Hungary Urged to Take Harsh Action to Aid Economic Transition : East Europe: Panel also advises integration with the West. Report is timed to Sunday’s final election round.

The new Hungarian government to be named this month should immediately slash food and rent subsidies and impose other harsh but effective measures if it wants to attract the foreign money needed to rescue the economy, an international panel advised Friday.

In a report timed to coincide with Sunday’s final election round that will determine the next government, Western and Hungarian economists have outlined what they see as the most urgent measures needed to speed the transition to capitalism.

Politicians from both the center-right Hungarian Democratic Forum and the more liberal Alliance of Free Democrats have campaigned on promises to steer the nation out of the highly centralized structure imposed by Moscow over the past four decades and toward integration with Western Europe.

But few have made clear how far they are willing to go to chip away at Hungary’s staggering foreign debt of $21 billion and a tandem rise of prices and unemployment.

The East-West Forum, an international think tank with offices in New York and Washington, pooled economists and other experts from Europe, the United States, Canada and Asia to chart a course for prosperity.

“Hungary needs massive amounts of foreign investment to succeed in this transformation,” said James Montgomery, executive director of the East-West Forum. “Most Western countries have about 30% foreign ownership, while Hungary has less than 2%.”

The study carried out by 20 prominent industrialists, academics and financial experts--many of Hungarian origin--concluded that there is far too little money available to Hungarian citizens to privatize industry on their own. It estimated annual private savings at less than $300 million, while state-owned enterprises have been valued at about $30 billion.

“Practically all retail trade, service establishments, workshops and similar units of firms should be privatized within one year,” the report stated.

It called for a new law on agricultural land but indicated that a radical program of returning property seized by the Communists in 1947 should not be attempted.

The experts said only that the new government should “express regret to those who suffered after 1947.”

Another top priority identified was the need for a government commitment to convertibility of the forint, Hungary’s currency. The Western economists said the new leaders should set a time for carrying out the transition and a target for the fixed exchange rate tied to a stable European currency.

Subsidies for housing consume 15% of the national budget and those for food, utilities and consumer goods eat up another 13%, the report stated.

The researchers said housing should be self-financing within three years and other subsidies should be reduced to no more than 5% of government spending by 1992. Both measures would inflict hardship on many Hungarians, whose rents are currently minuscule and pegged to their earnings rather than the housing costs.

Other recommendations for urgent action by the new government were lower taxes, seeking associate membership in the European Community, regional coordination of environmental protection policies and “an aggressive policy of seeking foreign direct investment,” especially to overcome problems like Hungary’s hopelessly inadequate telephone network.

Montgomery said the report was issued to give the prospective new leaders an idea of what Western business sees as the best course for Hungary’s development.

He said that the Alliance for Free Democrats appears more willing to tackle the harsh measures needed for advancement but noted that two prominent activists with the more conservative Democratic Forum--Marton Tardos and Geza Jeszenszky--were among the panel of experts.