan" (44). The firms also were no longer explicitly told exactly what and how much to produce (43). The were instead given a specification as to the value of the output (43). Only key essential products, such as electric power and coal, "...for which central distribution was considered necessary" were still mandated by target outputs (43).
With each passing phase of reform since the collapse of the old Stalinist system in 1956, Hungary moved closer and closer toward the market system. This gradual process of relaxation of the old communist directives and adoption of elements of the market economy took another major step in 1968; at which time Hungary decided to abandon the command economy in favor of market socialism.
Report on WAGE TRENDS IN HUNGARY
It is a well known fact that Hungarian reforms towards a market type system have been in the making for over two decades now. What is not commonly known is that Hungary was one of the first countries to adopt a national wage liberalization program (Cukor and Kovari pg. 182). Therefore, it is interesting to examine Hungary's wage trends in order to get a feel for the success of Hungary's wage liberalization program.
Eszter Cukor and Gyorgy Kovari wrote their article, with the intentions of giving us a critical analysis of the wage trends in Hungary. The two economists concluded that Hungary is in dire need of a restrictive national wage policy which could help subdue the inflationary effects brought upon by the wage liberalization program. It is in their opinion that if wage growth limits are not met, Hungary's success in ever reaching a market economy may be jeopardized. In order to determine the strength of the two economists' conclusions, one should first study their formulations.
First, it would be helpful to the reader if I defined terms that I will use extensively in this text, namely the nominal wage, the inflation rate and the real wage Nominal wage is the actual wage paid in currency units at current prices. The real wage is nominal wage adjusted for inflation that is the wage expressed in "constant" currency units, which means at constant prices of a base time period.. This adjustment is usually done by dividing the nominal wage by the consumer price index (CPI). Inflation rate is the relative change of the price level. When considering wages, we usually mean the rate of change of consumer prices (CPI). When both the rate of change of nominal wage and the inflation rate are small the rate of change of real wage is approximately equal to the rate of change of nominal wage minus the inflation rate.
Now we can examine the Hungarian wage trends as reviewed by Eszter Cukor and Gyorgy Kovari. Looking at statistics form the years 1979 to 1990 (see appendix 1 at bottom), one can quickly determine that nominal wages have been rising in every period since 1979 and that their growth accelerated in recent years. Even so, the real wages have declined in 8 out of 12 years of that period This can be explained by the fact that in those 8 years inflation was faster than the growth of nominal wages (see appendix 1 at bottom). For example in 1990 the real wage declined by 6% although the nominal wage grew by 22%. Surely this is an extraordinary development at least by the current West European standards. That is why it is of interest to study Cukor's and Kovari's propositions and determine if the rate of real wage should be corrected in the manner they propose.
The economists do applaud the fact that the share of "total net personal incomes (in forints) originating in the state owned and cooperative sectors declined from 70.5% in 1970 to 47%, in 1990, while that derived from private activities more than doubled." Also, they award the fact that state owned and cooperative jobs decreased by 200,000 and 150,000 jobs while the private sector's GDP contribution to the economy jumped to 20% in 1990 (Cukor and Kovari 181). Yet, they raise concerns over the growing income disparity of the Hungarian people, especially of late (see appendix 2). "As a result of income redistribution under inflationary conditions, the rich in Hungary have become richer and the poor have become poorer (Cukor and Kovari p182)." One of their points is that of pensioners. The two economists argue that the purchasing power of these pensioners is on the decrease. Yet, the Hungarian government is offsetting the effects that the pensioners would otherwise feel by increasing the purchasing power of the low paying pensions at the expense of the higher paying pensions. Still, the authors quote the increase in the share of the social security program to 9.2% of GDP, probably due in part to the increasing purchasing power of pensions, as a potential future crises. Another of their examples is that of minimum wage earners. As the consumer prices have increased, the workers depending upon subsistence level incomes have faced more difficulty with the value of their incomes. Due to that reason, the Hungarian government has repeatedly increased minimum wage from 3000 forints in 1988, to 3660 forints in 1989, 4,000 forints at the beginning of 1990 and 7,800 forints in early 1991. (See appendix three ). The economists argue that even with government policy raising the minimum wage or increasing the pension budget to keep up with rising consumer prices, the result has still been a wave of income redistribution that has led to the rich getting richer and the poor getting poorer (pg. 182). This they argue is a dangerous situation for Hungary's future (see appendix 2). That is why they argue for a restrictive national wage policy to correct these problems.
The authors position is confusing. They state that in spite of rising consumer prices low income earners are not too worse off because the minimum wages and low pensions were growing fast and also because many low income workers found jobs in the growing private sector to compensate for rising prices. How can Cukor and Kovari take the stand that pensioners and minimum wage earners are losing their purchasing power? Nowhere do they state that pensioners and minimum wage earners are worse off than the rest. So, one can not assume that growing inequality presents a grave danger to Hungary's strive for a market system. Appendix 2 surely does not offer much evidence to support the hypothesis that inequality is a growing problem. If purchasing power has remained all right as they argue then it must be the case that government policy has worked to protect these two groups. That is why one is left believing that these authors are arguing for something other than controlling the rate of consumer price hikes which are the result of growing wage rates.
It was in 1985 that the wage control policy was initially liberalized in Hungary. The motive was to 1) improve the Hungarian labor supply shortage and 2) to revitalize the Hungarian economy (Cukor and Kovari pg. 182-183). The effect, the authors argue, was a macro-economic shock along with double digit inflation as a result of the new wage liberalization policy. That is why the government quickly inserted stringent wage policies soon after. However, by 1989, employer and worker pressure helped resume the initial wage liberalization policies. As a result, wage raises began to range from 5% to 45% in contrast to the government's recommendations that firms keep wage raises in between 3% and 10% (Cukor and Kovari, pg. 183). The consequence was that the acceleration of the growth of nominal wages led to price inflation to compensate for the firms' higher costs. This is why the two authors argue for a national wage policy which would control wage increases.
Yet, their argument seems to be one of wage equality. One understands why strict control should imposed over wages in state owned enterprises before privatization. But, it seems that Cukor and Kovari go beyond that to support a national wage policy also for the private sector (pg. 188).
The authors give statistics that wage 25% difference exists between skilled and semi-skilled workers. Senior company managers are charged with receiving huge wage increases and passing costs to everyone else. Even, companies with market power are charged by the authors (mining and telecommunications) with paying higher wages which inevitably lead to higher consumer prices; thereby directly depressing real wages for everyone else. Cukor and Kovari go even so far as to state that, "successful private enterprises tend to pay employees more than state owned enterprises"(188). A national wage policy would be a necessary precondition for preventing the large market power firms from excessive wage increases that cause price inflation.
Even though the authors claim not to be for wage egalitarianism, they use examples of wage differentials to prove their point of instability in the Hungarian real wage trends since 1985. This seriously weakens their argument for a national wage policy. Even if one were to grant to the authors that a problem exists with purchasing power of low paid workers and pensioners, one still can not accept growing wage differentials as a main reason for the need of a national wage policy. The authors never really prove that the inequality in these two groups necessitates such an action. The authors are right in claiming that Hungary's markets are adapting, product quality is getting better etc. This should be interpreted as a sign of upcoming market efficiency and functionality. Why do the authors not consent to letting the market determine wages as well? Even in a market system like that of the US, inequality must be accepted. The government should try to alleviate the pains of the disadvantaged through various social policies. An example would be the way the Hungarian government chose to handle its minimum wage policy..
In any case, these type of free market policies are the ones that are needed. If Hungary is to ever reach a market system, then as Jeffrey Sachs and others would agree, Hungary must allow the market to determine wage rates and consumer prices when firms are in the private sector. A national wage policy will help restrict wage hikes which effect consumer prices. I agree that a national wage policy should be used for that purpose, but not to the point where the wage policy aims to decrease inequality. Cukor and Kovari do not distinguish between the private and the state sectors. That is why one should disagree with their national wage policy
Appendix 1: Annual rates of growth (%)
Source: KSH, Budapest 1990.
Appendix 2: (PERCENTAGE INCOME DISTRIBUTION)
KEY: Tenth being the top tenth percent! source: KSH
Appendix 3: Minimum Wages 1988-90:
ANNUAL PERCENTAGE GROWTH
Eszter, Cukor. and Kovari, Gyorgy. WAGE TRENDS IN HUNGARY. International Labour Review volume 130 (2) 1991. pp 177-189.
ECONOMIST: week of November 5, 1994. pp 19-21. (Inequality).