Market Focus : Hungary Is Learning to Live With Capitalism : Slowly but surely the private sector is taking hold with a minimum of pain and disruption.

Once dubbed the “happy barracks of communism” because of its relative prosperity in an underprivileged bloc, Hungary now seems held back only by its own pessimism from becoming Eastern Europe’s happy bastion of free enterprise.

The fretful people of this tiny nation have emerged from a winter of hand-wringing to the surprising realization that they may be muddling through the worst of their transition to a market economy.

Massive layoffs are still expected when antiquated factories are closed down. But Hungary’s booming private sector is absorbing many of those made redundant.

The collapse of the Soviet-led Comecon trade bloc has forced Hungary to redirect its exports to the West, and it has been more successful than any of its Eastern European neighbors in reaching those lucrative, stable markets.

Privatization is still plodding along. But economists have decided that fast does not always equal best. Slowly but surely, business and industry are passing from state to private hands with a minimum of pain and social disruption.

There are still bitter pills to swallow to make the Hungarian currency, the forint, convertible and to rein in inflation. But with more than half of all foreign investment in Eastern Europe coming to Hungary, even Europe’s biggest pessimists are beginning to see the clouds’ silver lining.

Analysts now speak about months, not years, when predicting Hungary’s turnaround.

According to the Institute for Economic Market Research and Information in Budapest, “1991 will be a critical year for the Hungarian economy, the year when the recession will hit rock-bottom and inflation will hit the heights.”

Forecasts of double-digit unemployment, inflation topping 40% and a steadily declining balance of trade with Western countries prepared Hungary’s traditional worrywarts for the worst. In a classic case of reverse psychology, some now consider their 3% jobless rate bearable and inflation under 35% a blessing.

Most of the 200,000 workers laid off from failing industries last year found jobs with the 24,000 private businesses now operating in Hungary and accounting for nearly a third of production.

“This year, the numbers will be more alarming. By the end of the year, we may have 5% or 6% unemployment,” said Almos Kovacs, a deputy finance minister. “Most of the people will be absorbed by the private sector, so the overall picture is not bad.”

Most encouraging in this critical year, and in defiance of all predictions, Hungary has been running a trade surplus, despite the economic paralysis gripping the Soviet Union, which was until recently Hungary’s most important market.

Hungarian firms exported $2 billion in goods for hard currency between January and March, a 40% increase over the first quarter last year. Imports were held to $1.8 billion, leaving a healthy surplus of $200 million. An International Monetary Fund agreement had projected a $960-million deficit for early 1991.

The news is not all good.

Even a 3% unemployment rate is destructive amid floundering welfare services in a country where workers were reared on the principle that the greatest human right was the right to a job.

Inflation remains Public Enemy No. 1. Although apparently holding at 33%, it is seriously eroding the living standards of most families.

And even the impressive first-quarter trade figures are likely to diminish later this year if deals with the Soviet Union continue to fall through. Trade with Moscow is expected to fall as much as 50% this year, forcing mass layoffs at factories where output was destined for the Soviet market.

The idling of antiquated production lines will cause the overall economy to shrink up to 6% this year, the Finance Ministry calculated, on top of last year’s gross domestic product drop of 4%.

But the unexpectedly favorable import-export balance--due in large part to a drop in global oil prices--means the economy is more than $1 billion healthier than experts had calculated. That has lifted Hungarians into a rare mood of confidence.

Finance Minister Mihaly Kupa told officials of the 12-member European Community recently that Hungary expects to complete the transition to capitalism at least a year earlier than originally projected. “Within two years we would like to complete the adjustment to a market economy,” Kupa said in The Hague, encouraging EC states to accept his country as an partner.

Hungary has also brashly rejected the notion of begging the West’s forgiveness on any of its $21-billion foreign debt, the largest per capita in Europe. Since Washington decided to write off 70% of the $3.8 billion owed by Poland and to seek elimination of half the $33 billion Warsaw owes other countries, officials in Budapest have leaped at the opportunity to portray themselves as a more reliable financial partner.

“It is the cheapest and the best for Hungary to continue to pay its debts properly,” said Gyorgy Suranyi, president of the National Bank of Hungary.

Budapest had to spend half of its hard-currency earnings to service the debt last year. But with steadily rising exports and tourism, the burden is expected to get lighter with each year.

As for the loss of the Soviet market, Hungary already anticipated that possibility because Comecon, the Moscow-controlled trading bloc, had announced that it would switch this year to a dollar-based accounting after decades of trading shoddy goods for worthless currencies. Hungary, more than any other new democracy struggling to stay financially afloat, was prepared to market its goods, some of which it also had ensured would be of higher quality; it has managed to find Western buyers for items Moscow no longer can afford.

One area where Hungary has been criticized for foot-dragging is in privatizing its state-owned industries. Less than 3% of nationalized property was sold to private investors last year, despite the stated goal of Prime Minister Jozsef Antall’s center-right government of privatizing 50% of state holdings by the end of next year.

“It’s not a linear process,” explained Peter Kazar, head of the State Property Agency’s new department of asset management. Antall’s economic Cabinet is banking on a softer, gentler move to private ownership by putting off the sale of failing enterprises, whose buyers are likely to immediately shut them down.

But critics like Marton Tardos, the opposition Free Democrats’ chief economist, warn that unless privatization is stepped up, the recovery will stall.

Kazar’s office is leasing out some state-owned businesses that have been operating in the red, in hopes that interim private management will rejuvenate the enterprises and make them more valuable when it’s time to sell.

“Not all of the companies being transformed are in an attractive position for foreign investors,” Kazar said. “What we have to do is insure these assets against devaluation” while waiting for a buyer.

Lajos Csepi, head of the State Property Agency charged with overseeing all privatization, complained that continuing uncertainty over who owns what in Hungary is driving away many investors.

Hungarian legislators have been haggling for months over a compensation bill for those who lost property during the Communists’ 1948 nationalization.

A program approved by Parliament last week would repay victims with investment coupons that could be redeemed for stock in enterprises being privatized or for purchase of state-owned housing.

But the opposition Free Democrats are pressing for a veto from President Arpad Goncz, a member of their party, which could drag out the compensation issue for months.

“Delay is the most serious problem at this moment,” said Csepi, who wants to keep the economic momentum going. He urged the political leadership to move quickly to settle property ownership, arguing that “even a bad compensation law would be better than this uncertainty.”

Hungary’s Surprising Economy The hand-wringing Hungarians have emerged from a winter of worry to realize that they may already be muddling through the worst of their transition to a market economy. Inflation remains a problem. But foreign trade is providing a ray of hope.

AT A GLANCE

1990 estimated population: 10.5 million

Area: 35,920 square miles

Currency: Forint

Major industries: Iron, steel, machinery, pharmaceuticals, vehicles, communications equipment, milling, distilling, mining (bauxite and natural gas).

Source: Ministry of International Economic Relations; GKI--Economic Research Institute, Budapest