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Changes in economic management systems in Hungary and other east European countries
632
CHANGES IN ECONOMIC MANAGEMENT SYSTEMS IN HUNGARY AND OTHER EAST EUROPEAN COUNTRIES Tamas Meszaros
Taking Hungary as an example, this article examines changes taking place in economic management systems in Eastern Europe. Developments in the political, institutional and economic sectors of Hungarian society are analysed, and current trends and problems are presented. Countries of Eastern Europe are classified into three categories in order to show how a need for change emerges under different constraints.
The last few years, and particularly the last few months, have been a period of relatively rapid change in Hungary. There have been contrasting views in Hungary and elsewhere about the speed of the changes, but there is no doubt about the rapidity with which new developments are occurring. The declared goal of the different developments is not only to halt the decline of the Hungarian economy, but also to find the best ways of improving economic performance. The decisions of the last few months were designed to lead the country out of its crisis. Although Hungary’s policies are extraordinary and important it is not alone in facing serious economic problems and in looking for ways to resolve them. Most East European countries have decided to implement-to various degreeseconomic management reforms during the past decade. If we thoroughly examine the measures implemented and results achieved by the various countries, we find substantial differences. Naturally there are some common aspirations, first of all in recognizing the need for change and in increasing the role of market forces. However, with regard to directions, solutions, methods and even results, the differences tend to be major. The main reasons for these differences can be found in political and historical backgrounds, traditions, different levels of technical development, behaviour of leadership, relationships with Western countries (in the case of East Germany for example), participation in the CMEA, and so on. In this short article I cannot analyse the situation in depth; instead I try to show through the example of Hungary how the East European nations are
Dr Meszaros is Head of the Department Budapest IX, Dimitrov ter 8 1093, Hungary.
0016-3287/89/060632-08$03.00~1989
Butterworth
of
Industrial
Economics,
& Co (Publishers)
Ltd
Karl
Marx
FUTURES
University,
December
1989
Changes
in economic
management
systems
633
moving from centralized planning to a market-oriented economy. I go on to describe briefly the attempts, plans, recent results and problems of some of these countries. In trying to do so, an important question must be answered: how can we characterize an economic management system and how can we describe its development process ? I have selected a few key economic management factors which were generally used in Hungary. In addition I will discuss some other features to show the impact of the system on enterprises. The economic management factors I have chosen are as follows: l
l l
l
l
l
The national planning system, which defines the general role of the national plan and its specific impact on enterprise management. taxation and the regulation of The regulatory system, which concerns capital investment and wages. The institutional and organizational system, which is the structure and authority of different organizations at both central and enterprise (including banks) levels. An important issue in this system is enterprise autonomy. The main enterprise goals, which refer to how enterprise performance is evaluated and how the various interests in an enterprise are coordinated. The price and exchange rate system, which refers to the types of consumer prices, the relationship between the world market and domestic prices and exchange rates. The nature of competition, which refers to competition in the different markets (domestic, rouble and dollar areas) and also to competition between domestic enterprises.
To provide an overview of the various developments in Hungary, I shall discuss events in three different time periods: before 1968, after 1968, and the 1980s. The period before 1968 can be characterized as the period of These instructions were based upon the centrally planned instructions. principle that all important decisions involving economic activity must be made by central institutions such as the National Planning Office. During the period after 1968 the so-called new economic mechanism was introduced in Hungary. The measures of 1968 were the first major steps towards a market-oriented economic management system. The most recent period (the 1980s) is still taking shape. I therefore describe the most recent measures and currently planned changes in the economic management system. Characteristics Before
of the economy
during three main periods
7968
The national planning system was the basic instrument for managing the economy, with the enterprise plan an integral part of the national plan. All important decisions involving economic activities were made in central institutions (ie, the National Planning Office). Detailed instructions about production, investment, and so on, were transmitted through the different levels of the hierarchy to the enterprises. The key element was control through the central plan.
FUTURES
December
1989
634
Changes
in economic
management
systems
The regulatory system was used by the state to withdraw and redistribute all income from the enterprises. Decisions about investments and wages were centralized. The institutional and organizations system was characterized by centralization and monopolization. State-owned enterprises were dominant; enterprises had little autonomy and their establishment or elimination was a were excessively large and concenprerogative of the state; enterprises trated; foreign trade and banks were monopolized by the state; cooperatives existed primarily in the agricultural sector; the role of the private sector was slight; there was a large number of ministries and other central organizations. The main goal of the enterprises was the quantitative fulfilment of the plan, which was determined by the higher administrative levels. The price and exchange policy was centralized. There was no relationship between prices (ie, all consumer prices) and the domestic market, let alone the world market. All prices were fixed. The situation was the same for exchange rates. There was a complete lack of competition.
After
1968
The national planning system formed plans at two separate levels: national and enterprise. Their relationship was to be indirect. Mid-year and annual plans were required of the enterprises. In practice, the role of the national Many bureaucratic elements of the system remained. plan was dominant. Consequently, the basic instruments for managing the economy were the national plan and regulation of the enterprises. The enterprise plans were formal and uninformed. Still, some attempts at strategic planning appeared. There were many changes in the regulatory system. A complicated and frequently changing tax system was instituted and the regulation of wages varied greatly. Provision and withdrawal of resource support for enterprises was confusing, which caused great difficulties in evaluating enterprises. The government determined about half of all investments. Possibilities for mobilizing capital were very limited. In the system of institution and organization there were only a few fundamental changes. Some enterprises were able to be directly involved in foreign trade, although the state monopoly remained in control of hard currency. The private sector increased, especially in the retail area. The number of ministries was reduced. A process of excessive concentration was continuing in industry and even in agriculture. Enterprise autonomy was increasing but dependence on ministries and other central organizations remained high (ministries appointed enterprises’ top management). Most members of agricultural cooperatives had household plots, and their collective and private production worked well together. In theory, the main goal of enterprises was increased profit. In practice this was not the case because of price distinctions and subsidies. The central regulation of the price system was maintained because market conditions were backward and imperfect and because of social conditions and the living standard policy. There were three forms of which were defined by the authorities; consumer prices: fixed prices, ceiling prices; and free prices. The proportion of free prices grew, although
FUTURES
December
1989
Changes
in economic
management
systems
63.5
some obstacles were applied (eg, requirements for reporting price rises and consulting with the Central Price Office about the level of price rises). There were strong connections between prices and supply and demand within the country but tenuous relations with world market prices. Different price systems were implemented in three different markets: domestic, rouble, and non-rouble. An inflationary tendency became evident at the end of this period. In its exchange rate policy, Hungary made a gradual adaptation to hard currencies. There were no changes within the CMEA. There was only limited competition. Recent plans and trends There is debate about the role of the national plan. Some specialists recommend a significant reduction in its future role with a focus on only some of the economy’s monetary processes. Others agree with the need for change but are unsure about restricting it to a solely monetary role. Enterprise plans are formed independently, including decisions about the planning are type of plan, time frame, and so on. Ideas about enterprise changing and strategic management is improving. The basic instrument for managing the economy is the regulatory system. The regulatory system now focuses on monetary instruments. New taxes-a value added tax (VAT) and a personal income tax (PIT&--became effective on 1 January, 1988. The government initiated a new entrepreneur profit tax in 1989. Though decisions about investments are generally to be determined by enterprises, at present this is greatly limited because of the Possibilities for capital mobilization, both domestic and fiscal deficits. foreign, are increasing significantly. The government is planning a complete so that in future wages will depend on reform of the wage system, agreements between employers and trade unions. In the last eight years there have been a number of serious changes in the institutional and organizational system. Three separate ministries were fused into the Ministry of Industry in 1980; some large industries and trusts have been decentralized (up to 1985, IO trusts and 47 big companies were modified); a number of new small private enterprises, novel cooperatives, and corporations have been established. New forms of enterprise management have been introduced (enterprise council, assembly of delegates). This generally means complete independence from the ministries, except for certain important enterprises and crucial sectors of the economy. The top management of most enterprises are elected by the enterprise council or the assembly of delegates. A two-level banking system and commercial banking hours have been established, thereby changing the bank monopoly. In October 1988, the Hungarian parliament passed a corporation law, which makes it possible to establish different forms of companies: private enterprises (the maximum permitted number of employees has been raised from 30 to 500 if the owner is Hungarian, and the ceiling has been removed altogether for foreign owners); joint stock companies; limited liability companies; and joint ventures with foreign firms (of which there are at present 111, the most in Eastern Europe). The main goal of enterprises is economic growth and increased assets.
FUTURES
December
1989
636
Changes in economic
TABLE 1. NATIONAL
management
systems
INCOME’ ACCORDING
TO DIFFERENT
FORMS OF PROPERTY2
Type of property
1970 %
1980 %
1988 %
Socialist sector (total) of which: state owned cooperative employees’ complementary Private sector (total)
97.4
96.5
93.0
70.7 23.6 3.1 2.6
69.8 23.0 3.7 3.5
63.4 23.0 6.6 7.0
economy
Notes 1. Natlonal Income or net national product (NNP) 2. Hungarian Statistical Almanac, 1987.
As far as the price policy is concerned no fundamental changes have occurred although much research is being done. The main goals are to approach world market prices and to eliminate the so-called ‘three markets equals three prices’ construction. However, there are some results, such as the increasing approximation of world market prices in the area of raw materials, and the growing proportion of free prices. In 1988 double-digit inflation reached 17%, which necessitates a change in the exchange rate policy. The government expected double-digit inflation for 1989 as well. The possibility of competition is growing, mainly in the domestic there is no competition within market. However, many obstacles remain; the CMEA, and competing in Western markets is difficult for Hungarian firms, because of the relatively low level of technology of their products.
Present economic
issues
One of the key current issues is the question of property rights. This issue It is being raised is not simply economic, but also political and ideological. Poland and other socialist not only in Hungary but even in the USSR, countries. Current approaches to this issue represent significant changes, and today in Hungary a new corporation law allows the establishment of private enterprises. Crucial barriers to private enterprises are being eased or removed, such as the increased limit on number of employees, as mentioned above. According to the new corporation law companies may sell
TABLE 2. INDEX OF HUNGARY’S
Year
GROSS DOMESTIC
PRODUCT,
1981-1988
Domestic use
GDP (Index: 1980 = 100)
1981 1982 1983 1984 1985 1986 1987 1988 (projected) Source: Hungarian
101.4 101.3 99.6 99.9 100.3 104.2 107.5 104.5
102.9 105.8 106.5 109.4 109.1 110.7 115.2 115.3 Statistical Almanac,
1987.
FUTURES December 1989
Changes in economic management
TABLE 3. INDEX OF HUNGARY’S National income (actual prices)
Year
Domestic outlays
NATIONAL
INCOME,
systems
637
1960-1988
Material consumption
Net investment
(Index: 1950 = 100) 1960 1970 1980 1988 (projected)
177 300 467 521
183 316 450 442
168 273 399 435
251 522 666 373
Source: Hungarian Statistical Almanac, 1987. TABLE 4. LIVING STANDARD
INDICATORS,
1970-l 988
Year
Real income (per capita) (Index: 1960 = 100)
Real wages (per capita)
1970 1980 1988
159.4 217.2 240.2
129.3 157.8 146.3
Source: Hungarian Statistical Almanac, 1987. TABLE 5. RETAIL PRICE INDICES, 1987
1985
(1980 = 100) 159.1
107.0
1985-l 988
1987 1986 (Annual index: previous year = 100) 105.3
108.6
1988 (projected) 116.5
Source: Wan Econ Report, 9 September, 1988.
shares, and the legal framework for a fully fledged stock exchange has been established. It is now possible to transform state enterprises into joint stock companies, and this is already happening. The new corporation law and the accompanying measures will probably cause significant changes in the structure of ownership in Hungary. Table 1 illustrates the current trends. The development of the so-called ‘socialist market economy’ is an urgent task for the Hungarian leadership. Despite the good annual results achieved at the beginning of the 197Os, such as the rise in living standard, the increased assortment of consumer goods, the relative independence of enterprises, and the generally continuing improvements during the last decade, Hungary today confronts a stagnant and even declining economy. There are several aspects to this development. There are problems with economic growth (illustrated in Tables 2 and 3). The standard of living is declining (see Table 41, and there is an upward inflationary trend (see Table 5). Hungary has a relatively high external debt, namely, US$17739 million in 1987.’ Unemployment has become a problem: there were 11500 registered unemployed at the end of the second quarter of 1988.2 The basic structure of the economy in particular is ineffective as it is changing too slowly. There is a growing income differentiation, resulting in more poor people. The recognition of these problems has led to the following expectations of the rapid changes in Hungary’s economic management system:
FUTURES
December 1989
638
l
l l
Changes
in economic
management
systems
to mobilize dormant capital, create a favourable investment lure Western investors with money and knowhow; to increase economic growth and the living standard; and to develop a social support system for poor people.
climate
and
Having spelt out the expectations, I should add that there are no illusions about how fast all of this can take place. There is general agreement in Hungary that it is impossible to reform the economy without political reforms. This means that in the process of implementing economic reform because the new measures will lead to an we have to expect resistance, additional decline in the standard of living during the early years. The ways, and even the consequences of the reform are not yet the possibilities, completely understood. There are many risks, contradictions and hardships in the process of implementation. Social problems, new competitive pressures, and the continual increase of external debt through imports are just a few illustrations of this. The conditions needed for real competition are generally limited, for There is no competition within the CMEA, and the various reasons. currency to replace conditions for competition tie, a real convertible bilateral trade) are missing. Most Hungarian products cannot compete in Western markets because of their poor technical quality, and the relatively small domestic market. These are facts, but, of course, they do not mean that Hungary cannot change the situation and take advantage of the opportunities. This view is held in other East European countries as well, and this is a crucial factor.
Situation in other East European countries When we discuss the changes in economic management system in Eastern Europe, we have firstly to distinguish between declarations and facts. Undoubtedly, there are very different pressures for change in these countries as well. On the basis of what is actually happening, one can group these countries into three different categories, described below.
Countries
rejecting
development
of new economic
management
system
These include the German Democratic Republic (GDR) and Romania. These countries do not admit their economic problems in public, and so they see their current political-economic direction as a proper one. To deal with problems and tensions they tend to strengthen centralization. The system of the GDR has two basic elements. One is a strict fulfilment of plans and balancing the requirement for the quantitative books, and the other is the high degree of operational independence of the so-called middle management organizations (for example combines). This is flexible because of certain informal system, in spite of its overregulatjon, solutions. In Romania, the leadership wants to solve its crisis in the Stalinist manner. The basic elements of the management system are the ‘natural In recent years Romania has signifiecohomy’ and major central decisions. cantly reduced its foreign debt, but the problems of the domestic market
FUTURES
December 1989
Changes
in economic
management
systems
639
are increasing and the living standard is continuously declining. Various believe that the country could authorities (including the IMF), however, achieve important and fast results through the elimination of current practices. Countries
where
continuity
is predominant
We can define this group as nations which profess to be making reforms, the changes undertaken are not fundamental. but where, in reality, Czechoslovakia and Bulgaria belong to this group, despite significant differences. In the 1970s Bulgaria could be characterized as a highly centralized economy. In the last decade the leadership has declared spectacular changes as part of its ‘new economic approach’ (involving changes in the price system, and self control of enterprises). The new measures are frequently withdrawn because of their unexpected consequences. Direct state interference with management decisions is viewed as undesirable, but the state maintains control over the direct allocation of materials, trade balances, and other central decisions, including large investments. The Czechoslovakian leadership plans some major changes in 1991. Recent measures show that it intends to create an indirect type of economic rather than a market-oriented one. There is no management system, intention, for example, to make changes in the system of national planning. In Czechoslovakia there is no urgent need for reform because of the relative However, signs of economic problems are equilibrium of the economy. (in 1986 annual growth beginning to appear. Economic growth is slowing was 2.6%; in 1987 it was 2.2%; and in the first half of 1988 it was about 2.0%, instead of the average 3.5% achieved in recent five year plans). Countries
developing
a market
economy
This group of countries is trying to create a market-oriented economy, but the manner in which they have worked towards this objective during the last decade is full of contradictions. Poland and Hungary represent this group. The other common characteristic of their approach is that so far they have not developed a successful model of a socialist market economy. Both countries have relatively high foreign debts. This results in the postponement of important decisions which limits technical development. The general opinion at present is that their performance does not support the attempts at change promoted by the USSR. Naturally, there are significant differences between these two countries. A headline in the New York Times of 10 October 1988 read: ‘Hungary sets the pace for East bloc change’. Hopefully, the analysis presented in this article can serve as a basis for a precise evaluation of future trends in the new socialist world.
References 1. P/an Econ Report, 2. Figyelo, Economic
FUTURES
December
9 September and Political
1989
1988. Weekly,
16 September
1988.
CHANGES IN ECONOMIC MANAGEMENT SYSTEMS IN HUNGARY AND OTHER EAST EUROPEAN COUNTRIES Tamas Meszaros
Taking Hungary as an example, this article examines changes taking place in economic management systems in Eastern Europe. Developments in the political, institutional and economic sectors of Hungarian society are analysed, and current trends and problems are presented. Countries of Eastern Europe are classified into three categories in order to show how a need for change emerges under different constraints.
The last few years, and particularly the last few months, have been a period of relatively rapid change in Hungary. There have been contrasting views in Hungary and elsewhere about the speed of the changes, but there is no doubt about the rapidity with which new developments are occurring. The declared goal of the different developments is not only to halt the decline of the Hungarian economy, but also to find the best ways of improving economic performance. The decisions of the last few months were designed to lead the country out of its crisis. Although Hungary’s policies are extraordinary and important it is not alone in facing serious economic problems and in looking for ways to resolve them. Most East European countries have decided to implement-to various degreeseconomic management reforms during the past decade. If we thoroughly examine the measures implemented and results achieved by the various countries, we find substantial differences. Naturally there are some common aspirations, first of all in recognizing the need for change and in increasing the role of market forces. However, with regard to directions, solutions, methods and even results, the differences tend to be major. The main reasons for these differences can be found in political and historical backgrounds, traditions, different levels of technical development, behaviour of leadership, relationships with Western countries (in the case of East Germany for example), participation in the CMEA, and so on. In this short article I cannot analyse the situation in depth; instead I try to show through the example of Hungary how the East European nations are
Dr Meszaros is Head of the Department Budapest IX, Dimitrov ter 8 1093, Hungary.
0016-3287/89/060632-08$03.00~1989
Butterworth
of
Industrial
Economics,
& Co (Publishers)
Ltd
Karl
Marx
FUTURES
University,
December
1989
Changes
in economic
management
systems
633
moving from centralized planning to a market-oriented economy. I go on to describe briefly the attempts, plans, recent results and problems of some of these countries. In trying to do so, an important question must be answered: how can we characterize an economic management system and how can we describe its development process ? I have selected a few key economic management factors which were generally used in Hungary. In addition I will discuss some other features to show the impact of the system on enterprises. The economic management factors I have chosen are as follows: l
l l
l
l
l
The national planning system, which defines the general role of the national plan and its specific impact on enterprise management. taxation and the regulation of The regulatory system, which concerns capital investment and wages. The institutional and organizational system, which is the structure and authority of different organizations at both central and enterprise (including banks) levels. An important issue in this system is enterprise autonomy. The main enterprise goals, which refer to how enterprise performance is evaluated and how the various interests in an enterprise are coordinated. The price and exchange rate system, which refers to the types of consumer prices, the relationship between the world market and domestic prices and exchange rates. The nature of competition, which refers to competition in the different markets (domestic, rouble and dollar areas) and also to competition between domestic enterprises.
To provide an overview of the various developments in Hungary, I shall discuss events in three different time periods: before 1968, after 1968, and the 1980s. The period before 1968 can be characterized as the period of These instructions were based upon the centrally planned instructions. principle that all important decisions involving economic activity must be made by central institutions such as the National Planning Office. During the period after 1968 the so-called new economic mechanism was introduced in Hungary. The measures of 1968 were the first major steps towards a market-oriented economic management system. The most recent period (the 1980s) is still taking shape. I therefore describe the most recent measures and currently planned changes in the economic management system. Characteristics Before
of the economy
during three main periods
7968
The national planning system was the basic instrument for managing the economy, with the enterprise plan an integral part of the national plan. All important decisions involving economic activities were made in central institutions (ie, the National Planning Office). Detailed instructions about production, investment, and so on, were transmitted through the different levels of the hierarchy to the enterprises. The key element was control through the central plan.
FUTURES
December
1989
634
Changes
in economic
management
systems
The regulatory system was used by the state to withdraw and redistribute all income from the enterprises. Decisions about investments and wages were centralized. The institutional and organizations system was characterized by centralization and monopolization. State-owned enterprises were dominant; enterprises had little autonomy and their establishment or elimination was a were excessively large and concenprerogative of the state; enterprises trated; foreign trade and banks were monopolized by the state; cooperatives existed primarily in the agricultural sector; the role of the private sector was slight; there was a large number of ministries and other central organizations. The main goal of the enterprises was the quantitative fulfilment of the plan, which was determined by the higher administrative levels. The price and exchange policy was centralized. There was no relationship between prices (ie, all consumer prices) and the domestic market, let alone the world market. All prices were fixed. The situation was the same for exchange rates. There was a complete lack of competition.
After
1968
The national planning system formed plans at two separate levels: national and enterprise. Their relationship was to be indirect. Mid-year and annual plans were required of the enterprises. In practice, the role of the national Many bureaucratic elements of the system remained. plan was dominant. Consequently, the basic instruments for managing the economy were the national plan and regulation of the enterprises. The enterprise plans were formal and uninformed. Still, some attempts at strategic planning appeared. There were many changes in the regulatory system. A complicated and frequently changing tax system was instituted and the regulation of wages varied greatly. Provision and withdrawal of resource support for enterprises was confusing, which caused great difficulties in evaluating enterprises. The government determined about half of all investments. Possibilities for mobilizing capital were very limited. In the system of institution and organization there were only a few fundamental changes. Some enterprises were able to be directly involved in foreign trade, although the state monopoly remained in control of hard currency. The private sector increased, especially in the retail area. The number of ministries was reduced. A process of excessive concentration was continuing in industry and even in agriculture. Enterprise autonomy was increasing but dependence on ministries and other central organizations remained high (ministries appointed enterprises’ top management). Most members of agricultural cooperatives had household plots, and their collective and private production worked well together. In theory, the main goal of enterprises was increased profit. In practice this was not the case because of price distinctions and subsidies. The central regulation of the price system was maintained because market conditions were backward and imperfect and because of social conditions and the living standard policy. There were three forms of which were defined by the authorities; consumer prices: fixed prices, ceiling prices; and free prices. The proportion of free prices grew, although
FUTURES
December
1989
Changes
in economic
management
systems
63.5
some obstacles were applied (eg, requirements for reporting price rises and consulting with the Central Price Office about the level of price rises). There were strong connections between prices and supply and demand within the country but tenuous relations with world market prices. Different price systems were implemented in three different markets: domestic, rouble, and non-rouble. An inflationary tendency became evident at the end of this period. In its exchange rate policy, Hungary made a gradual adaptation to hard currencies. There were no changes within the CMEA. There was only limited competition. Recent plans and trends There is debate about the role of the national plan. Some specialists recommend a significant reduction in its future role with a focus on only some of the economy’s monetary processes. Others agree with the need for change but are unsure about restricting it to a solely monetary role. Enterprise plans are formed independently, including decisions about the planning are type of plan, time frame, and so on. Ideas about enterprise changing and strategic management is improving. The basic instrument for managing the economy is the regulatory system. The regulatory system now focuses on monetary instruments. New taxes-a value added tax (VAT) and a personal income tax (PIT&--became effective on 1 January, 1988. The government initiated a new entrepreneur profit tax in 1989. Though decisions about investments are generally to be determined by enterprises, at present this is greatly limited because of the Possibilities for capital mobilization, both domestic and fiscal deficits. foreign, are increasing significantly. The government is planning a complete so that in future wages will depend on reform of the wage system, agreements between employers and trade unions. In the last eight years there have been a number of serious changes in the institutional and organizational system. Three separate ministries were fused into the Ministry of Industry in 1980; some large industries and trusts have been decentralized (up to 1985, IO trusts and 47 big companies were modified); a number of new small private enterprises, novel cooperatives, and corporations have been established. New forms of enterprise management have been introduced (enterprise council, assembly of delegates). This generally means complete independence from the ministries, except for certain important enterprises and crucial sectors of the economy. The top management of most enterprises are elected by the enterprise council or the assembly of delegates. A two-level banking system and commercial banking hours have been established, thereby changing the bank monopoly. In October 1988, the Hungarian parliament passed a corporation law, which makes it possible to establish different forms of companies: private enterprises (the maximum permitted number of employees has been raised from 30 to 500 if the owner is Hungarian, and the ceiling has been removed altogether for foreign owners); joint stock companies; limited liability companies; and joint ventures with foreign firms (of which there are at present 111, the most in Eastern Europe). The main goal of enterprises is economic growth and increased assets.
FUTURES
December
1989
636
Changes in economic
TABLE 1. NATIONAL
management
systems
INCOME’ ACCORDING
TO DIFFERENT
FORMS OF PROPERTY2
Type of property
1970 %
1980 %
1988 %
Socialist sector (total) of which: state owned cooperative employees’ complementary Private sector (total)
97.4
96.5
93.0
70.7 23.6 3.1 2.6
69.8 23.0 3.7 3.5
63.4 23.0 6.6 7.0
economy
Notes 1. Natlonal Income or net national product (NNP) 2. Hungarian Statistical Almanac, 1987.
As far as the price policy is concerned no fundamental changes have occurred although much research is being done. The main goals are to approach world market prices and to eliminate the so-called ‘three markets equals three prices’ construction. However, there are some results, such as the increasing approximation of world market prices in the area of raw materials, and the growing proportion of free prices. In 1988 double-digit inflation reached 17%, which necessitates a change in the exchange rate policy. The government expected double-digit inflation for 1989 as well. The possibility of competition is growing, mainly in the domestic there is no competition within market. However, many obstacles remain; the CMEA, and competing in Western markets is difficult for Hungarian firms, because of the relatively low level of technology of their products.
Present economic
issues
One of the key current issues is the question of property rights. This issue It is being raised is not simply economic, but also political and ideological. Poland and other socialist not only in Hungary but even in the USSR, countries. Current approaches to this issue represent significant changes, and today in Hungary a new corporation law allows the establishment of private enterprises. Crucial barriers to private enterprises are being eased or removed, such as the increased limit on number of employees, as mentioned above. According to the new corporation law companies may sell
TABLE 2. INDEX OF HUNGARY’S
Year
GROSS DOMESTIC
PRODUCT,
1981-1988
Domestic use
GDP (Index: 1980 = 100)
1981 1982 1983 1984 1985 1986 1987 1988 (projected) Source: Hungarian
101.4 101.3 99.6 99.9 100.3 104.2 107.5 104.5
102.9 105.8 106.5 109.4 109.1 110.7 115.2 115.3 Statistical Almanac,
1987.
FUTURES December 1989
Changes in economic management
TABLE 3. INDEX OF HUNGARY’S National income (actual prices)
Year
Domestic outlays
NATIONAL
INCOME,
systems
637
1960-1988
Material consumption
Net investment
(Index: 1950 = 100) 1960 1970 1980 1988 (projected)
177 300 467 521
183 316 450 442
168 273 399 435
251 522 666 373
Source: Hungarian Statistical Almanac, 1987. TABLE 4. LIVING STANDARD
INDICATORS,
1970-l 988
Year
Real income (per capita) (Index: 1960 = 100)
Real wages (per capita)
1970 1980 1988
159.4 217.2 240.2
129.3 157.8 146.3
Source: Hungarian Statistical Almanac, 1987. TABLE 5. RETAIL PRICE INDICES, 1987
1985
(1980 = 100) 159.1
107.0
1985-l 988
1987 1986 (Annual index: previous year = 100) 105.3
108.6
1988 (projected) 116.5
Source: Wan Econ Report, 9 September, 1988.
shares, and the legal framework for a fully fledged stock exchange has been established. It is now possible to transform state enterprises into joint stock companies, and this is already happening. The new corporation law and the accompanying measures will probably cause significant changes in the structure of ownership in Hungary. Table 1 illustrates the current trends. The development of the so-called ‘socialist market economy’ is an urgent task for the Hungarian leadership. Despite the good annual results achieved at the beginning of the 197Os, such as the rise in living standard, the increased assortment of consumer goods, the relative independence of enterprises, and the generally continuing improvements during the last decade, Hungary today confronts a stagnant and even declining economy. There are several aspects to this development. There are problems with economic growth (illustrated in Tables 2 and 3). The standard of living is declining (see Table 41, and there is an upward inflationary trend (see Table 5). Hungary has a relatively high external debt, namely, US$17739 million in 1987.’ Unemployment has become a problem: there were 11500 registered unemployed at the end of the second quarter of 1988.2 The basic structure of the economy in particular is ineffective as it is changing too slowly. There is a growing income differentiation, resulting in more poor people. The recognition of these problems has led to the following expectations of the rapid changes in Hungary’s economic management system:
FUTURES
December 1989
638
l
l l
Changes
in economic
management
systems
to mobilize dormant capital, create a favourable investment lure Western investors with money and knowhow; to increase economic growth and the living standard; and to develop a social support system for poor people.
climate
and
Having spelt out the expectations, I should add that there are no illusions about how fast all of this can take place. There is general agreement in Hungary that it is impossible to reform the economy without political reforms. This means that in the process of implementing economic reform because the new measures will lead to an we have to expect resistance, additional decline in the standard of living during the early years. The ways, and even the consequences of the reform are not yet the possibilities, completely understood. There are many risks, contradictions and hardships in the process of implementation. Social problems, new competitive pressures, and the continual increase of external debt through imports are just a few illustrations of this. The conditions needed for real competition are generally limited, for There is no competition within the CMEA, and the various reasons. currency to replace conditions for competition tie, a real convertible bilateral trade) are missing. Most Hungarian products cannot compete in Western markets because of their poor technical quality, and the relatively small domestic market. These are facts, but, of course, they do not mean that Hungary cannot change the situation and take advantage of the opportunities. This view is held in other East European countries as well, and this is a crucial factor.
Situation in other East European countries When we discuss the changes in economic management system in Eastern Europe, we have firstly to distinguish between declarations and facts. Undoubtedly, there are very different pressures for change in these countries as well. On the basis of what is actually happening, one can group these countries into three different categories, described below.
Countries
rejecting
development
of new economic
management
system
These include the German Democratic Republic (GDR) and Romania. These countries do not admit their economic problems in public, and so they see their current political-economic direction as a proper one. To deal with problems and tensions they tend to strengthen centralization. The system of the GDR has two basic elements. One is a strict fulfilment of plans and balancing the requirement for the quantitative books, and the other is the high degree of operational independence of the so-called middle management organizations (for example combines). This is flexible because of certain informal system, in spite of its overregulatjon, solutions. In Romania, the leadership wants to solve its crisis in the Stalinist manner. The basic elements of the management system are the ‘natural In recent years Romania has signifiecohomy’ and major central decisions. cantly reduced its foreign debt, but the problems of the domestic market
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December 1989
Changes
in economic
management
systems
639
are increasing and the living standard is continuously declining. Various believe that the country could authorities (including the IMF), however, achieve important and fast results through the elimination of current practices. Countries
where
continuity
is predominant
We can define this group as nations which profess to be making reforms, the changes undertaken are not fundamental. but where, in reality, Czechoslovakia and Bulgaria belong to this group, despite significant differences. In the 1970s Bulgaria could be characterized as a highly centralized economy. In the last decade the leadership has declared spectacular changes as part of its ‘new economic approach’ (involving changes in the price system, and self control of enterprises). The new measures are frequently withdrawn because of their unexpected consequences. Direct state interference with management decisions is viewed as undesirable, but the state maintains control over the direct allocation of materials, trade balances, and other central decisions, including large investments. The Czechoslovakian leadership plans some major changes in 1991. Recent measures show that it intends to create an indirect type of economic rather than a market-oriented one. There is no management system, intention, for example, to make changes in the system of national planning. In Czechoslovakia there is no urgent need for reform because of the relative However, signs of economic problems are equilibrium of the economy. (in 1986 annual growth beginning to appear. Economic growth is slowing was 2.6%; in 1987 it was 2.2%; and in the first half of 1988 it was about 2.0%, instead of the average 3.5% achieved in recent five year plans). Countries
developing
a market
economy
This group of countries is trying to create a market-oriented economy, but the manner in which they have worked towards this objective during the last decade is full of contradictions. Poland and Hungary represent this group. The other common characteristic of their approach is that so far they have not developed a successful model of a socialist market economy. Both countries have relatively high foreign debts. This results in the postponement of important decisions which limits technical development. The general opinion at present is that their performance does not support the attempts at change promoted by the USSR. Naturally, there are significant differences between these two countries. A headline in the New York Times of 10 October 1988 read: ‘Hungary sets the pace for East bloc change’. Hopefully, the analysis presented in this article can serve as a basis for a precise evaluation of future trends in the new socialist world.
References 1. P/an Econ Report, 2. Figyelo, Economic
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December
9 September and Political
1989
1988. Weekly,
16 September
1988.