Hungary

Hungary has long been an integral part of Europe. It converted to Western Christianity before AD 1000. Although Hungary was a monarchy for nearly 1,000 years, its constitutional system preceded by several centuries the establishment of Western-style governments in other European countries. Following the defeat of the Austro-Hungarian Dual Monarchy (1867-1918) at the end of World War I, Hungary lost two-thirds of its territory and nearly as much of its population. It experienced a brief but bloody communist dictatorship and counterrevolution in 1919, followed by a 25-year regency under Adm. Miklos Horthy. Although Hungary fought in most of World War II as a German ally, it fell under German military occupation following an unsuccessful attempt to switch sides on October 15,1944. In January 1945, a provisional government concluded an armistice with the Soviet Union and established the Allied Control Commission, under which Soviet, American, and British representatives held complete sovereignty over the country. The Commission's chairman was a member of Stalin's inner circle and exercised absolute control.

Communist Takeover
The provisional government, dominated by the Hungarian communist party (MKP), was replaced in November 1945 after elections which gave majority control of a coalition government to the Independent Smallholders' Party. The government instituted a radical land reform and gradually nationalized mines, electric plants, heavy industries, and some large banks. The communists ultimately undermined the coalition regime by discrediting leaders of rival parties and through terror, blackmail, and framed trials. In elections tainted by fraud in 1947, the leftist bloc gained control of the government. Postwar cooperation between the U.S.S.R. and the West collapsed, and the Cold War began. With Soviet support, Moscow-trained Matyas Rakosi began to establish a communist dictatorship.

By February 1949, all opposition parties had been forced to merge with the MKP to form the Hungarian Workers' Party. In 1949, the communists held a single-list election and adopted a Soviet-style constitution which created the Hungarian People's Republic. Rakosi became Prime Minister in 1952. Between 1948 and 1953, the Hungarian economy was reorganized according to the Soviet model. In 1949, the country joined the Council for Mutual Economic Assistance (CMEA, or Comecon), a Soviet-bloc economic organization. All private industrial firms with more than 10 employees were nationalized. Freedom of the press, religion, and assembly were strictly curtailed. The head of the Roman Catholic Church, Cardinal Jozsef Mindszenty, was sentenced to life imprisonment.

Forced industrialization and land collectivization soon led to serious economic difficulties, which reached crisis proportions by mid-1953, the year Stalin died. The new Soviet leaders blamed Rakosi for Hungary's economic situation and began a more flexible policy called the "New Course." Imre Nagy replaced Rakosi as prime minister in 1953 and repudiated much of Rakosi's economic program of forced collectivization and heavy industry. He also ended political purges and freed thousands of political prisoners. However, the economic situation continued to deteriorate, and Rakosi succeeded in disrupting the reforms and in forcing Nagy from power in 1955 for "right-wing revisionism." Hungary joined the Soviet-led Warsaw Pact Treaty Organization the same year. Rakosi's attempt to restore Stalinist orthodoxy then foundered as increasing opposition developed within the party and among students and other organizations after Khrushchev's 1956 denunciation of Stalin. Fearing revolution, Moscow replaced Rakosi with his deputy, Erno Gero, in order to contain growing ideological and political ferment.

1956 Revolution
Pressure for change reached a climax on October 23, 1956, when security forces fired on Budapest students marching in support of Poland's confrontation with the Soviet Union. The ensuing battle quickly grew into a massive popular uprising. Gero called on Soviet troops to restore order on October 24. Fighting did not abate until the Central Committee named Imre Nagy as prime minister on October 25, and the next day Janos Kadar replaced Gero as party first secretary. Nagy dissolved the state security police, abolished the one-party system, promised free elections, and negotiated with the U.S.S.R. to withdraw its troops.

Faced with reports of new Soviet troops pouring into Hungary despite Soviet Ambassador Andropov's assurances to the contrary, on November 1 Nagy announced Hungary's neutrality and withdrawal from the Warsaw Pact. He appealed to the United Nations and the Western powers for protection of its neutrality. Preoccupied with the Suez Crisis, the UN and the West failed to respond, and the Soviet Union launched a massive military attack on Hungary on November 3. Some 200,000 Hungarians fled to the West. Nagy and his colleagues took refuge in the Yugoslav Embassy. Kadar, after delivering an impassioned radio address on November 1 in support of "our glorious revolution" and vowing to fight the Russians with his bare hands if they attacked Hungary, defected from the Nagy cabinet; he fled to the Soviet Union and on November 4 announced the formation of a new government. He returned to Budapest and, with Soviet support, carried out severe reprisals; thousands of people were executed or imprisoned. Despite a guarantee of safe conduct, Nagy was arrested and deported to Romania. In June 1958, the government announced that Nagy and other former officials had been executed.

Reform Under Kadar
In the early 1960s, Kadar announced a new policy under the motto of "He who is not against us is with us." He declared a general amnesty, gradually curbed some of the excesses of the secret police, and introduced a relatively liberal cultural and economic course aimed at overcoming the post-1956 hostility toward him and his regime. In 1966, the Central Committee approved the "New Economic Mechanism," through which it sought to overcome the inefficiencies of central planning, increase productivity, make Hungary more competitive in world markets, and create prosperity to ensure political stability. However, the reform was not as comprehensive as planned, and basic flaws of central planning produced economic stagnation. Over the next two decades of relative domestic quiet, Kadar's government responded to pressure for political and economic reform and to counterpressures from reform opponents, By the early 1980s, it had achieved some lasting economic reforms and limited political liberalization and pursued a foreign policy which encouraged more trade with the West. Nevertheless, the New Economic Mechanism led to mounting foreign debt incurred to share up unprofitable industries.

Transition to Democracy
Hungary's transition to a Western-style parliamentary democracy was the first and the smoothest among the former Soviet bloc, inspired by a nationalism that long had encouraged Hungarians to control their own destiny. By 1987, activists within the party and bureaucracy and Budapest-based intellectuals were increasing pressure for change. Some of these became reform socialists, while others began movements which were to develop into parties. Young liberals formed the Federation of Young Democrats (Fidesz); a core from the so-called Democratic Opposition formed the Association of Free Democrats (SZDSZ), and the neopopulist national opposition established the Hungarian Democratic Forum (MDF). Civic activism intensified to a level not seen since the 1956 revolution.

In 1988, Kadar was replaced as General Secretary of the MKP, and reform communist leader Imre Pozsgay was admitted to the Politburo. That same year, the Parliament adopted a "democracy package," which included trade union pluralism; freedom of association, assembly, and the press; a new electoral law; and a radical revision of the constitution, among others. A Central Committee plenum in February 1989 endorsed in principle the multiparty political system and the characterization of the October 1956 revolution as a "popular uprising," in the words of Pozsgay, whose reform movement had been gathering strength as communist party membership declined dramatically. Kadar's major political rivals then cooperated to move the country gradually to democracy. The Soviet Union reduced its involvement by signing an agreement in April 1989 to withdraw Soviet forces by June 1991.

National unity culminated in June 1989 as the country reburied Imre Nagy, his associates, and, symbolically, all other victims of the 1956 revolution. A national roundtable, comprising representatives of the new parties and some recreated old parties--such as the Smallholders and Social Democrats--the communist party, and different social groups, met in the late summer of 1989 to discuss major changes to the Hungarian constitution in preparation for free elections and the transition to a fully free and democratic political system.

In October 1989, the communist party convened its last congress and re-established itself as the Hungarian Socialist Party (MSZP). In a historic session an October 16-20, 1989, the Parliament adopted legislation providing for multiparty parliamentary elections and a direct presidential election. The legislation transformed Hungary from a people's republic into the Republic of Hungary; guaranteed human and civil rights; and created an institutional structure that ensures separation of powers among the judicial, executive, and legislative branches of government. But because the national roundtable agreement was the result of a compromise between communist and noncommunist parties and societal forces, the revised constitution still retained vestiges of the old order. It championed the "values of bourgeois democracy and democratic socialism" and gave equal status to public and private property. Such provisions were erased in 1990 as the need for compromise solutions was obviated by the poor performance of the MSZP in the first free elections.

Free Elections and a Democratic Hungary
The first free parliamentary election, held in May 1990, was a plebiscite of sorts on the communist past. The revitalized and reformed communists performed poorly despite having more than the usual advantages of an "incumbent" party. Populist, center-right, and liberal parties fared best, with the Democratic Forum (MDF) winning 43% of the vote and the Free Democrats (SZDSZ) capturing 24%. Under Prime Minister Jozsef Antall, the MDF formed a center-right coalition government with the Independent Smallholders' Party (FKGP) and the Christian Democratic People's Party (KDNP) to command a 60% majority in the parliament. Parliamentary opposition parties included SZDSZ, the Socialists (MSZP), and the Alliance of Young Democrats (Fidesz). Peter Boross succeeded as Prime Minister after Antall died in December 1993. Thc Antall/Boross coalition governments achieved a reasonably well-functioning parliamentary democracy and laid the foundation for a free market economy.

In May 1994, the socialists came back to win a plurality of votes and 54% of the seats after an election campaign focused largely on economic issues and the substantial decline in living standards since 1990. A heavy turnout of voters swept away the right-of-center coalition but soundly rejected extremists on both right and left. Despite its neocommunist pedigree, the MSZP continued economic reforms and privatization, adopting a painful but necessary policy of fiscal austerity (the "Bokros plan") in 1995. The government pursued a foreign policy of integration with Euro-Atlantic institutions and reconciliation with neighboring countries. But neither an invitation to join NATO nor improving economic indicators guaranteed the MSZP's re-election; dissatisfaction with the pace of economic recovery, rising crime, and cases of government corruption convinced voters to propel center-right parties into power following national elections in May 1998. The Federation of Young Democrats (renamed Fidesz-Hungarian Civic Party (MPP) in 1995) captured a plurality of parliamentary seats and forged a coalition with the Smallholders and the Democratic Forum. The new government, headed by 35-year-old Prime Minister Viktor Organ, promised to stimulate faster growth, curb inflation, and lower taxes. Although the Orban administration also pledged continuity in foreign policy, and continued to pursue Euro-Atlantic integration as its first priority, it was a more vocal advocate of minority rights for ethnic Hungarians abroad than the previous government. In April 2002, the country voted to return the MSZP-Free Democrat coalition back into power. The new government, led by Prime Minister Peter Medgyessy, has a very slim majority in Parliament following the closest elections of the post-communist era.

The Hungarian economy prior to WWII was primarily oriented toward agriculture and smallscale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources also have dictated a traditional reliance on foreign trade. In the early 1950s, the communist government forced rapid industrialization after the standard Stalinist pattern in an effort to encourage a more self-sufficient economy. Most economic activity was conducted by state-owned enterprises or cooperatives and state farms. In 1968, Stalinist self-sufficiency was replaced by the "New Economic Mechanism," which reopened Hungary to foreign trade, gave limited freedom to the workings of the market, and allowed a limited number of small businesses to operate in the services sector.

Although Hungary enjoyed one of the most liberal and economically advanced economies of the former Eastern bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s, and Hungary's net foreign debt rose significantly--from $1 billion in 1973 to $15 billion in 1993--due largely to consumer subsidies and unprofitable state enterprises. In the face of economic stagnation, Hungary opted to try further liberalization by passing a joint venture law, enstating an income tax, and joining the International Monetary Fund (IMF) and the World Bank. By 1988, Hungary had developed a two-tier banking system and had enacted significant corporate legislation which paved the way for the ambitious market-oriented reforms of the post-communist years.

The Antall government of 1990-94 began market reforms with price and trade liberation measures, a revamped tax system, and a nascent market-based banking system. By 1994, however, the costs of government overspending and hesitant privatization had become clearly visible. Cuts in consumer subsidies led to increases in the price of food, medicine, transportation services, and energy. Reduced exports to the former Soviet bloc and shrinking industrial output contributed to a sharp decline in GDP, falling 18% from 1990 to 1993.

Unemployment rose rapidly--to about 12% in 1993. The external debt burden, one of the highest in Europe, reached 250% of annual export earnings, while the budget and current account deficits approached 10% of GDP. In March 1995, the government of Prime Minister Gyula Horn implemented an austerity program, coupled with aggressive privatization of state-owned enterprises and an export-promoting exchange rate regime, to reduce indebtness, cut the current account deficit, and shrink public spending. By the end of 1997 the consolidated public sector deficit decreased to 4.6% of GDP-- with public sector spending falling from 62% of GDP to below 50%--the current account deficit was reduced to 2% of GDP, and government debt was paid down to 94% of annual export earnings.

These reforms and a massive infusion of foreign direct investment set Hungary on a path of high growth, falling inflation, and unemployment. Growth has averaged 4.5% since 1996; inflation fell from 28% to under 7%; and unemployment fell to under 6%, the envy of many EU countries. Eighty percent of GDP is now produced by the private sector, and foreign owners control 70% of financial institutions, 66% of industry, 90% of telecommunications, and 50% of the trading sector. Hungary is now one of Europe's fastest-growing and most open economies, deeply integrated into the European economy, and it is expected to be among the first new members of the EU--as early as 2004.

The Orban government, which has been in power since 1998, maintained the broad macroeconomic reforms of its predecessor. However, it did little to address structural problems in agriculture, health care, and the tax system. Under the slogan "economic patriotism," the government moved to increase the government's role in the economy; it brought to a halt the region's most effective privatization program and effectively renationalized the postal savings bank. In the run-up to elections in April 2002, the government increasingly used off-budget funds to circumvent public scrutiny and public procurement laws.

In 1995 Hungary's currency, the forint (HUF), became convertible for all current account transactions, and subsequent to OECD membership in 1996, for almost all capital account transactions as well. In 2001, the government lifted remaining currency controls and broadened the band around the exchange rate, allowing the forint to appreciate by more than 12% in a year. Hungary hopes to qualify for the Euro as soon as 2006. Prior to the change of regime in 1989, 65% of Hungary's trade was with Comecon countries. By the end of 1997, Hungary had shifted much of its trade to the West. Trade with EU countries and the OECD now comprises over 75% and 85% of the total, respectively. Germany is Hungary's single-most important trading partner. The United States has become Hungary's sixth-largest export market, while Hungary is ranked as the 72d largest export market for the United States. Bilateral trade between the two countries increased 46% in 1997 to more than $1 billion. The United States has extended to Hungary most-favored-nation status, the Generalized System of Preferences, Overseas Private Investment Corporation insurance, and access to the Export/Import Bank.

Foreign investment was the key to Hungary's success. With about $23 billion in FDI since 1989, Hungary has been a leading destination for FDI in central and eastern Europe--including the former Soviet Union. Of this, more than $7 billion has come from U.S. companies. The largest U.S. investors include GE, General Motors, Coca-Cola, Ford, IBM, and Pepsico. Foreign companies modernized Hungary's industrial sector and created thousands of new, high-skilled, high-paying jobs. Foreign companies account for over 70% of Hungary's exports, 33% of GDP, and about one-quarter of new jobs.