Hungary’s Former Showcase Economy Now Needs Fixing

A Hungarian businessman recently described his nation’s economy as a once-flashy sports car, regarded in its early days as something of an engineering marvel and gazed at with envy by the neighbors.

“Now,” he said, “we are pushing it down the street to the mechanics. It needs a big overhaul and it is long overdue.”

The businessman’s metaphor seemed particularly apt, for the Hungarian economic system, 10 years ago at least, was indeed a sparkling innovation relieving the generally dispirited economic landscape of Eastern Europe.

Now, however, as the need for repair becomes ever more evident, the system is being looked at less as a smooth-running machine than as a kind of contraption, an economic thingamajig put together out of spare parts. And like many an automobile, it has often looked much better than it has performed.

It was nearly 20 years ago that Hungary embarked on its economic experiment, then unique in Communist Bloc countries, that led to the creation of a “second economy” in which private enterprise was encouraged to grow alongside a state-run, centrally planned economic system.

In 1968, when these innovations were introduced, they were regarded by many of Hungary’s neighbors in the Soviet sphere as a dangerous kind of heresy, a plan destined to invite conflict, contradiction and opprobrium, or worse, from Moscow.

But through the 1970s, the Hungarian economy seemed to do remarkably well, leading the population of 10 million to a level of prosperity that was unique in Eastern Europe. Food was abundant and cheap, and the stores were filled with consumer goods. The lovely capital of Budapest seemed almost Parisian by the standards of most capitals in the region.

A trip to Budapest is still a glittery holiday for most East Europeans who travel to the city, but for Hungarians, the picture is not as rosy as it seemed a decade ago. New “reforms” are on the way and not all of them are pleasant.

Economic growth has stagnated; inflation is on the rise; the specter of unemployment has risen. While Hungary’s standard of living remains the highest in Eastern Europe, its foreign debt, about $10 billion, is also the highest, per capita, in the region.

The Hungarian Communist Party warned in July that belt-tightening would be needed as the country mustered the discipline to pull out of its economic doldrums. As promised, austerity measures have been imposed. The cost of basic goods has gone up. Prices for bread, gasoline, tobacco and household lighting and heating went up by an average of 20%. Price increases for meat ranged between 16% and 22%. Liquor and beer prices rose 10%. Prices for coffee and restaurant meals were raised earlier in the year.

As the nation’s many economists sometimes point out, Hungary needs “a reform of the reform.”

The Hungarian Communist Party, at least on paper, agrees. It has announced plans for an “economic consolidation” that will press toward further decentralization and a more market-oriented economy and will continue to encourage private enterprise. The government also plans to introduce a new tax system next year, including a personal income tax, a rarity in a Communist state.

These “reforms of the reform” are not likely to be easily carried out. But many economists here contend that they are vital and that Hungary has gone as far as it can go with an economy that has attempted to rationalize two disparate systems.

Their argument is that Hungary can no longer live with one foot racing to keep up with the capitalist world and the other, as one academic put it, “caught in the complications of socialist theory.”

The issue is important, not just to Hungary but to the rest of the Soviet Bloc, now wrestling with the questions of reform and restructuring inspired by Soviet leader Mikhail S. Gorbachev.

Some analysts say that what is happening now in Hungary has ominous overtones, for it suggests that reform, carried out as a half-measure, does not really succeed, and that reform carried out fully can only lead to the demise of the Communist system as it has stood for 70 years.

Hungary’s reforms, begun almost two decades ahead of the Soviet Union and the rest of the bloc, might be regarded as a sort of proving ground for Gorbachev’s concepts of glasnost and perestroika (openness and reconstruction), But, in fact, many of the reforms being pressed more urgently now have been debated, without much action, since 1978.

The debate in itself has been a delaying tactic, the result of resistance on the part of the bureaucrats and vested interests who recognize more fundamental change as a threat to their power and security.

Leadership Aging

“What do you think these people will do,” a Budapest importer said recently, “when they carry out all the needed reforms? They have no real skills. Are they going to go to work in a bank? A factory? A clerk in a store? Of course not. These people have nowhere to go, and they know it, so they are seriously frightened at the moment.”

Part of the sluggishness has been due in part to an aging leadership and the uncertainty over when and how it might change.

In April, Janos Kadar, the 75-year-old Hungarian party leader, suggested that “it is natural that personnel changes are also needed” in Hungary, but added that he would continue in his post.

“Even though I have been entitled to a pension for 15 years,” he said, “it seems that this pension will continue to be saved for the time being.”

Diplomats say that a shuffling of the Central Committee in June resulted in no significant rejuvenation of the party hierarchy.

The Hungarian Parliament later this month will take up the problem of the new system of taxation for businesses and individuals.

The business tax reform is designed to simplify or replace the present tangle of subsidies and exemptions that, the government planners say, distort the relationships between production costs and prices and make it impossible to manage the economy rationally.

“You never know what anything costs here,” a businessman complained. “Take this teacup: It has a certain price in the store where you buy it, but you have no idea--no one has any idea--what it really costs. The raw material, the clay that goes into it, may be subsidized. Or the fuel the factory uses to produce it.”

The government also hopes that the imposition of a personal income tax will be a step toward providing some consistency to the value of work, whether it is done for a state factory, a cooperative enterprise or a private firm.

Workers employed in private business now tend to be more highly paid than workers in state companies, whose heavy taxes go to support the state and, in theory at least, the workers. The new system will allow businesses to pay employees more according to merit and ability. In effect, it is designed to reward employees who show energy and creativity--an almost revolutionary concept in a Communist state.

Mostly, though, it is an attempt by the government to put some consistency and rationality into a system that has grown up as a bureaucratic hodgepodge over the last 30 years or more, and one that has become increasingly outdated as Hungary’s economy has grown in contradictory directions.

It is going to be a complicated business, all the experts agree. Since wages will increase to offset the losses that some individuals will suffer in the new system, there are worries about increased inflation, already pushing toward the double-digit level. There is also the problem of administering a completely new system. About 3,500 people run the tax department now, but the government plans to add another 2,500 to get the new system operating.

Hungarians hope that the new tax system will bring a halt to what is known here as the “third economy”--the untaxed tips, bribes and moonlighting work that the government estimates is now approaching a total of $500 million a year. Unofficial estimates suggest that the figure might be twice that amount.

Need to Skirt Rules

Although the third economy fills a vital function by catering to consumer demands that the state sector is unable to meet, the government hopes that by rationalizing its system of taxes and wages it can bring this sector into the mainstream of the economy and benefit from its revenue, as well as its creativity.

The very existence of this sector of Hungary’s economy is a testimony to its present schizophrenic nature. Recently, the executive of a high-technology enterprise, chafing under state controls, spoke of his unwilling reliance on the third economy, a pervasive problem for companies trying to compete in a faster-paced world that moves far more quickly than the entrenched rules of socialism will allow.

“I hire a man to do a job,” he said, “and because the state says I can pay him only so much, he is on the books as making a certain salary. But in fact, he will not do the job I need for that salary, and we both know it from the start. So you work something out. You ‘hire’ his apartment, his brother, his mother, his cousin. They’re on the books, too, but it’s just a piece of paper.

“If you want to compete and survive in the real world, that’s what you have to do.”