The Soviet Central Planning System was based on the ideal of substituting private ownership by public ownership in order to replace greed by need. Unfortunately this idealistic philosophy introduced my Karl Marx is difficult to introduce to the real world due to reasons of human nature. Furthermore the system of central planning abolishes the free economic market forces that help the economy to move as smoothly and efficiently as possible. Many of the nations under the Soviet-type system experienced economic difficulties brought about by large inefficiencies. In the early 1990s finally many Eastern European nations revolted against this inefficient and bureaucratic economic system and succeed by throwing over the Soviet dominated governments and freely elected democratic governments.
The implementation of public ownership and central planning failed due to two major reasons. First of all, most individuals are not willing to devote the majority of their time on doing what somebody else decides them to do, instead of working for their own interest. Central Planners in the Eastern European countries rarely found volunteers who would completely agree with the Marxian philosophy and would dedicate their lives willingly for the communal good. For this reason the economic planners had to set strict work regulations and give out many orders to their subordinates. The existence of orders was the reason for many "subordinates" not to share their full knowledge with the planners. This lead to lack of innovations technical stagnation. The "planned" were highly demotivated and thus not only innovations were lacking, but the entire economy in all sectors was lacking efficiency.
The second main problem was the absence of the free market forces that were abolished by planning. Wrong choices in either demand or supply side could not be detected and corrected. Resources were not distributed according to their scarcity or demand conditions, but according to the bureaucratic decision-making.
Hungary as well as Czechoslovakia recognized the dangers of central planning early and introduced economic reforms as early as 1968. In 1968 Hungary started decentralizing the management of large enterprises. It also started liberalizing prices in the same year and raised its energy prices to the world level in 1982. These reforms were undertaken in order to create a socialist economy that functions more efficiently. However, further reforms starting in 1987 had stronger aim on gradually introducing a Western-style market economy. Reforms such, as a new bank system that would facilitate privatization was introduced as well as new tax system that included as value-added tax.
These reforms were very costly for the nation and were mainly financed by foreign borrowing. This heavy borrowing has caused Hungarys immense debt problem in the early 1990s. In 1990 the Hungarian foreign debt was estimated to be $20 billion. However, the Hungarian foreign reserves only held $700 million. Fortunately many foreign countries as well as foreign enterprises found great interest in Hungary and helped the nation by providing foreign direct investments. FDIs include Volkswagens plants in Gyor and Suzukis manufacturing plants in Szeged. Furthermore Hungarys balance of trade has greatly improved starting 1991.
The Hungarian model of the economic transition has to be viewed separately from the ones for most countries. The Hungarian reforms were implemented gradually in contrast to most other nations who experienced a sudden transition from the centrally planned economies to the free market economies. Many have criticized the Hungarian, but in retrospective it has been just as successful as the transition plans of other countries.
The modernization in the Hungarian market structure is mainly due to contribution of the European Union. In December 1991 an agreement has been established between the EC and Hungary called the EC-Hungary Association Agreement. The major goal of this agreement was to help the country to develop a great democracy as well as to modernize the economy. The agreement is mainly based on investment and trade regulations. In essence the EC was willing to abolish all tariffs and quotas on most Hungarian exports. In exchange Hungary had to reduce and later completely abolish its duties on EC-originating products. The advantage of this international trade agreement was its stability. It cannot be abolished by any future governments and thus is a reliable economic aid plan.
A further problem faced by many nations was the lag in technological advances. The Soviet Union has not invested into the Hungarian industry since the late 1940s. The Kadar regime invested in the modernization of the Hungarian industry by buying equipment from Western Europe. These investment activities were one of the reasons for Hungarys large debt. The need for technological innovation was the main reason for the Hungarian dependence on FDIs that introduce new technological equipment to the country.
The EC-Hungary agreement as well as many FDIs have helped Hungary to become one of the leading industrial nations in Eastern Europe. The Hungarians have a strong incentive to join the European Community as soon as possible in order to finally become a "real" part of Europe again. This desire for acceptance is one of the reasons for the rapid economic and technological progress. The country will, however, have to fight many more battles in order to become admitted to the community. It has to get a grip of its foreign debt problem, its relatively high inflation and naturally its budget deficit.