Economic_History_anim.gif (3797 bytes)  HUNGARY 



by Shauna Mulcahy

by Andreas Marathovouniotis


The Transition of Hungary to a Democracy

by Shauna Mulcahy

 The last ten years or so has shown dramatic changes within the state of Hungary.  Reforms of the economic, social, and political systems had led to far-reaching improvements in standards of living, morale, and international opinion.  In this essay we will explore the recent transition of Hungary to a democracy and what its consequences have been on the economy of Hungary.   

 The most substantial development within Hungary during the last decade has been its transition to a democracy.  “Hungary’s transition to a Western-style parliamentary democracy was the first and the smoothest among the former Soviet bloc, inspired by a nationalism that long had encouraged Hungarians to control their own destiny.”1  The push towards democracy began in 1988 when the Parliament adopted what was called a “democracy package,” which included trade union pluralism, freedom of association, assembly, and the press, a new electoral law, and a radical revision of the constitution.  The reform movement began to gain even greater speed as a result of the declining membership in the Communist party.  Also, in April 1989, the Soviet Union reduced its involvement in Hungary by signing an agreement that stated they would withdraw their troops by June 1991.1       

 In the late summer months of 1989 the political parties of Hungary, such as the Communists, Social Democrats, and Smallholders, met to discuss changes in the Hungarian constitution in preparation for free elections and the transition to a fully free and democratic political system.  Then in October of that same year, the Communist party convened for the last time before re-establishing itself as the Hungarian Socialist Party (MSZP).  Also during the month of October, the Parliament adopted legislation that provided for multiparty parliamentary elections and a direct presidential election.  This legislation “transformed the state of Hungary from a people’s republic into the Republic of Hungary, guaranteed human and civil rights and created an institutional structure that ensured separation of powers among the judicial, executive, and legislative branches of government.”1 

            The first free parliamentary election was held in May 1990.  The reformed communists fared badly, but the populist, center-right, and liberal parties performed the best, with the Democratic Forum winning 43% of the vote and the Free Democrats capturing 24% of the vote.  The Democratic Forum then went on to form a coalition government with the Independent Smallholders’ Party and the Christian Democratic People’s Party to gain 60% of the vote and a majority in the parliament.1  This coalition government achieved a well-functioning parliamentary democracy and laid the foundation for a free market economy. 

 In the May 1994 elections, the socialists staged a comeback and won 54% of the seats while focusing primarily of economic issues and the substantial decline in living standards since the democratic parties took over in 1990.  The socialist party, the MSZP, continued with economic reforms, privatization and a policy of fiscal austerity.1  They also followed a foreign policy of reconciliation with neighboring countries and integration with Euro-Atlantic institutions.  Also, during the leadership years of the MSZP, Hungary was invited to join NATO.  

The invitation into NATO, along with improving economic conditions, however did not guarantee the re-election of the MSZP.  There was widespread dissatisfaction with the rate of rising crime, government corruption, and the pace of economic recovery.  Therefore, in the May 1998 parliamentary election the Federation of Young Democrats captured a plurality of parliamentary votes and forged a coalition with the Smallholders and Democratic Forum.  This new government promised to stimulate faster growth, lower taxes, and curb inflation.1  This new government, which is currently in power, is also continuing to pursue Euro-Atlantic integration and is “a more vocal advocate of minority rights for ethnic Hungarians abroad than the previous government.”1

In the years of Hungary’s transition to a democracy, the economy has gone through many ups and downs.  In the period between 1990 and 1994, market reforms began with price and trade liberation measures, a new tax system, and a market-based banking system.  During these years however, the government policy of overspending and the high degree of privatization had a problematic effect on the economy.  Unemployment rose, the cost of food and necessities rose, the GDP began to decline, and external debt rose dramatically.  This led the socialist government, elected in 1994 to implement an austerity program along with a policy of privatization of state-owned enterprises.  They aimed to shrink public spending, cut the current account deficit, and reduce indebtedness.  By the end of the socialist reign in 1997, “the public sector deficit was reduced to 4.6% of the GDP, the current account deficit was reduced to 2% of the GDP, and the government debt was paid down to 94% of annual export earnings.”1  

The current economic program calls for continued liberalization of prices and privatization of enterprises.  Within the last two years, virtually all prices within the economy have been freed, though there are still consumer and producer price subsidies on some goods, and controls on prices of energy, property rents, and utilities.2  Hungary also began to work diligently with the IMF with the aim of reducing its debt and budget deficit and also in controlling inflation.  Today, Hungary no longer requires financial assistance from the IMF and has repaid all its debt to the fund.  They also enjoy favorable borrowing terms from major credit-rating agencies due to their current economic status.

Loans from the World Bank, the EU, Japan, and Germany have also been granted to Hungary with the aim of promoting decentralization and modernization.2

Help has also been given to Hungary from the international organization called USAID in the hope of reforming the economy.  USAID has sponsored several labor market reforms within the nation for the past decade.  The goal of USAID’s three programs were to “generate employment for the long-term unemployed by training them for jobs and skills that are in demand, improve the ability of the Hungarian government to deal with mass layoffs from privatization, and to help the Hungarian government, trade unions, and enterprises develop a national industrial relations system.”3 

The growth of the economy of Hungary within the last few years has also allowed the government to begin to concentrate on structural reforms within the nation.  These include the implementation of a fully funded pension system, reform of higher education, and the creation of a national treasury.  These reforms are all directed at the larger, more encompassing goal of Hungary – preparation for accession to the European Union at the earliest date possible.  Many challenges still face Hungary as they work toward this goal, but the prospect of membership within the next decade is excellent.1

 Earlier, the major trading partners of Hungary were the Comecon countries, but today, most of Hungary’s trade is directed toward the west.  The EU receives 64% of Hungary’s exports and provides 63% of Hungary’s imports.  Germany is Hungary’s most important trading partner and the United States is Hungary’s sixth-largest export market.2  

 Finally, as already noted, Hungary has been aiming its foreign policy toward achieving integration into Western economic and security organizations.  Within the last decade it has achieved this goal aggressively.  Hungary joined the Partnership for Peace program in 1994 and has also been an active supporter of IFOR and SFOR missions into Bosnia.  Also, most importantly, Hungary received invitations to join both NATO and the European Union in 1997.1

1 Background notes: Hungary

 2 East-Central European Economic Trends


 3 Hungary: A Country Overview


Economic reforms in Hungary 1950-196

by Andreas Marathovouniotis

From 1950 until the introduction of the 1968 reforms, Hungary was managed in accordance with the familiar Soviet model of centralized planning. The instrument used for economic management was the plan; five-year plans determined the broad framework of economic development in each period, while annual and other quarterly plans provided the basis for operational management at enterprise level. The practical inability though, to formulate reliable detailed plans was one source of pressure in favor of some type of economic reform in Hungary. Furthermore, the shortcomings of the enterprise-level incentive system, which tended to take much of the initiative for innovation away from enterprises, added to the pressure for reform. The model of planned economy was not though totally inefficient and ineffective, for it had generated impressive growth rates of output and employment, notably during the 1950's and somewhat during the 1960's.

The application of an economic strategy of forced industrialization in a country like Hungary, poor in capital and natural resources, had led to serious difficulties by the time the first long term plan was completed. A planned economy did make possible a rapid accumulation of capital, the concentration of material resources and a rapid rate of development, and but in a way that was excessively costly. As a result, about one fifth of the increase in national income was lost through various "leaks" in the economy.

The demand for substantial change in the Hungarian economy come with Imre Nagy and his followers who found many difficulties with the implementation of the central plan. In June 1953 under the preasure from Moscow Nagy was installed as the premier of Hungary replacing the Stalinist leader Matyas Rakosi. By 1954, Nagy initiated a new program whose purpose was to solve many of Hungary's economic ills. Some of the changes that were to be implemented under the new approach were an increase of the share of consumption in the national income, an increase of the investment resources allocated to light industry, agriculture and infrastructure, an increase of wages and a decrease of retail prices. This policy of relaxation and gradualism was attacked by numerous scholars lead by Gyorgy Peter. He supported a greater freedom for enterprise managers and "central provision of the requirements necessary for the fulfillment of paramount economic goals"(Robinson, p.9). Matyas Rakosi, who retained his position as the Communist Party leader tried to suppress Nagy and the other rebellious intellectuals. With the help of Soviets he succeeded and in 1955 Imre Nagy was demoted and expelled from the party.

Khrushchev's report on the twentieth Congress of the Communist Party of the Soviet Union in February 1956 changed the constellation of power again. On July 16, 1956 Rakosi moved to arrest Imre Nagy and top four hundred "troublemakers". This time however Soviets did not back up Rakosi and replaced him with Erno Gero. Yet, Gero continued to apply Rakosi's policies, an action which gradually led to the grass-roots revolution of October-November 1956. Gero was overthrown and Imre Nagy returned to power declaring neutrality of Hungary and moving in the direction of multiparty democracy. This was too much for Soviets, they invaded the country, Nagy was arrested and later executed.

The new government of Janos Kadar realized that changes had to be made in the prevailing economic strategy. The Party, agreed with this decision, established a team of two hundred economists with Dr. Istvan Varga--a former member of the Smallholders Party and a well-known economist--as the leader. The team's task was to investigate the current economic system and propose measures "for the revision of the economic mechanism, including the planning system, price-fiscal policies and material incentives"(Robinson p.18). The team's report appeared in the October-December 1957 issue of Kozgazdasagi Szemle. It stated that future economic development could be achieved on the basis of continued government ownership of the major portion of the means of production. Indirect guidance through economic regulators should have also been introduced while better balance should have been achieved between outlays for consumption and investment. The report added that more job openings had to be created in order to provide employment for the excess manpower in agriculture. The committee felt that it was essential to increase power production in order to develop an atomic power plant. According to the report, existing industries should have been modernized and industrial activity should have been adopted to the country's natural endowments, such as its general poverty of power resources and raw materials. In addition, it was suggested that a minimum and a maximum limit should have been applied to raw materials and a maximum level to the prices of other industrial products. Thus competition between enterprises would have been encouraged. In its final remarks the committee proposed the creation of a "genuine planned economy" instead of the system of centralized management that existed in the past (Robinson p.21).

The Minister of Internal Trade, Szurdi, elaborated on the Party's position, which was against most of the fundamental changes that the report had recommended. The adoption of economic development to the country's natural endowments was totally rejected by Szurdi but the strongest attack was against the committee's views on the institution of a new system of economic guidance. He specifically said, "the principle of economic efficiency could not be recognized as the sole and unlimited principle of action. State directives were also necessary in order to strengthen the socialist elements of society, to limit the prevailing capitalist sector and to group the small-scale firms in the cooperatives"(Berend p.23).

Some of the proposals though were considered essential in order to ensure economic development in the future. The purpose was to change some of the economic machinery while leaving the basic framework intact. The process begun immediately after the revolution of 1956 due to the decision to cancel the introduction of the system of compulsory agricultural deliveries. In 1957, after the Varga proposal were voted the price reform was put in effect. This was a dual price system, where the producers' prices were basis for enterprise bookkeeping and for the exchange of goods within the state sector, while "consumer prices served to regulate the distribution of goods and to create an equilibrium between purchasing power and goods available"(Robinson p.24). The turnover tax caused a big difference between the artificially low producers' prices and those paid by the consumer, who had to absorb a disparity that varied from 200 to 1000 percent.

By 1960, it was obvious that the economy did not respond to the new measures. By the end of the second Five-Year Plan (1965), it was evident that the idea of partial measures was a failure; "The maintenance of the essential features and framework of the old structure acted as a barrier to and a break on influence and operation of the new components that had been installed" (Robinson p.52). For example, the dismantling of the old regulatory mechanism was not placed by a new one. As a result enterprises were not given directions from whom to buy and to whom they had to deliver. Great difficulties arouse with the purchase of necessary raw material due to a lack of market incentives and the absence of the preassure for quality, profitability and assortment. The 1959 producer price reform also failed to produce any significant results for it was only a short term solution of an incomplete nature.

By the end of 1964, the Party decided to begin another phase of reform process. The December Central Committee Plenum was to investigate "the possibility of a comprehensive economic change on an official basis and in greater detail" (Hare, Radice, Swain, p.16). The committee came up with the 1965 CC Plenum which was to make fundamental changes in the system of economic control and management. When approved by the Central Committee in May 1966 the number of personnel engaged in the reform, increased in order to work out the detailed decrees and regulations of the reform that was to be introduced on January 1, 1968. in this way, a totally new framework of Hungarian economic system was set up moving thus away from a centrally planned economy to a market socialist system.


  • Berend Ivan T., The Hungarian Economic Reform, Cambridge University Press, 1990.

  • Robinson William F., The Pattern of Reform in Hungary, A Political, Economic and Cultural Analysis, Praeger Publishers, 1973.

  • Hare Paul, Radice Hugo, Swain Nigel, Hungary, A Dacade of Economic Reform, George Allen and Unwin, 1981.



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