My Hungarian Illusion – the Mixed Economy Follies

Redux – Here’s a piece I did for the Freeman in 1987 on the “Hungarian Illusion.” Brian Summers was the Freeman’s editor back then, and he was excellent to deal with.

(This is the pre-edit version of the text. The full text is no longer available online from FEE.)

THE HUNGARIAN ILLUSION
by James Bovard

The history of political debate in the twentieth century largely consists of intellectuals desperately searching for a socialist success story. Every few years there is another nominee – from the Soviet Union during the l930s and again in the l950s, to Cuba in the l960s, to China and Yugoslavia in the l970s. Today, Hungary is the world’s most frequently-cited socialist success story – and living proof that socialism and efficiency can be successfully combined.

In America, the leading liberal political magazine, the NEW REPUBLIC recently implied that the quality of life in Hungary was almost as high as it was in America. American newspapers and magazines routinely refer to Hungary as a “market-oriented” economy providing a good life for its participants. Both China and Russia are borrowing heavily from the Hungarian model to reform their own economies, and the World Bank is pouring hundreds of millions of dollars [derived from U.S. government and other government contributions] into the Hungarian government’s treasury.

But, rather than a valuable example, Hungary represents only another case of the failure of government control of the economy. Real wages have fallen five percent since l980 and seven percent since l978. Industrial efficiency has sharply declined, as the government has failed to allow incentives to modernize and rationally use resources. The citizenry’s health appears to be rapidly deteriorating – life expectancy has decreased sharply for males in recent years. Many Hungarian villages still do not have telephones, electricity, or reliable drinking water.

And the economic crisis in Hungary is rapidly worsening. The government recently froze all wages, while allowing prices to continue rising – another further de facto cut in wages and living standards. Investment is declining, and the aging machinery and deteriorating infrastructure are making Hungary more backward every year.

Hungary has doubled its debts since l982 – from around $7 billion to over $l4 billion, and shows no likelihood of being able to service its debt load anytime in the coming decade. Hungary could be much closer to defaulting on its loans that most western bankers and admirers realize. Much of the apparent prosperity in Hungary is the result of a borrowing binge, with billions squandered on consumer items that buy political peace but only add future burdens to the country’s economy.

In Hungary, there is socialism and there is prosperity. But the socialist parts are not prospering and the prosperous parts are not socialist. And since the economy is over 90% socialist and cooperative, Hungary is a depressed, increasingly backward economy.

Hungary’s experience is valuable for the rest of the world. How much benefit is there in allowing limited market competition in a fundamentally socialist economy? How much can a small amount of capitalism do to remedy the defects of a large amount of socialism? Is a mixed economy a viable alternative for today’s slowly-sinking socialist monoliths? Hungary’s experience is especially valuable in gaining an insight into the Soviet Union’s recently-announced reforms,which are partly inspired by Hungary.

HISTORICAL BACKGROUND

Hungary is a small country with a population of l0 million and has always been heavily dependent on foreign trade. Hungary thus was ill-suited for the socialist autarky model — a form of economic organization where the government tries to totally control the economy and achieve maximum national economic autonomy. Socialism has always been biased against foreign trade, since politician prefer to control all economic factors – and they can rarely control businesses and individuals beyond their borders. For almost 40 years, Hungary’s leaders and bureaucrats have tried to “plan” an economy whose survival and prosperity depended on rapidly adjusting to changing world markets.

Before World War II, Hungary had a highly developed pharmaceutical industry and was a world leader in some areas of agricultural machinery production, though its economy was primarily agricultural. When the communists took control of Hungary in l949, they launched a crash industrial program based on the usual socialist goal of creating a “country of iron and steel” – “conspicuous production,” as Michael Polyani terms it. But, since Hungary was still an agricultural economy with a limited industrial infrastructure, this was a disastrous policy, and the government’s widespread coercion in pursuit of its foolish economic policy provoked a popular revolt in l956 that was crushed only by massive Soviet military intervention.

In the early l960s, limited private incentives were allowed in agriculture – with excellent results. In l968, convinced of the failure of the basic Soviet socialist model, Hungary announced the New Economic Mechanism (NEM). The NEM tried to replace central planning by limited market relations among state-owned firms, linking domestic and world market prices, and reforming investment policies. NEM was an attempt to preserve socialism without central planning – or, as Hungarian economist Tamas Bauer describes it, “neither plan nor market.”

In the first years of reform, Hungary’s economy was one of the strongest in Eastern Europe. But, the new prosperity created a backlash from those who felt they were not getting a fair share of it. In l972, the trade unions and conservative communist Party members, concerned about growing inequalities in income and the Party’s loosening grip on the economy, launched an attack on the reforms and many of the reforms were scaled back or abandoned. Economic decision-making was recentralized and central planners increasingly intervened in the day-to-day operations of companies. The central planners then tried to isolate Hungary from rapidly shifting world markets and world prices for energy.

To implement this policy during the l970s, Hungary borrowed billions of dollars from the West for a massive investment program to modernize its economy and close the gap in living standards with the West. But, even with huge amounts of western capital, Hungarian leaders still could not produce a western-type prosperity. Most of the investments were poorly chosen and poorly executed, and the net result is a huge foreign debt with little or no increase in productive resources to service it. In l979,Hungary again began loosening some of the controls over economic activity. In l982, some forms of private economic activity were legalized, private citizens were allowed to own their own taxi cabs and trucks, and small retail service establishments were tolerated. But, as a recent World Bank report noted, “Neither the l968 reforms nor those beginning in l980 fundamentally changed the dominance of state ownership.”

Hungary adopted reforms in the early l980s partly as a desperate attempt to avert bankruptcy. Hungary avoided default thanks to large loans from the World Bank and the International Monetary Fund. Though this aid saved Hungary’s credit rating and allowed it to continue borrowing from western banks, in retrospect the l982 bailout appears to have been a two-edged sword for Hungary. By postponing the day of reckoning, the World Bank/IMF bailout allowed the government to perpetuate economically restrictive policies that have perpetuated the people’s poverty and increasingly injures their health. Though there is an active “second” economy in Hungary, it has not solved the problems caused by socialism. As Hungarian economist Tamas Bauer concluded, “In this country, the common prevailing opinion is that… ‘people’ generally do not perform their work well, that the workers are not paid decent, and that one cannot obtain quality goods and services for his money.”

The Hungarian economy today is like a slowly sinking ship that just happens to have a very nice “private sector” sideshow on one of the decks. The sideshow is not good enough to keep the ship from sinking, but it keeps everyone entertained as the water rises.

THE HUNGARIAN LABOR MARKET

Perhaps the best place to start to understand Hungary’s problems is to look at its labor market. As even Josef Stalin recognized, “Human beings are the most important and decisive capital in the world.” Yet, the Hungarian system seems almost designed to squander and discourage workers’ efforts. Hungary, like so many other socialist countries, has found that it is much easier to give a right to a job than to enforce a duty to work.

In Hungary, there is no unemployment – but on the other hand, there are not so many people actually working either. In my recent visit, Budapest is seemed to be a city filled with people leaning on brooms. The Party newspaper often denounces workers for their laziness.

It is an old saying among Hungarian workers, “We pretend to work, they pretend to pay us.” A Hungarian pension manager told me that the average Hungarian works only four hours a day at his government job- and spends the other hours smoking, talking, and generally avoiding strenuous effort. A Swedish engineer complained to MAGYAR HIRLAP, the national newspaper, “Work discipline is bad… An individual Hungarian worker does not do more than 5 and a half hours of work a day… Workers arrive for work an hour or even 90 minutes late, they have a long lunch break and disappear from time to time during the day.” Ferenc Havasi, Secretary of the Hungarian Socialist Workers Party, recently complained that “l5-20% of the work time of five million active earners is lost for various reasons.” and calls for “the improvement of interestedness” of workers in their work.

Guaranteed employment has had other bad effects on workers. According to the World Bank, “On many occasions, workers sabotaged technology taken from other enterprises, in part because they did not want their bonuses reduced to pay for that technology.” Workers pay is partly based on the surplus the firm has left over at the end of the year – thus, low investments can mean a higher surplus and higher wages for the employees). As the World Bank notes, guaranteed jobs “greatly reduces the concerns workers have about replacing old machinery or shifting to new products. Workers tend… to push for the continued use of certain machinery and production of traditional products, since they are familiar with them.” The workers’ unwillingness to learn new skills handicaps the entire economy.

As a recent Organization for Economic Cooperation and Development (by OECD) study by Professor Paul Marer pointed out, “Labor is underpriced because money wages in industry pay for only about 60% of the personal consumption of the wage-earners’ family.” This encourages firms to “hoard” labor – to rely on labor intensive production methods and to be relatively apathetic about getting full value from their workers – because they are not paying the full cost of worker’s wages. This discourages efficient utilization of the most important commodity in the economy.

Hungary provides massive consumer subsidies to make the cost of living low by keeps wages very low. Thus, workers cannot see the returns on their effort in their paychecks.

The government also allows little flexibility in wages, so that engineers are sometimes paid little more than janitors. As Radio Free Europe recently reported, “The wage differential between Hungarian white-collar and blue-collar workers is only 5-l0%, as opposed to 30-70% in the developed countries.” Inflexible wages have created both pervasive labor shortages – and labor surpluses. There is no effective mechanism to shift workers from one occupation or job to another – from a place where his efforts are less productive to where they would be more productive in response to changing economic conditions and emerging opportunities. The artificial shortage is so severe that the typical Hungarian white-collar worker can choose between two or three jobs at any one time, and the manual worker can choose between ten or fifteen jobs.

The problems in the labor market have helped cause severe damage throughout the whole economy. OECD estimates that labor productivity in the Hungarian chemical industry is only one-third that of world levels. The main Hungarian telecommunications factory – Beloiannis Telecommunications Factory with l0,000 workers, has achieved a level of labor productivity between only one-tenth and one-fifth of western standards. Labor productivity in the textile industry is less than one-seventh of that in developed countries’ textile workers.

Part of the reason the government does not encourage shifting of labor to better uses is because of the severe housing shortage. Since there are few available houses or apartments, the transfer of workers would cause significant social stress. This is a typical case of a socialist bottleneck – harmful controls in one part of the economy causing a negative chain reaction throughout the rest of the economy.

One attempt to avoid the constraints of the socialist wage system and allow stronger incentives is the economic working associations (EWAs) – associations of workers who stay after their normal jobs to perform work on contract for the factory, using factory tools and equipment. On the surface, this looks like a sure winner, and western journalists have almost uniformly praised it. But, as one Hungarian enterprise director complained, “Contract work associations yield contradictory results because sometimes they create a schizophrenic attitude: the worker has an incentive to do as little as possible for the basic wage since after work he can do the job for a much higher compensation… It is absurd economically that [identical] labor has a dual price: on the free market it earns multiple (occasionally tenfold or more) than what it is paid in the socialist sector.”

Hard work is also discouraged because Hungary, like all socialist economies, has a perpetual shortage of quality consumer goods. No matter how much a worker earns, there is still little or nothing good to spend it on, especially since major items are rationed by queue, not price.Hungarians must wait up to six years for a car, and up to 12 years for a telephone. The cheapest new car costs the average worker three years pay – and that car is basically a wooden car with a motorcycle engine. There is a seven year wait to get an apartment.

The artificial labor shortages also result in decreased individual freedom. The government recently sharply increased the prison sentences for “workshirkers” – people who are not performing socially-useful labor in the opinion of the government. As HETI VILAGGAZDASAG reported “A Budapest court found guilty a young girl who was capable of working but was supported by her parents because she would not accept employment after she completed her studies, spending her time instead mostly on reading.” Even if a person is working twice a week on an occasional basis, the courts will still convict him of “workshirking” and send him off to jail. Since the government can imprison people for the crime of not producing, it looks like the government owns the people – that people exist for the good of the government, and not government for the good of the people.

And the inflexible, unresponsive labor market also drives the government to use coercion instead of voluntary agreement in other areas. Coal production has been declining, – and the government recently responded by ordering coal miners to work on Saturdays and Sundays. In a free society, workers are enticed to work extra for higher pay -time-and-a-half, double-time – or whatever. In a socialist economy, where many people consider using wage incentives to be immoral and selfish, coercion is the only substitute.

THE CONTINUING PROBLEMS OF HUNGARIAN INDUSTRY

Though Hungary is praised as having a working combination of socialism and capitalism, the Hungarians themselves are increasingly critical of their malfunctioning economic system.

Hungary’s Ministry of Industry recently complained,”The productivity of Hungarian industry is approximately half of that of countries that are comparable to us in terms of size and industrial development….. We have not been able to reduce the proportion of defective production and have an excessive number of accidents.”

A recent World Bank report concluded that “industrial efficiency – as measured by… gross production per unit of production fixed assets, and the ratio of profits to total assets – appears to have declined over the l970s.” According to Hungarian technology expert Laszlo Pal, “It can be proven by facts that our backwardness compared to the industrially developed countries is growing year by year.” Lazlo Fodor recently complained in HETI VILAGGAZDASAG “We are lagging behind the international development of science and technology, and our technology gap is widening year by year… The Hungarian economy’s competitiveness and ability to generate income has declined, its terms of trade have worsened, and its unprofitable economic activity has increased.”

Further insight into the Hungarian economy can be gained from a recent exchange on Hungarian radio (August 29, 1986) Interviewer Gyorgy Ney was speaking with Laszlo Bukta, Deputy Chairman of the State Office for Wages and Labor. Ney asked, “The budget devoted l57 billion forints ((the current official exchange rate is about 46 forints to the dollar )) last year to loss-making enterprises, enterprises without working capital, the crisis branches, under various legal headings and preferences, subsidies, special requirements, and so on. If my calculations are correct, this is roughly a quarter of the national income.” Bukta responded, “The facts are correct and your calcultions as regard the percent is also right. This is an intolerable situation.”

The Hungarian government wants to structurally transform the economy – while remaining totally in control of it. They want the benefits of capitalism while retaining the iron-grip of socialism. As economist Kazimierz Poznanski concluded in a World Bank study, “The main result has been an expansion of new regulations, not a strengthening of the motivation for efficiency in industry.”

And the government apparently still has much hostility to the private sector in itself. Fifteen private Hungarian investors recently opened the first privately built and managed hotel in the Eastern Bloc. But, the hotel was driven out of business when government “forced the management to reduce the number of beds available and to meet subsequently introduced laws governing private guest houses,” according to an Economist International Unit report in early l986.

Hungary has one of the most highly concentrated industries in the world. The economy is dominated by huge trusts that effectively make their own rules. In 1938, Hungary had almost 4000 manufacturing enterprises and in l960 still nearly 1400 state industrial enterprises, by l980 their number had fallen to under 700. There has been some limited reform in recent years – but large firms still dominate the economy and bleed the budget. This dominance means that the domestic economy is largely a handful of monopolies and monopsonies – with little real competition.

The large firms are perceived by many Hungarians as economic dinosaurs that are dragging down the whole country. The highly-respected Hungarian weekly economic paper, FIGYELO found “that for a wide range of measures, enterprise efficiency declined with size; in particular, enterprises undertaking dynamic investment programs were very likely to suffer a loss of efficiency in terms of return on capital.”

Not only do the large companies usually function poorly themselves, but they are also powerful opponents of reform in general. According to Andras Hegedus, a prominent sociologist who was Hungarian Prime Minister in l955-56, “Managers of big enterprises are not only against reform in general but, in view of their particular interests, also form obstacles to the achievement of particular economic policy aims…” Hegedus believes “that the government’s fear of autonomous economic units is today far greater than its wish for dynamic economic development.”

The government repeatedly has announced its commitment to more competition – and then followed up by pouring in massive amounts of subsidies to firms that flounder. As economist Janos Kornai notes, “One of the means by which the l979 reforms sought to ‘toughen up’ conditions for price formation by enterprises was to compel them to adjust their prices to those prevailing in Hungarian export industries, which try to compete on Western markets for hard-currency sales. When it appeared that only very few enterprises could live up to such high standards, their supervising ministries provided relief to as many as 74l out of 1136 firms.”

One acid test of whether a free market actually exists is whether firms are allowed to fail. If firms can’t go bankrupt, then the economy will never be able to discard its most inefficient producers. In Hungary, profits and loses are largely dependent on political decisions and losses are very rare. As the World Bank noted, “Only 10 Hungarian enterprises of l,735 showed a loss in l980 – a crisis year for Hungary.” In l984, only 28 firms showed a loss.

Investments are the future of any economy. In Hungary, economists refer to the investment system as the “Achilles’ Heel” of the economy. Actually, the way investments are made, it looks more like the entire economy is “brain-dead.”

The problems of investment in Hungary were nicely summarized recently by the deputy director of the investment division of the Ministry of Housing, Public Construction & Town Development ” a comparison of similar kinds of investment projects found that in Hungary completion takes an average 30-50 percent longer than in the other CMEA countries and 200-300 per cent longer as compared with the best firms in developed capitalist countries. Our costs are from three to seven times larger.”

Maximum government intervention characterizes Hungarian investments. As the deputy director noted, “The collection of rules and regulations that control all of the important aspects of enterprise investment activities represent a 700 page book, in which one finds approximately l50 decrees. As one of the authors of the volume, I calculated that there are, on average, l.6 changes in the decrees each week… At the present time both the investor and contractor have incentives to make the project as expensive as possible – and poor management provides plenty of opportunities to realize this.”

Rational investment is difficult because the state still controls – and distorts – the price of many key inputs, such as labor, energy, and raw materials. Investment requires central approval – and the central planners are still strongly biased in favor of the huge inefficient firms that dominateHungary’s economy.

Labor is not the only scarce resource that the Hungarian economy squanders. Hungarian industry is extremely inefficient in utilizing raw materials. As the Economist Intelligence Unit recently noted, “Materials make up about 65% of industrial production by value and studies show that Hungarian engineering products use too much material, often l.5-3.0 times higher than international standards.” This higher cost base diminishes the competitiveness of Hungarian goods on the world market.

But probably Hungary’s greatest problem competing on world markets is the poor quality of Hungarian goods. As in everywhere else in the East Bloc, shabbiness and socialism appear to go hand in hand. As Jan Vanous of PLANECON Consultants observes, “The Hungarian decisionmakers have selected the worst of all possible combinations in the area of exports- they have sufficiently weakened central control …while failing at the same time to put into place an alternative mechanism that would do the job (an open, competitive market-driven system).”

Though it has been obvious for decades that better quality production is Hungary’s only hope of success on the world market, the economy has been unable to meet the challenge. There have been some exceptions – Ikarus sells over ten percent of its bus production to the West. But, most of the manufactured goods Hungary sells to the West contain a large amount of western components -and Hungary often makes scant profit on the sales.

Trade among Hungarian firms tends to be limited and highly inefficient. It is often difficult for a company to get recourse for another company that fails to fulfill its contract. As a result, Hungarian companies often go to great lengths to manufacture their own components – usually very inefficiently and at far higher prices than could be done with advanced division of labor. As an OECD study noted, “It is characteristic of Hungarian industry that many firms have their own foundry. Thus, inputs that in much of the rest of the world manufacturers would buy from outside suppliers or subcontract to specialized firms, in Hungary enterprises produce themselves, typically under primitive workshop conditions.”

Even when Hungary has a good idea, it often cannot cash in. The Rubik Cube was a Hungarian invention – but the Taiwanese profited more from it because it took the Hungarians several years to boost their production of the cubes – and by then it was too late. The Hungarians even had difficulty exporting to the East Bloc, because Hungarian industry could not produce high quality color labels for the blocks; hard currency had to be spent for the color labels – which made the government reluctant to sell the cubes to socialist countries for soft currency. And, since East Bloc trade agreements leave little or no room for new products, Rubik Cube exports likely would have displaced other Hungarian toy exports.

Hungary is also severely handicapped by its reliance on COMECON trade. During the l970s, the leadership consciously decided to borrow heavily in the West in order to increase its sales to its fellow Warsaw Pact members, especially the Soviet Union. It was a peculiar strategy, since it is difficult to pay off hard-currency debts in near-worthless Soviet rubles.

Trade among COMECON members is usually based on primitive barter arrangements – trading two car tires for one truck tires, trading a rear axle for a front axle, etc. A few years ago, Poland and Czechoslovakia were exchanging tractor parts – based solely on one kilogram of Czech parts for one kilogram of Polish parts. Since the centrally-planned economies do not rely on prices, and each contrive their prices differently, they simply agree to exchange quantities of specified goods.

And this works out dreadfully. As OECD notes, “If a component is imported from a CMEA supplier, the Hungarian customer has no direct recourse to solve problems of quality or delays in delivery.” Looking at COMECON trade to purchase components for Ikarus buses, OECD found “the Hungarian party was regularly forced to accept and use subassemblies of unsatisfactory quality and technological standard, which impairs the technological standards of the completed vehicles and their competitiveness.”

If companies want to use western technology for their goods, they must get central approval for the imports. But, the central planners are still strongly biased in favor of the huge enterprises. Thus, scarce foreign currency is squandered to provide inputs for companies that cannot efficiently use them while other smaller and more dynamic companies or cooperatives are denied the resources that would give them a better chance to export to the West.

The lack of market prices and market signals often cripples Hungarian export efforts. As Figyelo recently reported, some products are exported in response to government pressure are imported by other firms at higher prices.

Hungary is also badly handicapped by its inadequate infrastructure and the incompetent state organizations responsible for its upkeep. Hungarian communications infrastructure is extremely backward, operating at only about ten percent of the level of the U.S. Hungarian estimates show that the inadequate telephone network requires extra work and costs (in terms of correspondence, delays in arranging transactions) that may amount to as much as l0% of national income.

And the electric power supply suffers from the same type of failings and could soon possibly cripple. Hungary receives much of its electrical power from Russia – but the quality of the connecting grids is very poor and appears to be deteriorating. If power wavers too much, it could wreck sensitive electronic components in every computer in the country. Yet, because of the lack of the right incentives in the right places, the entire economy is exposed to this l980s version of “Russian Roulette.”

The one bright spot in the Hungarian economy has been agriculture. Agriculture has been a success story in Hungary – largely because of the long history of tolerating or encouraging private activity. In l979, export of slaughtered rabbits from private operations yielded the same amount of foreign exchange ($50 million) as exports of the entire state pharmaceutical industry. But, private agricultural activity is too limited to make a significant difference in the fate of Hungary’s economy.

HUNGARY ON THE WORLD MARKET

Since the l960s, Hungary’s performance on the world market has sharply deteriorated. Hungary has failed to significantly increase the dollar value of its exports since 1980 – despite receiving billions of dollars of western credit and volumes of advice from the World Bank and IMF. Between l980 and l985, Hungary’s market share in developed countries’ imports of machinery and equipment fell by over a third – from l.25 percent to less than 0.8 percent. This is a nose-diving fall in competitiveness.

In the past, Hungary saw itself largely competing with the West. But,in the past 20 years, many Third World countries appear to have caught up and surpassed Hungarian industry – and Hungary lags South Korea, Singapore, Taiwan, and Hong Kong, and may already lag or could soon lag Mexico, Brazil, Argentina, etc.

Hungary’s inability to increase the dollar value of its exports may spell doom for its ability to dig itself out from under its mountain of debt. Hungary continues massive borrowings – – pulling in @ $l.6 billion in l985 and another @1 billion in l986 – rolling up its debts and postponing the day of reckoning. Hungary’s main asset appears to be the illusion in the West that its economic reforms are succeeding and that it continues to be a good credit risk.

THE FAILURE OF HUNGARIAN SOCIALISM

Economic mismanagement is having a dire effect on Hungarians’ health. The population is declining with no reversal in sight.

As in the Soviet Union, the mortality rate is rising in Hungary – an anomaly for an industrial country and an indication that public health is seriously deteriorating. According to the United Nations, average life expectancy at age 35 for Hungarian males declined by 2.7 years between l964 and l982. There was an especially sharp increase in mortality during the early l980s (l980-l982). Mortality for males age 30-44 increased by 4%, age 45-59 increased 5%, age 60-74 increased 2%.
In order to fully appreciate the cost of Hungarian socialism, it is interesting to compare the changes in per capita income for Hungarians and for other countries after World War II.

l949 l976 l984

Hungary $269 $2,280 2,l00
Austria 216 5,330 9,l40
Italy $235 3,050 6,420
West Germany $320 7,380 ll,l30
Japan $l00 4,9l0 l0,630
Singapore 2,700 7,260
Taiwan l.070 3,l40x
South Korea 670 2,ll0

l949 – From United Nations Statistical Papers, Series E, No. l, October l950, p. l4-l6
l976 – From WORLD BANK, WORLD DEVELOPMENT REPORT 1978, p. 77-78
l984- From WORLD BANK, WORLD DEVELOPMENT REPORT l986, p. l80-l8l.

Clearly, Hungary has done dismally compared to other countries. Hungary was on par or in the same league with Italy, Austria, and not so far behind West Germany in l949. Now, West Germany’s standard of living is five times higher, Austria’s is four times higher, and Italy’s is three times higher. Japan’s income was less than half of Hungary’s income in l949; now, it is five times higher and rising fast. The real cost of socialism becomes apparent when seeing what might have been – seeing how much prosperous other countries have become by following more market-oriented policies.

CONCLUSION

What has failed in Hungary is not the reforms – but the perpetuation of the basic structure. The economy has not suffered because government has allowed private citizens to drive taxis and sell ice cream, but because government continues to prohibit private citizens from combining to form their own large companies, to organize production according to market demands rather than political imperatives. Hungary remains poor not because of what it has allowed, but because of what it continues to ban. As economist Tamas Bauer observes, “The kind of ‘renaissance’ prevailing in Hungary…, may easily discredit the entire idea of reform by destroying its validity.”

Market socialism is the great illusion of the l980s. As long as the government controls production, no amount of private initiative in distribution will change poor quality goods into high quality goods. Hungary has avoided the long queues of its socialist neighbors – but it is little closer than they are to solving the great mystery of quality. As long as the state owns the means of production, the quality of goods will continue to be far inferior to those produced by private firms elsewhere.

Hungarians say that socialism is only the longest way to capitalism. But there is little indication that the Hungarian Socialist Workers Party has any intention of abdicating its control of the economy. Thus, Hungary faces an increasingly bleak future.