Györgyi Kocsis
Ten Years of Hard Labour
The Rebirth of Capitalism
[...]
In 1989 the transitional government of Miklós Németh tried, unevenly, to pull the country further out of the dead end street of socialism. This became the liberó year (after the first appearance of disposable nappies), when prices of almost half of imports, and the majority of prices for products and consumables, were liberalized. The introduction of proper passports (to replace the old two-passport system, one for socialist countries, the other for the “West”) was accompanied by measures easing the purchase of foreign currency. This famously resulted in a mass Hungarian shopping spree in Austria that year. Meanwhile, no measures were taken to stop the large state corporations from delivering goods to their (mostly Soviet) partners in a collapsing Comecon without receiving payment in money or in kind. It was in the interests of these firms, which had major political influence and which received enormous state subsidies, to maintain the rouble-denominated exports that accounted for almost half of all Hungarian exports at the time. The combination of measures taken and measures not taken took the country to the brink of financial catastrophe: the convertible currency current account closed with a deficit of 1.4 billion dollars, while the rouble-denominated currency account jumped to a surplus of 550 million roubles, four times the figure for the previous year. By the end of 1989 it became clear that the Hungarian economy had fallen into recession; the resources required to maintain full employment and the existing levels of investment and consumption had to be financed via an increasing budget deficit, foreign debt and inflationary monetary expansion.
The political change of direction demonstrated by the first free elections made it clear that this decline could only be stopped through the introduction of a free market economy. In the next few years large-scale spontaneous transformation of the various economic sectors took place in conjunction with the reform of the legal and institutional system.
[...]
At the start of the nineties the plan to sell the largest state firms quickly failed, thanks to the poor condition of the majority of the companies in question and the excessive bureaucracy involved in the procedures. This did not stop the so-called pre-privatization from being completed, the special way for transferring small retail shops into private hands. The Hungarian method differed from the form general in other Eastern European countries in that it placed the emphasis not on “voucher” privatization—effectively a free sale that gives preference to natives—but on privatization based on individual and normally money-based sale decisions. As a result, privatization of any substance progressed only slowly, but with the lion’s share of firms sold falling into the hands of capital-rich buyers with the necessary management skills, albeit mostly from abroad.
The social policy considerations emphasized by the Antall government led it
to try to support the possibility of accumulating capital, denied to a middle-class
under socialism, and to help participation in privatization, through two measures that had a noticeable effect on the transformation of property relations. The first was the state-subsidized “Existence-loan”, whose conditions were very generous, but which, whatever the government’s initial intentions, principally helped the managerial class of the socialist era to purchase shares in privatized state firms.
The second measure was that of “compensation”. Unlike in numerous other former socialist countries, Hungarian parliament decided not to compensate citizens whose property was nationalized under the communist system directly by reprivatization or in cash, but to award them tradeable securities, called compensation coupons, under the 1991 Compensation Act up to a maximum nominal value of 5 million forints per person. These coupons rapidly became the target of speculation and were introduced on the Budapest Stock Exchange. Within the limits of laborious regulations, their owners could use them to participate in the privatization programme, to purchase land specially set aside for this purpose by the agricultural cooperatives, to purchase council flats, or to exchange them for perpetual annuities.
During the process of compensation, which is still not completely finished—and which was later extended to those whose human rights were violated under the communist and fascist regimes as well as to just those who suffered property losses—more than one and a half million people received coupons to a total nominal value of nearly 250 billion forints. Of these about seven hundred thousand bought land, usually less than ten hectares; most of these new owners are short of capital or are elderly. Thus the compensation process itself significantly contributed to the continuing crisis in the anyway muddled Hungarian agricultural system.
Beginning with commerce and continuing with telecommunications and manufacturing companies, privatization reached the banking sector in 1994, and in the record year of 1995 most of the energy sector fell into private hands. As a result of unprecedentedly rapid privatization—this despite the fact that the programme was accompanied throughout by partly politically-motivated debates on the optimal extent of state ownership—by the end of 1998, of 2000 state firms, there were only 135 left with majority state control.
Today 80% of Hungary’s GDP is produced by the private sector. In this two key factors other than privatization played a part: the growth of the small and medium-sized business sector, and the inflow of foreign capital. The SME sector made its biggest gains at the start of the decade: in 1990 there was an enterprise explosion with the number of limited liability companies (Kft) increasing from four and a half thousand to eighteen thousand in the space of half a year, and to a hundred thousand by the middle of the decade. It is true, however, that the breaking up of former state corporations into smaller firms was almost inseparable from the creation of new companies. By 1991 there were 500,000 registered individual enterprises. However, in this last decade the small business class, going back to the socialist period, has not managed to “fuse” with the world of big cor-porations.
[...]
The inflow of foreign working capital was undoubtedly a key motor in Hungary’s transformation to a market economy: since 1990 this has arrived on a relatively steady rate of around $1.5 billion per
year, with the exception of 1995, when the figure was $4.5 billion. This means that
up to the middle of the decade about half, and looking at the period as a whole a good third, of all the working capital invested in Eastern Europe came to Hungary, which offered the advantages of a market economy tradition, political stability, a trained workforce and an advantageous geographical position. Only about a half of this foreign capital came into the country for privatization purchases, a similar amount was spent on green-field investments. A number of car manufacturers, and multinationals making electronic goods, telecommunications equipment and other machinery moved part of their production here, and this is currently the
primary factor in economic growth and in
exports.
The 25 largest foreign investors in Hungary
| Investor | Industrial sector in Hungary | Investment to 1997 ($m) |
| Ameritech International Inc. – Deutsche Telecom | Telecommunications | 2230 |
| GE Lighting | Lighting | 730 |
| RWE Energie AG – Energie Baden Württemberg AG | Energy | 628 |
| Eridania Béghin-Say SA | Sugar | 540 |
| Allianz | Insurance | 540 |
| Aegon | Insurance | 500 |
| General Motors (Opel AG) | Automobiles | 450 |
| Audi AG | Automobiles | 14 |
| PTT Telecom, Telenor, Telecom Finland, Teledenmark | Telecommunications | 400 |
| Bayernwerk AG | Energy | 370 |
| US West International | Telecommunications | 330 |
| Coca-Cola Amatil | Foods/drinks | 280 |
| Suzuki Motor Corp. | Automobiles | 260 |
| Electricité de France | Energy | 254 |
| VEW Energie AG/Ruhrgas AG | Energy | 252 |
| Magyar Telecom B.V. | Telecommunications | 250 |
| United Telecom Investment | Telecommunications | 216 |
| Gaz de France | Energy | 202 |
| Sanofi SA | Pharmaceuticals | 200 |
| Tractebel SA | Energy | 180 |
| Ford Motor Co. | Automobiles | 165 |
| Prinzhorn Group | Paper Manufacturing | 160 |
| Aluminium Company of America | Aluminium | 150 |
| IBM Corp. | Electronics | 150 |
| Pepsi Co. Inc. | Foods/drinks | 150 |
Nevertheless, exports as a whole dropped dramatically, not least because between 1991 and 1993 the Antall government’s exchange rate policy overvalued the forint so as to reduce inflation and stimulate the domestic economy. The situation became grave in 1993, when this policy resulted in a drop in exports of more than 10%, while imports increased by more than 20%, increasing the current account deficit sixfold in the space of just one year.
Change in GDP relative to previous year
(per cent)
| 1989 | 0.7 |
| 1990 | –3.05 |
| 1991 | –11.9 |
| 1992 | –3.1 |
| 1993 | –0.6 |
| 1994 | 2.9 |
| 1995 | 1.5 |
| 1996 | 1.3 |
| 1997 | 4.6 |
| 1998* | 5.0 |
*estimate
|
Year | Industrial
production
(1980=100) | Purchase
of agricultural goods
(1980=100) |
| 1987 | 115.4 | 102.8 |
| 1988 | 114.1 | 102.4 |
| 1989 | 108.4 | 96.1 |
| 1990 | 98.3 | 87.3 |
| 1991 | 80.3 | 73.6 |
| 1992 | 72.6 | 63.7 |
| 1993 | 75.5 | 44.6 |
| 199 | 82.7 | 42.6 |
| 1995 | 86.5 | 48.7 |
| 1996 | 89.4 | 51.2 |
| 1997 | 99.4 | 50.0 |
After the centre-left Horn government came to power in 1994, one of its first measures was an 8% devaluation, which was followed by a further 9% devaluation in 1995, and the introduction of a crawling-peg devaluation, which has remained in place to this day. Between 1994 and 1998 the economy conducted an exceptionally high profile export offensive, especially in machinery, with almost three-quarters of exports going to the European Union. These results came about through the combination of foreign investments in the first half of the decade, the completion of the privatization programme, and the effects of the export-stimulating policy of the second half. However, the change in direction and structure of trade took place in the context of a dwindling GDP, dramatically deteriorating incomes and an unstable macroeconomic balance. The collapse of trade with the East had, by 1990, already reduced sales by industry by 20%. Owing to the knock-on effects on the economy as a whole, in that year GDP fell by 3.5%. The real catastrophe took place in the following year, when GDP dropped by almost 12%.
[...]
The March 1995 stabilization programme, whose merits have continued to be debated ever since, attempted to avoid the dangers of insolvency and of the debt spiral getting out of control by cutting budget expenditures, introducing centralized price increases, and by using a two-year customs allowance and devaluation to narrow domestic demand and attract funds to enterprises capable of export. These measures were helped by a speeding-up of privatization: the exceptional $4.5 billion privatization revenues of that year went to foreign debt repayments, thus freeing the National Bank of substantial future interest payments. As a result of the Bokros package and this drastic privatization programme, the current account deficit fell from 5.6% of GDP in 1995 to 2.2% of GDP in 1997, with gross foreign debt dropping from a peak of $31.7 billion to $22.5 billion in the same period, and net debt from $16.3 billion to $11.2 billion. In 1998 the current account deficit again grew to a level of almost 5% of GDP—$2.3 billion—thanks partly to a deterioration of the balance of payments, and partly to the sudden outflow of “hot money” following the Russian financial crisis.
The stabilization programme reduced the level of state redistribution, as a proportion of GDP, from 80% at the start of the decade to below 50%. This change has taken place without any real systematic budget reform in the ten years following the change of regime: the budget deficit—which between 1991 and 1998 fluctuated between 4% and 6% of GDP, with the exception of the 8.1% figure for 1994—has come to be decided by a game played out between political bargains and the budget “scythe”. The new, three-pillar pension scheme came into effect on 1 January 1998, but neither operational and financial reforms of the health and education system, which both remain more or less as inherited from socialism, nor the modernizing of local government financing, have been put on the agenda.
Hungary’s foreign debt in
convertible currency ($m)
| Gross debt | Net debt |
| 1990 | 21.270 | 15.938 |
| 1991 | 22.658 | 14.555 |
| 1992 | 21.438 | 13.052 |
| 1993 | 24.560 | 14.927 |
| 1994 | 28.521 | 18.935 |
| 1995 | 31.651 | 16.817 |
| 1996 | 27.552 | 14.184 |
| 1997 | 23.747 | 11.157 |
Current account balance ($m)
| 1988 | –807 |
| 1989 | –1437 |
| 1990 | 127 |
| 1991 | 267 |
| 1992 | 324 |
| 1993 | –3455 |
| 1994 | –3911 |
| 1995 | –2480 |
| 1996 | –1678 |
| 1997 | –981 |
This all contributed greatly to an insecurity of state finances for the Orbán government that came to power in 1998, in which the tax-collecting institutions, accommodating to the number and nature of economic agents, cannot guarantee the amount or certainty of tax revenue. On the expenditure side, however, there is no social consensus as to the extent and distribution of state intervention. Critics of the Bokros package accuse it of overheating the economy, in particular by damaging domestic purchasing power through revving up inflation. There is no denying that the Hungarian public has made exceptional sacrifices on the altar of economic transformation. In the period between 1990 and 1994, in which GDP fell by 20%, net real wages fell by only 7.2%—in 1994 they even grew by 0.2%—while private consumption decreased by only half this value. As a result of the stabilization measures, however, net real wages fell by a further 17% in 1995–6, with consumption down by 9%. It was only in 1997 that these indicators turned positive again, although to a significant degree: in the last two years real wages have risen by almost 9%, and consumption by around 6%.
Györgyi Kocsis
is on the staff of Heti Világgazdaság,
an economic weekly.
