Zoltán Román
As a latecomer to the industrial revolution and loser in both the First and Second World Wars, Hungary started to reconstruct in 1945 after the heavy war damage from a relatively low level of GDP per capita, to revitalize the economy, and to build a new democratic society. With regard to this latter task, the attribute ‘democratic’ soon faded out, to be replaced by
‘socialist’.
Now, forty-five years later, the quest for democracy is a national priority again, and it is a matter of acute debate as to what the term ‘socialist’ does and should mean. In the constitution which the new Parliament is to approve in 1990, should ‘socialist’ be omitted, should the term ‘democratic socialism’
substitute for it, or should something else entirely be used?
Hungarian economy and society, including the political and public enterprise systems, are in transition. To facilitate an understanding of these fundamental changes and the state of public enterprise now, a historical perspective is necessary.
A brief survey of four decades
It will be useful to recall the major characteristics of the boundary years of these four decades in Hungary: 1948, 1958, 1968, 1978, and then the year 1988.
1948 At the beginning of that year the big banks and the mining industry, as well as the four largest heavy industrial corporations were already nationalized. In many significant fields of the economy there were indicative rather than directive three-year plans being implemented. All industrial enterprises with more than 100 employees were nationalized in March of that year, and the collectivization of agriculture was announced in August. It was the year when the monolithic power of the one-party system was institutionalized, and all other components of the Soviet model of this time (the Stalinist model) were quickly introduced (see Berend and Runki 1988): it was indeed ‘the year of change’.
1958 One and a half years after the defeat of the 1956 uprising and revolution (for three decades thereafter officially designated a counter- revolution) the economy showed signs of consolidation, which unhappily was achieved in political life only years later. Most of the economic reform proposals of 1956 and early 1957 were dropped, and only partial adjustments were introduced. However, the material well-being of the population was among the first priorities for the coming decades.
1968 This year saw the introduction of comprehensive economic reform.
It was aimed at an optimal combination of plan and market—the best components of both systems (in UN terminology, centrally planned and market economies). This optimism seemed to be verified by the economic results of the next few years, often labelled ‘the Golden Age’ (albeit short) of the Hungarian economy. At the same time, however, 1968 was also the year of the Warsaw Pact military intervention in Czechoslovakia (later condemned by both the Hungarian government and the Parliament of Poland), an event which overshadowed the prospects for Hungarian reform.
1978 This was a period of change in economy policy orientation. Due to the delay in adjustment to the changes in the world economy and to the prolongation of forced economic growth and overspending, US$8 billion dollars debt accumulated in convertible currency. To achieve a surplus in the balance of foreign trade became—and still is—the dominant priority.
Further steps in the implementation of the economic reform of 1968 were also envisaged, in anticipation of a backlash.
1988 A year of deep economic, political and social crisis. After some years of improvement in the balance of foreign trade, there was now a US$17 billion debt in convertible currency. This was equivalent to 63 per cent of GDP, and servicing this debt took around 50 per cent of export earnings in convertible currencies. There were also declining real wages and real incomes, near to 20 per cent inflation, discontent with the government, with the Communist Party, with the past, the present, and with future prospects. The result was a movement towards a multi-party political system, with a majority concensus on the need to transform Hungary into a market economy.
Industrial organization and the reform process
The pattern of industrial organization, like all other major components of the economic and political systems, was copied from the Soviet Union at the end of 1940, in Hungary as in the other Eastern European nations.
The enterprise is the core of industrial organization in the ‘classical’
Soviet system. After a short period of transition, the Soviet Union realized that production of commodities can be organized and managed only via economic entities with ‘independent accounting’ (hozraschot). The enterprises in this system, however, do not have real autonomy. They must follow the obligatory indicators of the plans; market signals are of
marginal significance for them. This model postulated that to achieve this situation—in harmony with other ideological and political considerations—private ownership must be eliminated by nationalization or possibly by establishing large centrally controlled co-operatives.
Two further concomitants were derived from the logic of the system:
1. both research and development, and trade functions were to be separated from the production units of enterprises and given to other specialized organizations, working according to their own plan indicators;
2. since market competition was not needed, monopolistic situations were perfectly acceptable—or even desirable. They facilitated the exercise of power and control for both the economic and political centres.
In the relatively short period until 1953–4, the model of the ‘centrally planned economy’ seemed for most economists, as in Hungary, to be not only feasible alternative but also potentially superior to the capitalist market economy. Experience proved this belief wrong.
How was the system to be changed? To a limited extent by adjustment, but to do so fundamentally required comprehensive reform, combining both planning and market. Berend (1988) distinguishes three stages in this process:
1. intellectual antecedents of reform and the first steps of adjustments, from 1953 to 1969;
2. the period of the reform-decision in 1966 and then the years of the comprehensive reform, with many setbacks and reversals;
3. the return to reform, accompanied by delay, ambiguity, and a new turn in the 1980s.
Other authors, especially Agnes Ungvarszki, have tried to identify cyclical changes in these events. Ungvarszki (1989) describes the alteration between three ‘doctrinaire’ and three ‘renewal’ courses between 1948 and 1984, each with specific policy and economic policy orientations.
Looking back to 1968, we continually ask why we did not succeed with reform. Why had we to wait twenty-one years to recognize that instead of achieving a combination of the best components of the two systems, we ended up with a mixed bag of many of the unfavourable corollaries of both systems: inflation, unemployment, inflexibility, bureaucracy, and corruption?
Politicians and representatives of the administration on the one side, and research workers on the other, give markedly different responses to this question. The former stressed only the unfavourable external changes, like the fall in oil prices, the end of the ‘Golden Age’ of the world economy, terms-of-trade losses, and problems in CMEA integration and co-operation.
On the other hand, the latter pointed out the negative impact of the stop-go
cycles in the reform movement due to both internal resistance and external influences. Then there were the universally recognized failures of economic policy, bad investments, and delays in structural adjustment. In recent times the increasing glasnost has revealed under the surface the severe damage caused by the dominance of political institutions and political power on economic decisions, thereby distorting planning, regulation, corporate management, and allocative and operational mechanisms (see Román 1987).
There have however been some changes in Hungary as a consequence of the reform process. There is progress in re- integrating R & D, production, marketing, and sales activities into the enterprises. The role of the market, the real entrepreneurial freedom of movement of the enterprises, has also increased—but only to a moderate extent.
We have also seen minor changes in the shares of the social sectors of the economy and—in spite of criticisms from the mid-1950s, adjustments in the 1960s, and the comprehensive reform in 1968—minor changes also in the centralized pattern of the state-owned sector, in the institutional pattern of the economy, and in the power of the administration.
Hungary is now coming up to a free parliamentary election with about a dozen competing political parties, who have only roughly-sketched economic programmes. Common to most (but not all) of these programmes is the promise to create a market economy and a democratic welfare state. In detail, however, many of the basic features of these ultimate goals have yet to be clarified.
Changes in the share and statute of the state-owned enterprises
Economic structure
Changes in the share of the state-owned sector in originating national income since 1960 (the year before the collectivization of agriculture) have been rather small (see Table 5.1).
The share of the co-operative sector was 17.0 per cent in 1960 and invariably around 23 per cent in the other years quoted. The rest consists of the contribution of the private sector and of the auxiliary activities of the population (see Table 5.2).
In Hungary we distinguish three types of economic activity:
1. the formal or ‘first’ economy;
2. the ‘informal’ or ‘shadow’ economy;
3. the ‘second’ economy.
The first economy is as published by the Central Statistical Office, and is derived from the principal activities in the economy. The informal economy
is relatively small, although after the introduction of a steeply progressive personal income tax in 1988 its growth has accelerated.
The second economy includes all non-illegal activities performed either as second jobs of people employed (beyond their normal working hours) or by non-active earners of the population.1
According to different estimates around 25–30 per cent of the total labour force will be engaged, and about 20 per cent or more of the GDP will be generated (see Revesz 1986). It requires more precise clarification as to which part of the second economy is registered as originating in the state- owned and co-operative sectors, and which part might not be adequately taken into account at all.
The second economy helps to make life more tolerable, and compensates for stagnating and declining incomes and real wages; it contributes to the elimination of shortages on the market, and serves as a school and incubator for entrepreneurship and small businesses.
But it also increases dissatisfaction with jobs and incomes in the state- owned and traditional co-operative sectors, and participation can involve 50–60 (or more) working hours per week. Health, family life, and other considerations do not allow this to continue in the long run, or in a period of rising unemployment. But, increasingly and inevitably, low productivity and low income in the first economy will be compensated for by working and earning in the second.
Table 5.1 Shares of state-owned sector in national income
Table 5.2 Shares of private sector and auxiliary activities in national income
Two important qualifications need to be added here. First, the original document of the comprehensive reform declared as its fundamental feature the organic connection, the combination of the planned, central guidance of the economy and of the active role of the market, on the basis of the socialist ownership of the means of production (Central Committee of the HSWP 1966:92).
Only in recent years has a majority view emerged of the need for a much higher share of private ownership, partly by promotion of the growth of small business and partly by the privatization of state-owned enterprises.
Secondly, the former interpretation of ‘social’ and state ownership has been questioned. The hierarchical dependence of the state-owned enterprises on the sectoral supervising ministries had been cut in 1984–85 for nearly two-thirds of enterprises and they obtained a new statute.2 They are now governed by Enterprise Councils, composed 50 per cent of members elected by the employees, and 50 per cent nominated by the general manager. He himself will be elected (and eventually dismissed) by this Council. However, mixing ownership and participation, governance and management, in an environment without market competition weakened managerial authority, heated up short-term income pressures, and so did not prove to be a sound decision.
Cutting the hierarchical dependence of the state-owned enterprises from the sectoral ministries somewhat reduced (but did not eliminate) the power of the administration. It shifted dependence to the functional ministries, principally to the Ministry of Finance.
In 1988, Parliament approved the Act VI which widened the choice of legal forms of enterprises, including those with mixed state, foreign, and private ownership, and raised the limit of the number of employees in a private enterprise to 500. Act XIII, approved by Parliament in the spring of 1989, regulated, with the intention to facilitate and to promote, the transformation of enterprises from one statute to another.
Ownership
For state-owned enterprises the joint stock company is now considered as the optimum form, and their conversion is declared necessary. This requires a far-reaching ownership reform which is now only at the stage of discussion.3 Ownership reform is a complete departure from the situation when everyone’s property is no one’s property, and therefore the functions of the true owner must be restored. There are also serious doubts about the assignments of civil servants of state authorities, even under democratic control. Their powers must be limited. Foreign and domestic private capital can fulfil a proper role, but access to the former and the
accumulated wealth of the latter are insufficient. To overcome this second barrier there are proposals to distribute the shares of public wealth either to the employees or to all citizens.
Another suggestion is to distribute shares and stocks of public wealth to communities and to pension funds. This is based on the trend towards institutional shareownership in many countries. (A similar proposal is described and elaborated in Statham 1977, 1987.)
All these however postulate the existence of real commodity and capital markets and the functioning of a market economy. This is where Hungary is heading, albeit very slowly. The decision on the ownership issue cannot be postponed for much longer. Most probably we have to start with a wide spectrum of ownership and governance patterns, including the variants mentioned above, as well as the more traditional forms of state holdings and the cross-ownership of enterprises.
It is clear that additional measures are needed. They should be elaborated in detail, in order to avoid the familiar traps inherent in self-management and the lightning-fast redistribution of wealth.
Concentration and competition
Concentration
Centrally planned economics usually prefer large organizations for both economic and political reasons. For many decades this was also true in Hungary. Although the economic reform in 1968 accepted and declared that a more balanced size profile for enterprises was needed, change has been slow.
The number of state-owned enterprises is shown in Table 5.3.
Between 1970 and 1979 the number of industrialized co- operatives decreased from 821 to 673, the number of state farms from 194 to 131, the number of agricultural co-operatives from 2,241 to 1,350, and the number of domestic trade organizations from 946 to 603.
In 1980 the government stopped the process of centralization, and proclaimed its intention to reverse it. This was one of the few occasions when—in an upswing period of reform—repeated research findings and protests succeeded in bringing about a governmental decision.
Nevertheless, decentralization went on with modest results. In 1987, in the state-owned industry sector, 4,869 establishments were in operation, in a total of 1,043 enterprises. This means that the overwhelming majority of enterprises are multi-plant firms. The number of state farms and agricultural
co-operatives is the same today as it was in 1979. Now this high degree of centralization system of agriculture, as elsewhere, is being questioned.
Due to the high concentration of the state-owned industry sector, generating more than 80 per cent of total output, the market share of the largest producers in most cases indicates a dominant position.
The market share of the three largest producers in 1975 was more than 50 per cent in thirty-eight of the fifty-four branches of manufacturing industry. This share exceeded two-thirds in twenty- four branches (see Román 1981).
Aware of the fact that branches are too heterogeneous to assess the actual degree of competition, I prepared a survey for 1982 of 637 product groups covering 75 per cent of Hungarian manufacturing industry (Román 1985). The share of the largest producer in total production exceeded 50 per cent in 419 out of the 637 product groups.
In 323 product groups this share was more than two-thirds, and in 219 more than 90 per cent. Taking the three largest producers, the same categories of the 637 product groups included 568 with over 50 per cent, 508 with more than two-thirds, and 390 with over 90 per cent of industrial output.
In addition, perhaps even more important, in a small country like Hungary the minimum efficient scale for a great number of products does not permit competition among domestic producers:
they should meet competition in export markets and via import penetration.
Too much emphasis on exporting, however, limits this kind of competition, and since a surplus on foreign trade at any price is invariably the first priority of the Hungarian economic policy, positive effects on competition cannot be expected from this side. On the other hand, import restrictions are being reduced. Step-by-step liberalization gives more hope for positive stimuli from import penetration. Further
Table 5.3 State-owned enterprises, 1960–87
progress in this direction depends heavily on the balance of international payments, and on debt management.
Small and medium-sized enterprises
Aiming to increase the number of sellers and buyers, great significance is attributed now to small business and to small and medium-sized enterprise (SME) promotion. The share of the SME sector is quite significant at the present time, although still about one half of the share in market economies (see Table 5.4).
Today the SME sector has a significant and positive role in the Hungarian economy. In addition to its contribution to national income generation, providing employment (and second jobs), eliminating shortages, and widening the assortment of consumer’s choice, it offers a greater potential for autonomous work and entrepreneurship, and for the natural, positive, and increasing ambition of a significant part of the population, than do larger organizations. On the other hand, it is not yet dynamic and innovative enough to have a marked impact on structural adjustment.
Most small firms are innovative in finding market and regulation niches. From many thousands, however, only hundreds are based on (and are introducing further) technological innovations. Direct export in the small business sector is still marginal, though its contribution as subcontractors and via intermediate goods is not negligible. The inclin-ation to invest in small business is weak. In order to change this attitude a programme for SME promotion is being developed.
Table 5.4 Percentage shares of the SME sector in the Hungarian economy