Chris Harman, Simon Terry & Andy Zebrowski

Crisis in Eastern Europe

Myth of the miracle market

From Socialist Worker Review, No.111, July/August 1988, pp.17-20.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

ON 18 June Hungary’s new leader, Karoly Grosz, showed that he was prepared to use brute force to keep any process of “reform’’ firmly in his own hands. The police quickly moved in to break up a thousand strong demonstration commemorating the 30th anniversary of the execution of Imre Nagy, Communist prime minister during the Hungarian revolution of 1956. Nagy was kidnapped by Russian troops, tried secretly and executed, with the support of Grosz’s predecessor, Janos Kadar.

Among those arrested for taking part in the demonstration was Sandor Racz, president of the Greater Budapest Central Workers council in 1956, who was imprisoned for seven years after the suppression of the revolution.

The dissident poet Miklos Haraszti told Socialist Worker Review.

“The police went in to beat people up. Nineteen were arrested and beaten in custody. The worst was Gabor Demszky who is the biggest independent publisher and his wife Rosa Hodosan, a teacher. They were beaten up at the square and later at the police station.

“The government is being very selective about when it uses these tactics. On 15 March eight of us were held by the police while 10,000 marched. There were no beatings.”

Yet Grosz’s assumption of power three and half weeks earlier had been greeted by the Western media as a great victory for liberalism.

If the Western press have misunderstood the nature of the changes taking place in the Hungarian leadership, it is not the first such mistake. The belief that the market is the magic remedy for every economic failing in Eastern Europe has led to a systematic refusal of Western journalists and economists to recognise the problems facing Hungary for the last 20 years.

Hungary began to implement the sort of economic reforms which are now proposed for the USSR back in 1968.

The ideas behind its reform scheme, known as the New Economic Model (or NEM), were not new.

But only in Hungary and, to an even greater extent, Yugoslavia did such proposals get fully implemented.

The Hungarian reforms involved reducing the controls which the state exercised over individual enterprises, leaving their managers to decide what they produced and with what inputs. The market was to be the main mechanism ensuring that enterprises produced what was needed by each other and by consumers.

The switch to the market was necessarily accompanied by a series of price reforms, which attempted to make the prices of goods reflect the costs of production of producers of average efficiency. Then more efficient enterprises, it was said, would make bigger profits, be able to keep a proportion of these profits and to expand production, while less efficient enterprises would be squeezed until they changed their ways.

Finally, the reform involved dismantling many of the obstacles to direct relations between Hungarian enterprises and other economies. The enterprises were allowed to trade directly, without going through the ministry of foreign trade, and to keep a portion of their overseas profits themselves. Foreign capital was encouraged to enter into joint ventures with Hungarian enterprises. Restrictions on the flow of Hungarian currency were reduced, until it became effectively a “hard” currency, with very little difference between its internal and its external value.

The introduction of these reforms seemed to Western journalists and economists a vindication of everything they had always believed about the innate superiority of the “free market”. As the Budapest Hilton opened and became the venue for international business conferences, article after article spoke as if an economic miracle was taking place.

In fact, what were put forward were a series of myths.

There was the myth that the economy was doing qualitatively better than the other East European economies. In fact, the rate of growth was around average for the Eastern bloc. At around 6 percent in the first five years of reform (1968-73) it was about the same level as Poland and East Germany. In the second half of the 1970s it fell sharply, to an average of 3.2 percent, with output actually declining marginally in 1979-80.

As American economist Marshall Goldman has admitted,

“Western calculations of the growth of net material product per capita in both Hungary and the German Democratic Republic do not show much difference. From 1965 to 1975 Hungary grew faster. Thereafter East Germany grew faster, but the difference in growth was not significant.”

There was the myth that living standards were much better in Hungary than in any of the other East European countries.

But the figures which are available do not paint any such picture with regard to the living standards of the mass of the population.

A 1980 study by George Feivel of living standards in different East European states argues that:

“Throughout the 1960-75 period Czechoslovakia and the GDR led the way in the stock of (consumer) durables, followed by Poland, the USSR and Hungary. During 1971-75 the fastest increase in the stock of durables appears to have been in Poland ... By 1975, the countries could be grouped as follows according to the stocks of passenger cars: the GDR, Czechoslovakia, Hungary and Poland.”

It is some years since these figures were collated. But the picture is unlikely to have changed enormously. The “golden age of reform” was the years 1968-71. Per capita real wages rose only 0.6 percent a year in 1976-80 and since then have stagnated or even fallen.

Hungarians may seem to be much better off, on average, than Rumanians, but they certainly do not display any great affluence if compared with the inhabitants of Prague or East Germany.

In any case, talk of the “average” living standard is misleading. All the East European states are marked by a very sharp class division between those with commanding positions in the bureaucracy and the mass of workers. So in both the unreformed Polish economy in 1977 and the “reformed” Hungarian one, the top 10 percent of employees “earned” more than four times more than the bottom 10 percent. The top 1 percent do even better than this, of course. In Poland in 1978 the top declared salaries were 11 times the lowest wages; in Hungary there is a small group of 0.7 percent of the workforce who get more than 10,000 forints.

So despite the presence of a vast range of goods in Hungarian shops, a very large section of the population simply cannot afford to buy them. Over 45 percent of households with three children last year had incomes of less than 1,000 forints per person per month – well below the poverty line. Fifteen percent of the population are estimated to live below the “deprivation” level and another 15 percent on the margins of it.

The third myth is that the only reason reform has not been pushed faster has been resistance from conservative bureaucratic elements inside the party – and that this resistance has been for “ideological reasons”.

There has been bureaucratic conservative resistance, although it has not been motivated by ideology but crude material interests (ie their positions in the bureaucratic pecking order are threatened by reform). But what has to be explained is why this resistance has been more effective at some points in time than at others.

The resistance could not stop the reforms taking root in 1969-70. But then in November 1972 the conservative forces succeeded in partially reversing the reforms, and in getting rid of some leading reformers. It was not until 1977 that the reform path was resumed, although in a more radical manner than previously.

The sudden strength of the conservative camp in 1972 flowed from the fact that the reformed Hungarian economy suddenly ran into problems not that different from those that had affected the unreformed economy prior to 1968. Fear that reform will lead to such an outcome is one of the most important factors strengthening the enemies of reform not only in Hungary, but also in the USSR, East Germany and Czechoslovakia. In Hungary in 1972 it suddenly became clear that the reformed economy was displaying many of the faults of the unreformed economies, in particular the drive to “over-investment”. As one official report told:

“Current investment expenditure in Hungary appears to have broken all bounds and is running 23 percent higher than during the first half of last year.”

The president of the Hungarian National Bank reported that funds tied up in unfinished investments amounted to more than half the total investment for the year. The prime minister reported:

“Investment has gone up twice as fast as the national budget ... Too frequently investments are being embarked upon which are not feasible either technically or financially.”

Imports shot up at twice the rate of exports as enterprises bought plant and machinery abroad, while only 11 out of 19 planned investment projects were completed.

What in the West would be called a “credit squeeze” – a restriction of investment – had to be imposed by the government. Investment, which had increased by 27 percent in 1971, fell by 25 percent in 1972, and a further 1 percent in 1973. And if all the investment projects, those nearly finished and those nowhere near completion, were not going to be delayed equally, there had to be some selection by the centre of who it hit. The old system of “priorities” was suddenly back again. The conservatives in the bureaucracy seized their chance and said, in effect, “We told you so,” and bumped a few of the most prominent reformers.

But the partial recentralisation of the economy soon ran into trouble itself. Managers relied on the central planners to supply them with the resources necessary to complete investments, without any great regard to cost considerations. The central planners discovered that the Western banks were only too eager to lend them money necessary to pay for an import bill that shot up as result of the world oil price rise in 1973-74.

Although total investment in 1976-80 was slightly greater than had been planned, the output only grew at about half the planned rate and the consumption of the population at about 35 percent of the planned rate. Now it was the turn of the reformers to say “We told you so”, and in 1977 the Hungarian regime decided on a greater reliance on the market than ever before.

The adoption of the further reforms made the Hungarian leadership into darlings of the ideologists of the free market everywhere.

It was only a few worried banking advisors who noted “the shadow of 1985” – the year when Hungary’s foreign debts began to become due for repayment. Even fewer people noticed that while there was a Hungarian middle class which was able to afford the new consumer goods, a huge chunk of the working class were living in unalleviated poverty and as alienated from the regime as they had ever been.

What was missing from the perceptions of both supporters and opponents of reform was that “over investment” is not an accidental phenomenon, or simply a result of bureaucratic miscalculation. It is rather a product of the way an economy like Hungary’s interacts with the world economy – whether as one single centrally administered unit, or as a set of autonomous enterprises.

Hungary’s is a relatively small economy which has made the transition from being an overwhelmingly agricultural to an industrial one in the last 40 years. It can only hope to compete at world standards if its enterprises – and the investments they undertake – are similar in scale to those of bigger countries. It is this which leads whoever is responsible for investments to undertake over ambitious investments, and for these investments then to absorb a massive portion of the national wealth.

What has been happening in Hungary is very similar to what happens with the boom-slump cycle of classical Western capitalism. In order to compete, each individual capitalist invests as much as possible during periods of boom and in doing so helps create a climate which leads other capitalists to undertake similarly massive investments. But this massive surge of investment throughout the system (what Marx called “over-accumulation”) leads to pressures on labour and raw material resources (or the credit which gives each individual capitalist access to these), until shortages force up prices, cut into profits and bring the boom to a sudden end.

Under the unreformed East European system, the boom is brought to an end when the state finds it does not have the material resources to meet the massive investments it undertook in response to international pressures. Under the reformed system it is not so much a shortage of internal physical resources as a shortage of foreign currency to pay the import bills of the individual enterprises. But the end result is the same – the sudden onset of stagnation and recession.

It is this which explains why the Hungarian economy has suddenly entered into yet another acute crisis. The turn to the market ten years ago did not solve any fundamental problems. But the largesse of bankers, who shared the Hungarian marketeers illusions, and a policy of “austerity” towards the workers managed to defer the day of judgement.

Now the crisis is there for all to see. As Grosz admitted at the party conference in late May:

“The economic and political situation is very complex. For years we have had the oppressive burden of foreign debt ... World standard products in one plant – bad quality goods in another, sometimes both in the same factory, a stagnating living standard on one side, a visibly growing prosperity on the other ... We became content with the successes of yesterday. We made ourselves believe that with our innovations we were creating a perfect work ... In economic management ... subjectivism gained ground ... In certain people and in certain institutions a feeling of infallibility gathered strength. We made serious mistakes on big economic issues.”

The deputy premier, Peter Medgyessy, was even more forthright:

“The Hungarian economy has for a decade been characterised by stagnation and deteriorating competitiveness. The earlier driving forces necessary for rapid economic development have by now been exhausted. So in the past we were forced to restrict investments and today increasingly to limit consumption in order to prevent the process of indebtedness becoming an avalanche.”

The economic crisis has rapidly turned itself into a crisis of the whole society. This has been shown in pan by the growth in the influence of the open dissidents, such as those who organised the Imre Nagy memorial march. It has also been shown by the way in which more than 5 percent of the ruling party’s members have refused to renew their membership. In a country in which few party members believe the official ideology and most see the party card as no more than an additional meal ticket, such an exodus of members is a clear sign that people of all sorts are losing faith in the regime.

The response of the Grosz wing of the party has been to opt for a still more radical swing to the market, to encourage inefficient firms to be driven out of business by foreign competition in the hope that this will allow efficient firms to prosper at their expense. As the central committee member in charge of the economy, Miklos Nemeth, puts it:

“Up to now ... enterprises and individuals alike were able to obtain satisfactory incomes with weak performances or with outputs which were more and more being devalued on the world market. We have to break with supporting the middle, with being middling ... Our most important task is the construction of a market economy.”

Grosz repeated the same message at the conference.

“We cannot guarantee the security of a workers’ collective which is not successful ... Comrade Katalin Bleieier says that the measure of value should be honest work.That is not enough. Only profitable work that reaps gains can be the measure of value.”

In line with this approach, the government is intent on allowing whole enterprises, employing many thousands of workers to go bankrupt, and on forcing these workers on to dole queues.

At the same time, it intends to do its utmost to establish joint companies with Western capital to exploit the rest. As Nemeth told the conference:

“We should promote with all available means an increase in international competitiveness ... It will become even more important for Hungary’s economic development to involve foreign working capital. We advocate solutions that enable us to convert part of our foreign debts into assets of foreign interest ... The integration of public limited companies and the stock exchange into the system of socialist ownership ... are issues that await settlement”

In an interview he provided exactly the same justification for his approach that you would get from any Tory minister:

“Why is it not work if I invest my earnings in some activity or enterprise which operates at a good profit, if I take a certain risk – because after all, it is possible that the enterprise will fail and then I lose all my money – and perhaps gain an income from the capital I have invested?”

Reports suggest that the Hungarian government has even been studying the experience of the British miners’ strike, just in case it meets resistance from some of the very many workers it wants to make redundant.

There is nothing new about inequality in Hungary. It has always been a highly unequal society – with the special shops, the luxury flats, private villas for the top bureaucrats, and the special kindergartens and special schools for their children in the pre-reform period, with the open disparities of income of the post reform period.

What is new is the apparent readiness of the rulers to allow the world market to determine what enterprises succeed and what fail in Hungary. In conditions of world economic crisis, that would involve allowing huge chunks of the economy to go under in the hope that others would succeed.

Hungary’s economy is relatively small and weak. If the regime is really going to take the medicine it speaks of, then the result may well be to create the sorts of conditions caused by monetarism in, say Chile, rather than the rather milder one created in Britain.

Under those conditions, it is not surprising that Grosz has felt it necessary to turn his police on an oppositional demonstration. “Liberalism” on economic issues is only possible for him if he can stop the more radical of the dissident intellectuals making common cause with the workers in the fight to preserve living standards and jobs – and that means using the forces of the state just as mercilessly as his “centralist” opponents in the party would. The crisis in Hungary is made worse by the way the Russian leadership is itself afflicted by arguments over how to deal with its economic crisis. In the past Grosz would have been able to point eastward as a warning against dissident intellectuals and workers taking to the streets. The memory of what happened to Budapest in 1956 of the 20,000 dead, the tens of thousands of deportees, has been a powerful deterrent to revolt against the regime.

That, no doubt, is why the regime has carefully left many of the bullet holes from 1956 unrepaired on buildings in the centre of Budapest to this day. The near open wrangles between Gorbachev and Ligachev in Moscow and the mass activity in the streets of Armenia has emptied the old threat of much of its force for the time being, anyway.

Just as the fight over restructuring within the Russian bureaucracy has opened up space for all sons of dissident forces to operate inside the USSR, including those who stand for working class interests against the economic schemes of both wings of the bureaucracy, so it has opened up space for those who identify with the revolutionary mass activity of 1956 to express themselves in Hungary.

At the same time, economic developments in Hungary should serve as a warning to anyone elsewhere in the Russian bloc who sees reform as being sufficient to solve the crisis of state capitalism.

The proponents of economic reform will talk about glasnost and democracy so long as such talk helps them mobilise against their enemies within the bureaucracy. But all the time they will do their utmost to limit the development of glasnost-from-below. And the moment they have won the battle for restructuring, they will try to turn the glasnost tap off, unleashing the police against those who fight for a real opening up of political discussion outside the hierarchies of the party.

What is needed throughout the bloc is for people to fight for such a real opening up and to connect it with the struggle against workers having to pay the cost of an economic crisis caused by their rulers. Genuine socialists will seize the opportunities (and if either Gorbachev or Ligachev are allowed to get their ways, they will be temporary opportunities) presented by glasnost to fight for such a real opening up and for a revolutionary solution to the crisis based on workers’ self-activity and social self-management.

Last updated on 15 April 2010