The Unloved Hungarian Capitalism

Clichés and perceptions do not change fast; it was not long ago that Hungary ceased to be seen as a most successful ‘Transition’ country. In fact, Hungary was the first EU member state to turn to the IMF for financial support in 2008. Macroeconomic figures indicate that the Hungarian economy is, at best, a mediocre achiever in the Transition game. As for the domestic perception: the Hungarian public became very critical of the state of affairs in the second half of the last decade, and one of the main themes of the 2010 election was the perceived failure of the regime change process of the last two decades.

Was the Hungarian Transition in the 1990s overrated, and hence the later disenchantment? Or did the transformation process in fact derail over time? Or perhaps the whole thing is about perceptions rather than substance. However we look at the present situation, the end result of the last two decades is depressingly meagre: too many Hungarians do not identify themselves with the market economy they live and work in. What follows is an attempt to review and evaluate the factors behind the events and processes that have led to the public disappointment about this particular version of capitalism.

First, a note on Transition. This is the received term used in international political and financial circles, a sort of short hand for the complex transformation of the former planned economies amounting to a profound political and social regime change. The term itself refers to a certain finality: in transit, one moves from one given state to another given state; in our case, from a communist (state socialist) regime towards a free market economy. This concept of finality is so typical of the dominant Western view of history (the “end of history” school), a one time expansive Weltanschauung since the late 1980s/early 1990s, when the liberal market ideology emerged victorious vis-ŕ-vis Communism. Not all Western analysts, of course, shared the mainstream; as A. O. Hirschman so lucidly said, “there is and has always been a large variety of ‘really existing’ market societies… (...) . to opt for ‘the market’ thus does not mean to copy some uniform model of institutions and practices – a conclusion that is of some importance for (but is not yet well understood) in the countries now emerging from decades of ‘really existing’ socialism” (Hirschman, 1992).

Twenty years on, communistic ideals are as dead as they were in 1990 but the then mainstream ideology has lost some of its shine and appeal.

I personally believe that the term “Transition” has always been a misnomer. The starting positions of nations were rather diverse at the time of the tectonic political changes, and the countries of the region have followed various development paths, with different results. Historical reality is thus far from the idea of a unilinear transit route. Personal perceptions of the events have also been diverse across generations and social strata even in one single country: for some, the end of planned economy around 1990 promised a return to democracy and market, for most of the young and the middle aged or those without memories of the pre-war society the collapse of the old order heralded a new era, some older folks even perceived the whole change as loss and degradation. People may call these years in many ways, but no one refers to them as Transition in Hungary; the term has never been in circulation. From the very start we’ve talked of sweeping socio-economic changes that put an end to state socialism and created capitalism as rendszerváltás (system change) or rendszerváltozás (changing of the system) or rendszerváltoztatás (changing the system).

The other related term, capitalism, is not commonly used either for the market based system that emerged after the collapse of the planned economy. Capitalism and capitalists – they have always sounded somewhat charged and provocative. Still, I will use this provocative term to make my points on why the new market economy (‘Hungarian capitalism’) is seen as not working well enough.

Viktor Orbán, Hungarian Prime Minister again since 2010 has spoken lately of a constitutional Hungarian revolution that must close the whole chapter of the last two decades in Hungarian history. Politicians are prone to express themselves in overstatements; he is no exception. But any professional politician would only use the term revolution if it resonates with the feelings of the electorate. He can only reject the whole process of regime change stretching two decades from the annus mirabilis of 1989 if the voters are not positively identified with the regime change and the end-result as they saw it in 2010.

Unhappiness with the institutions and disenchantment with the output of the socio-economic system is not, of course, a particular Hungarian feature. The European public is critical of capitalism (market economy) in its present shape, especially since the onset of the 2008 financial crisis. But Hungarians are even more critical of its local version and the road leading to it – and this is more than just another case of proverbial Hungarian blues.

This must come as a surprise for those who have regarded the Hungarian Transition a success story. But it is also a bit of surprise for those of us who have otherwise been rather critical of the regime change processes. This negative mood does not seem to be fully justified by economic troubles alone. Why do Hungarians feel so dismissive of the market economy? What has happened to Hungarian transformation successes? What do people really want now? Is what they do want feasible? These are the issues I’d like to raise and comment on.

Mixed legacy of the Gulash Communism past

One should go back in time to understand the context of the regime change process in the East Central European region in general, and in Hungary, in particular. After the communist takeover in the second half of the 1940s, one party rule and centrally planned economy was forced on the whole region. Westerners perceived the countries of the region as parts of a block, at first. Yet during the 1960s and after, tendencies and variations appeared clearly in the region: Tito’s Yugoslavia, maverick Romania, and most significantly, institutional reforms in some Central European countries, particularly the short lived 1968 reforms in Czechoslovakia, and the introduction of elements of the market in Hungary and Poland during the 1960s. As a result of the cautious top-down reforms, two models emerged within the centrally planned economies since the mid-1960s: the orthodox and the reformed version of state socialism.

The versions differed as far as the economic institutions were concerned, but they remained similar in their power relations, security and foreign policy orientation. Reformed regimes complemented or substituted the hierarchical state planning with a control mechanism applying monetary incentives, allowed a higher degree of enterprise autonomy, while in the other group the political rulers tried instead to streamline the planning process through computational and other technical developments. In the former version, authorities allowed their state owned enterprises (SOEs) to trade with Western partners, and as a consequence, these economies became relatively open to world trade and finance flows – in contrast to the classical Soviet-style regimes.

The commonplace “transitology” view about the “countries in Transition” has been that the legacy of a reform-socialist past is an advantage, and the lack thereof is a disadvantage in the transformation process that followed the political changes after 1989/1990. The rationale behind such a view is that the society under the reformed version of state planning must have been more prepared for the market era. Countries with a reform-communist past were thus supposed to have faced less difficulties in the 1990s compared to countries with a non-reconstructed socialist system in their past. Certainly, people and executives raised in closed planned economies had had fewer contacts with market economies, and therefore certain key skills were just not available at the time of the initial period of Transition, and thus they must have faced tougher challenges in managing the transition shocks.

This hypothesis stands true in the broad context of the Eastern Central European nations versus the former Soviet Union: the output decline was much less in the former region than in the Commonwealth of Independent States (CIS – reference to the loose coalition of the legacy republics of the core Soviet Union). In the ECE region, however, this common wisdom has proved to be superficial: Czechoslovakia entered the regime change period in 1989 with a history of two decades of “orthodox” communist past, yet the Czech Republic to be born in 1992 was not handicapped at all from the very start compared to “reformed” Yugoslavia or Poland or Hungary. Let us take the Baltic case: the new republics that emerged in 1991 managed to develop fast in spite of their poor initial conditions within the strict Soviet regime.

Socialist market reforms have thus turned out to be a mixed blessing rather than a clear advantage in the transformation. Countries with a reform-communist past may have gained certain cultural advantages over the orthodox regimes as they all entered the Transition period, but their particular past also produced side-effects and unwanted symptoms that countries previously under orthodox communist policies had not experienced to that extent. Therefore, it is useful to look critically at the legacies in the region, and at the different paths that these countries have taken since the start of political changes.

Let us take economic openness that outside observers assume to provide automatically a better starting position in Transition. In reality, there have been pluses and minuses of the relative external openness of reformed socialism. On the plus side there are the exposure to foreign influences (economic and otherwise) in a reformed planned economy and use of the price mechanism that educated the economic agents about money, taxes, accounting, pricing and other market institutions. More price liberalization in the 1980s also meant less severe physical shortages in a reform country: this was the period of the famous Gulash Communism in Hungary – a reference to a rich soup with lots of meat in it (while other nations east of us had mostly cabbage in their soup at that time). This metaphor was true: material life was not as harsh in Hungary as in some of her neighbours, and the regime became gradually more tolerant than in orthodox communist countries. This is certainly a plus (even if Hungarian communists were in fact not as enlightened as they claimed, and remained unscrupulous enough in the use of secret police methods against the opposition until the very last moment); all this created later a less unfavourable comparison with the new, democratic era that was born in crisis during the transformation years of the 1990s.

But there were also the minuses. Trade openness certainly meant that state owned enterprises were more exposed to world market competition, their managers were given the authority to sell and buy abroad; but it soon became clear that SOEs even in a reformed planned economy were not competitive enough to sell their products and services in highly competitive capitalist markets at profit. More foreign trade led soon to higher trade deficit with the West. Few managers in a reform-socialist economy resisted the opportunity to import good quality materials, products and modern technology from Western markets, but even fewer were able to turn these inputs into competitively marketable products. Hence the obvious macroeconomic consequences: high import propensity, which, coupled with weak export performance, lead to a structural foreign trade deficit.

As long as foreign suppliers and banks were willing to offer loans to finance the deficit, the trade imbalances could persist, but at the price of accumulating current account deficits and hard currency debts. Soon two of the reform-socialist countries went insolvent on their foreign debts (Poland in 1981, Yugoslavia in 1988) and the third (Hungary) was very close to sovereign default in 1982 and in 1989. This turn of events was not an accident, nor solely due to bad economic policies. These regimes remained systematically uncompetitive in a highly competitive world economy.

The history of the reform-socialist experiments was also a history of politically motivated economic cycles of stop and go nature: first, efforts to speed up economic growth, and soon afterwards measures to reduce disequilibria. Half-baked reforms were followed by political regression. Meanwhile the living standard remained higher than in other countries of the Soviet block; but this relatively good position was not justified by higher productivity: foreign bank loans supported the above-average levels of consumption. The general public may have guessed that not everything was right with the economic system, but debt and deficit figures were classified and, as such kept away from the public.

The reform-socialist period invariably left behind a sad legacy of macro-financial mess across the region, and Hungary was no exception. Massive foreign trade deficit led to large current account deficits – as long as Western banks were willing to finance these. Joining the IMF and the World Bank helped the Communist regime for a while: a programme with the IMF and official loans from the Fund and Bank made it possible for the government to tap international capital markets as well and to pile up more foreign debt; only to realize at the latest by the end of the 1980s that the economy was unable to service such a huge debt. At the very moment when the region entered the hard and risky process of Transition, an external credit crisis erupted in countries with reform-socialist past, calling for determined corrective measures.

Two decades of regime change – with continuous Socialist presence

This is the Hungarian story of the late 1980s and of the early regime change years. The cabinet of Prime Minister József Antall inherited the financial crisis in spring 1990, but managed to avert the worst by reorganizing the profile of the old foreign debts, and to accelerate foreign capital inflows, official and private alike. The first democratically elected government also created the necessary market institutions (legal framework for banking, competition, and bankruptcy, central banking independence), and launched privatisation programs in order to modernize the economic system. Hungary at that time became remarkably successful in absorbing foreign direct investments (FDI) that contributed through net exports to the recovery of the GDP.

Yet, FDI by its nature does not create a large number of jobs. Foreign firms systematically avoid underdeveloped areas, and they are unwilling to employ older or unskilled workers. In the absence of a vibrant local entrepreneurial class, employment – particularly outside the capital city and growth poles – tends to remain limited. While the centre-right Antall government made efforts to strengthen domestic businesses, the next (Socialist-Liberal) government coalition (1994–1998) cared less about beefing up the middle class – known to vote mostly for the political right.

A major turning point was 1995 when the Socialist-Liberal coalition applied a textbook-like neoliberal macroeconomic stabilization package to correct economic imbalances. The package may have restored the cost-competitiveness of domestic and foreign businesses in Hungary, but its socially insensitive composition greatly reinforced the growing disenchantment of the general public with the market economy. Poll figures show (Median, 1995, 2005) that only five years after the democratic changes, the majority of Hungarians already rejected such tenets of capitalism as “pay should be determined by market and not by the State”: the number of those surveyed supporting this statement was 72 per cent in 1991, but only 60 per cent in 1995, and even less, 44 per cent, in 2005. A similar truism of market based economy (large scale enterprises being in private ownership rather than in state ownership) was also rejected by that time: the number of those supporting the statement “big companies should be in private ownership” amounted to 53 per cent in 1991, but support disappeared by 1995 (40 per cent), and remained poor after that (42 % in 2005).

The Socialist-Liberal coalition lost elections in 1998. Its narrow defeat was partly due to economic policies but probably even more because of corruption cases that became (and remained) associated with the rule of the Socialists – successors of the former establishment (Socialist Worker, that is, Communist) party.

The incoming centre-right government under PM Orbán (1998–2002) inherited a public opinion that had by that time become very critical of the way Hungarian capitalism worked. Nominally conservative, that is pro-market, his government followed a heterodox economic policy, including controlling retail energy prices and stopping privatization. The Orbán cabinet restarted supports for domestic entrepreneurs, tried to forge a “patriotic economic policy” and to mobilize the country around positive values. Though the record of this second non-socialist government was rather positive, and the economy happened to be in good shape, Orbán lost to the Left in 2002. The negative public mood supported the socialists who focused on material well being alone, and promised a return to tension-free “everybody gets something” domestic politics. Unfortunately, the winners of 2002 did deliver the oversized spending promises leading, not surprisingly, to the re-emergence of external indebtedness.

The Socialist party proved to be successful in winning elections (1994, 2002, and 2006) but fell back on the old habit of living on borrowed money. In the longer term that was what undid them in 2010, although the highly controversial personality of PM Gyurcsány (2004–2009) plus the financial crisis together were certainly among the factors explaining the implosion of the Socialist Party in the 2010 general elections.

On values and attitudes

What are the factors behind the negative public attitude to markets in Hungary? It is not easy to provide an overall explanation. Cross country opinion polls add to our knowledge the value system changes of recent decades. Asked whether people in Transition countries are satisfied with the political regime change, the respondents, as seen below, reacted very negatively in Hungary (Pew Research, 2009). The collapse of a rigid communist regime and return to democracy was, in understandable contrast, strongly welcomed by the vast majority of respondents in East Germany (the former German Democratic Republic) as well as in the then Czechoslovakia; and the support remained solid in the successor countries two decades after the regime change. In other countries, however, initial support has shrunk (like in Hungary) or collapsed (Ukraine). This tells a lot about the prevailing social and political conditions in the countries concerned in the year of the survey (2009), and the socio-economic path of the given society in the last two decades.

The same poll reveals that regime change is not much appreciated in some concerned countries in respect to its other main ingredient: change to a market based (capitalist) society (Table 2).

At the time of the collapse of the socialist regime, capitalism was seen as a strong promise of a better life and personal prosperity in former planned economies (less so in the former Soviet Union with its seven decade long history of anti-capitalist propaganda), yet the change in the rate of approval of capitalist Transition tells a story of disappointment. There is not much happiness about the particular versions of capitalism that emerged on the ruins of the local variations of central planning (“really existing socialism”); and soon market economy as a system seemed by many as a failure to deliver the promises.

Data in Table 3 strengthen the above message: many people simply feel that the “really existing” capitalism does not function well enough, and people had a better life under the old regime.

What is really surprising is the poor rating of the market economy’s performance in some new EU member states. In Hungary only eight per cent of the respondents feel that people live a better life under democratic market economy: this must be more than just the legendary Hungarian pessimism. Take Poland, the least critical of the present state of affairs as compared to the communist times: this is a country that was in very bad shape in the crisis decade of the 1980s, and therefore the present economic and political situation should objectively be appreciated by the vast majority of the Polish society; yet the 2009 status quo is disappointingly underrated by so many Poles.

One is tempted to draw a quick conclusion about the short memory of the people, or about the weaknesses of human nature in judging objectively, or one may conclude that some ex-communist societies are still stuck in their backward value system. Fortunately, the latter is not the case. As Table 4 proves, key European values and aspirations do thrive in former communist-run countries.

The Hungarian public, for one, strongly supports democratic principles such as honest elections, freedom of speech, press and religion. Russia and Slovakia, at the other end of the spectrum, do not report much public support for freedom of speech or for the principle of civilian control of the military. Still, the Central and Eastern European value system as it appears in the table delivers a somewhat different message from the one implicit in previous data sets: nations on the periphery of Europe do share certain basic common European principles even if at the time of data collection in certain countries the same values and principles did not seem to prevail. Or put in another way: the political and economic realities defining the life of the people are far behind the expectations. This is one of the obvious conclusions that can be drawn from the above tables. A related message comes directly from data in Table 5, inquiring about the functioning of the state.

Again, it is less surprising that in Russia and Ukraine only a minority of the society prefers democratic government to a strong handed captain at the helms. EU member states such as Bulgaria, Lithuania or Hungary may be a disappointment in this respect, and the UK support for a strong leader is also disturbingly high, given the long British tradition of efficient democratic rule. But these are snapshots: actual political conditions in the countries concerned directly influence survey results. Political scientists can provide extensive explanations for the phenomena. But the fact is that main components of the so far common core of European values have been recently questioned; less in the developed centre, and more in the periphery.

Where to go from here?

The surprisingly negative figures from Hungary are partly due to the particular Hungarian domestic conditions in and before 2009: noisy and antagonizing general elections in 2002 and 2006; scandals of lies and brutal use of police force against innocent demonstrators in 2006, and the accumulation of evidence about systemic corruption. In addition, the international financial crisis hit Hungary harder than most other European nations.

Since that year, many aspects of the situation have changed. Rejection of previous policies, and popular discontent with cronyism and the associated vices of a particular version of peripheral capitalism, led to tectonic political changes in Hungary in 2010, catapulting the then main opposition party into power with a qualified majority. The new Hungarian Government under PM Orbán immediately embarked on non-conventional economic and social policy measures, using their strong parliamentary power. Seen from the international policy mainstream, decisions such as nationalising the compulsory private pensions funds, government buy-in into previously privatized oil and gas corporation MOL, taxing foreign dominated sectors (financial, retail, telephony) – all appear “statist” at best, or populist, if you are a purist. But some strong measures represent a correction of what had been a catastrophic government mismanagment of the economy, and a reaction to people’s expectations. Certainly, political support for most measures has remained strong, at least in the first year.

External voices are still rather critical of some of the mentioned non-mainstream measures. But the policy mainstream of yesteryear has become less than compelling lately in Europe. Since the financial turbulences of 2007 through 2009, changes in the values, wishes and worries of the voters have necessitated a redefinition of the role of the state. Unregulated global capitalism is on the retreat, and re-regulation is called for. National governments may not be much trusted, but public opinion asks for more orderliness: either through a “good social order” or personified by a strong leader. Nations in central and eastern parts of Europe have gained painful historical experiences about the dangers of “beloved leaders” at the helms, therefore an omnipotent state will not become a preferred choice, even with deep disenchantment with outcomes and processes of the Regime Change. But the Hungarian public has had enough of the “leave it to the market” attitude of the previous nominally Socialist, at the bottom self-serving politicians who were in office for 12 years out of twenty since 1990.

The nominally centre-right coalition with Mr. Orbán as Prime Minister took up issues appealing to large segments of society such as “protecting the mortgage loan borrowers from unscrupulous banks”, or “taxing the banks rather than the average people”, sounding pretty left-populist. Yet, at the same time, this government took its axe to the overgenerous Hungarian early retirement system, in order to bring back relatively young people into the labour market and restore the balance of the social security system. The Prime Minister used strong language against financial speculators but the Cabinet kept providing state aid to foreign big investors in the automotive industry (Daimler-Benz, Opel, and Audi).

His goals seem to include a reinvigoration of the whole society, restoration of the high status of manual labour, the increase of international competitiveness. In early 2011, after some turns in policies, Mr. Orbán pinpointed indebtedness as Public Enemy Number One. With nations exposed to international competition for capital, influence, talents and markets, excessive public spending would undoubtedly undermine competitive positions in the shortest run. European governments seem to understand this, particularly after the Greek financial crisis of 2010. Bloated public budgets soon necessitate correction; the State should retreat again – without a self-confident liberal credo this time.

Competitive pressures on European nations, including new member states, that arrive from the emerging world point to the direction of an active but lean state. Stable regulatory regimes can only build on clear principles: a new version of “Ordo” is needed. Post-crisis uncertainties may generate two diametrically opposing consequences: one is the weakening of trust in democracy and in market economy, particularly in East (and South) Europe. The other is the rise of new balances between state and economy, national and supranational structures, material and non-material (environmental, spiritual, community) values. The particular capitalist structures that Hungary and other new member states have erected on the ruin of the old state-socialist regimes are not really internalized, let alone loved by the general public. This message is clear from all opinion polls, research, and personal evidence. What is less clear is how the political classes, opinion leaders, and the general public will distinguish the particular version of capitalism from capitalism (market economy) as such. The temptation is high to turn back to older (and disgraced) ideas, or turn away from the unpleasant challenges of the present. The only certaintly is that the general public (“the people”) is not to blame for the low rating of periphery capitalism.

Time will tell what direction European, and within that Hungarian society will take in the face of the mounting challenges. What seems certain is that a strong middle class and vibrant domestic economy are vital for stability and balanced growth. Dual economies (that is: those with strong foreign owned sector and weak domestic businesses) are vulnerable and politically unstable. This is truer on the periphery of Europe than in the core.

References:

Bod, Péter Ákos (2010): Social Market Economy in Hungary – Its History, Presence and Outlook. In: Beckmann – Müller – Röpke (eds): Policy Advice on the Social Market Economy for Transformation Economies: Principles, Vision, and Application. Peter Lang Verlag.

Hirschman, Albert O. (1992): Rival Views of Market Society, Harvard University Press Median Opinion Poll (2005). Quoted by HVG, Budapest, 1st October, 2005.

PEW Research (2009): Global Attitude Survey, Two Decades After the Wall’s Fall.