THE ‘LAST TWENTY YEARS’ AS FAILURE?

Hungary’s Transition – Revised

TRANSITION IS A COMPLEX PROCESS

Society is a multilayered, flexible, and structured organism, closely connected with its global environment through bonds of interdependence. Defining the mechanisms of any society in simple yet meaningful terms is hence extremely difficult. Economic mechanisms on the other hand are assumed to be quantifiable to an extent; yet it is equally hard to tell how a country’s economy is doing at any given moment. Some market participants are doing fine while others are not. Certain sectors experience growth even on rainy days. Regional disparities can be large at any given moment, while foreign corporations may prosper at the same time as family firms are struggling. Thus, the “economy” as such is as vague a concept as “society”.

In principle, macroeconomic data and comprehensive social indicators provide an objective if abstract picture of a country; but only in principle. One may possess sophisticated databases, but one cannot condense the complex reality into figures, for a number of reasons. For starters, individuals and various social strata assess their own situation and their country’s situation, and such subjective evaluations may be very different from what the macro data suggests. Hard data simply will not tell us everything: the so-called objective socio-economic situation depends on the expectations, assessment sand intentions–inshort, subjective mind sets – of members of society and market players, such as investors, employees and consumers. Secondly, the data itself may be controversial, giving room for different interpretations of reality. Thirdly, foreign players may read these “objective” indicators and facts differently from the locals. Crucially, the way that foreign businesses, political partners, foreign analysts, and other influential external players feel about the state and outlook of a given country is one of the constituent factors of the country’s economic and political realities. External views about a country may well differ from what the data suggests, and even more from how society’s opinion-makers define the situation, and how various social strata feel about it.

A good illustration of ambiguity with respect to social assessment is the history of the Hungarian regime change. The new Hungarian socio-economic system was born amid changes of extraordinary intensity culminating in 1989–1990, as a consequence of both global geopolitical shifts and inner political dynamics. At the time of the first free elections in spring 1990, the country was already in a critical financial situation while the economy was on the brink of an unprecedented structural crisis. While most Hungarians were aware of the unique and historic nature of what was happening, they also felt acutely vulnerable to uncertainties and the threat of economic hardship. The domestic legacy of the defunct regime was compounded by dramatic external factors such as the disintegration of former foreign trade links, increased risks in external debt finance, and the prevailing uncertainty in the East European region. While the Western democracies observed the successful and mostly non-violent nature of the regime changes in the former communist countries with a degree of relief – the Hungarian transformation with its gradual, ordered, and negotiated nature was particularly favourably looked upon – people living in the region saw the changes in a different light. Regime change for many meant galloping inflation and high unemployment – and Hungary was no exception. The transformation of course put into motion progressive and hopeful processes within the economy and society at large but, certainly at first, more people suffered from the immediate shocks caused by the dramatic adjustment process, than enjoyed any of the positive benefits.

Even if there is no such thing as objective historical evaluation, posterity still would like to know whether the regime change was a success or not. Now, one can produce a gamut of macroeconomic data to rate the Hungarian transition, but it is illusory to suppose that the “data will speak for themselves”. For the most part, informed foreign observers were positive about the economic processes which followed the political changes of 1990. While biased and erroneous statements were not infrequent in the foreign press at that time – key figures of the Hungarian transformation were on occasion exposed to political attacks – the Western consensus on the early years of the Hungarian regime change was largely favourable. True, the Magyar transition stood out against a background of upheaval to the South and East of Hungary, most shockingly in contrast to the deep recession in the former Soviet Union, and the bloody conflict in the former Yugoslav republics. In short, while the Czech, Hungarian, and Polish transformations may have been hard, relatively speaking, these countries enjoyed a considerable head start on the rest of the region.

At home meanwhile, influential Hungarian opinion shapers and media figures were critical of the progress of the transformation, and particularly of the policies of the centre-right coalition (1990–1994). This though reflected as much the structure of the Hungarian media at that time as it did the socio-economic and political realities on the ground. Media and opposition voices kept urging the new government to “reveal the real situation” of Hungary, by which they meant a more critical, pessimistic description of the situation. Most macroeconomic data and social indicators did indeed show a deep and prolonged crisis in the early 1990s, but other data also pointed to a swift modernization which followed the initial shocks. There were ample reasons then to believe that the governing parties led by Prime Minister József Antall would succeed in laying the foundation of a competitive market economy and a properly functioning parliamentary democracy.

ON THE PERCEPTION OF THE REGIME CHANGE

The first promising results of the historic transformation of the society and economy appeared during the years of the Antall government (1990–1993) in the form of institution building and a set of new laws, as well as in fundamental changes in behavioural norms of economic agents (in the areas of entrepreneurial activity and labour productivity). An objective commentator could reasonably conclude on these grounds that the early days of the Hungarian transformation were a success, particularly when measured against the transition performance of other nations.

Yet this is far from the generally-held opinion in Hungary today. When the performance of the first democratically elected Hungarian government crops up in discourse, and when the balance of the social, political and economic trends of the first four transition years is drawn up, the public’s verdict is mixed, to put it mildly. The average man or woman on the street is likely to express criticism or disappointment. More surprising yet is the almost total absence of this heroic transformation period (and its important lessons) from political and social science discourse.

While the public sentiment is mixed or indifferent then, remarks by government figures are unambiguously negative. Although they do not mention the late Antall or his coalition government by name, a number of statements and policy goals of the new government have been defined and pronounced as rejection and negation of the “former twenty years”. Such a formula, first used in the 2010 general election campaign, implicitly identifies and associates the early transition years with later failures.

In this essay, I will not attempt to provide an overview of the whole transition period, but will rather focus on the first four years, not least because of personal involvement, having served in the Antall cabinet as Minister for Industry and Trade in 1990 and 1991. Another reason to revisit that period is that leading politicians pronounced the new political cycle, beginning with the 2010 watershed general elections, as bordering on regime change, claiming that it was meant to be much more than a customary change in government.

Now, there are obviously great differences between the early 1990s and the period beginning in 2010, although some similarities do exist. One of them is the fact that now, as in 1990, centre-right parties received popular mandates to govern Hungary; the difference being that this time the democratically elected government can count on a much stronger organizational, financial and social hinterland. Another similarity is that it is again the parlous state of the economy and especially the fragile financial situation that present the most critical challenges to the government. There are also parallels between the two periods in the dynamics of Hungary’s external relations: at that time, our whole security and political alliance was dramatically changed in tandem with the upheaval around the globe, while now the debates and tensions are within the European Union, under the shadow of geopolitical tectonic shifts taking place outside Europe.

Similar or not to the present, the early period of transformation can be helpfully revisited to help the reader contrast the present period against the beginning of a long process called transition.

One should also be careful to note the heterogeneity of the two decades which consisted of various different political phases. The linguistic formula commonly used by the present government, that of the “last two decades”, no doubt serving the political aim of emphasizing the uniqueness of the new political era starting in 2010, places the first historic four-year phase of Hungary’s transition under the same roof as the other phases with obviously negative connotations.

On the contrary, I would call this period of Hungary’s recent past a success. I base this firstly on the majority of external opinion, and secondly on the available comparable macroeconomic data.

A BAD START OR A BAD JOURNEY?

Given the multitude of negative statements about the transformation, one wonders if there might be a connection between this attitude and the fact that Hungary is once more mired in economic crisis. Is it possible that the general publicis negative about that period because of the current difficulties? It is not only the Orbán cabinet that expresses such critical views in such terms: opinion polls, business surveys and other indicators all show that Hungarian society feels predominantly negatively about both the present economic and social situation, as well as the road taken to get to this juncture, including the first leg of the journey. It should be noted here that the negativity is not focused on the very first years of transition. The government’s criticism takes aim instead at the eight years directly preceding the parliamentary elections of 2010, that is the double four-year parliamentary term of the Socialist-Free Democrats coalition, during which the Hungarian economy clearly lost its momentum and balance. There is more to it than dry macroeconomic data and abstract social indicators; the general public discerned the relative decline of Hungary, and identified the Socialist-led governments as responsible for the endemic corruption and general mismanagement. To understand the landslide victory of the centre-right in 2010 is to recognize how voters felt at that time about the left-liberal coalition’s eight years in power.

What has become unpopular, however, is more than a particular political tendency or a set of politicians. Looking at Pew Research’s comparative international opinion poll of popular support for regim echange (or transition to democracy) first in 1991, and then in 2009, one finds that the Hungarian figure was a solid 74 per cent in 1991, and only 56 per cent in 2009 (see my analysis of data and comment on the trends in the July 2011 issue of this present Review under the title “The Unloved Hungarian Capitalism”). In other words support for democracy slumped from a level similar to that of the Czechs to a level similar to that of present day Russia. Here again, however, the reader’s attention must be called to the structured and complex nature of the society. While the drop in support for the new order has also occurred in other transition countries, the scale of the fallin Hungary’s case is extraordinary. True, 2009 was a year of particular distress in all transformation countries, but in Hungary the trough in economic activity was also accompanied by a plunge in respect for politics in general and the political elite in particular.

THE LONG SHADOW OF THE PAST:

POST-COMMUNISM FOLLOWS REFORM-COMMUNISM

Given such a context, a dramatic change in the political sphere seemed inevitable, and it duly arrived in the 2010 general elections. “More than a change in government” was a Fidesz election slogan, and it turned out not to be an empty promise. The intensity of the changes though caused problems in our external relations as well as in the West’s perceptions of Hungary. The essence of how the new government considered its mission is revealed in the letter sent by PM Orbán to State Secretary Clinton in January 2012, in reaction to her publicly-aired criticisms and concerns.

Lamentably Hungary has failed until now to conclude its post-communist era. This term is used to describe a political order without a new constitution or a truly free competition-based market economy. In the last twenty years Hungary was the only post-communist Central European country which failed to introduce a new constitution. My government, however, has been courageous enough to introduce a new Fundamental Law. The economy has been dominated by old relationships and monopolies formed under the communist era; my government is devoted to transform it.

Not every reader would share the view that Hungary did not introduce a new constitution at the beginning of the regime change. The October 1989 Constitution became the basic act for the new socio-economic system; political parties represented in the Hungarian Parliament amended and shaped the original text several times, starting with the so-called Antall–Tölgyessy pact that made Hungary’s economic governance feasible. It is also an over-simplification to say that the battle against the special relationships and monopolies left behind by the communist era did not start until 2010. In fact, the first four years of transition brought about qualitative social and economic changes in all fields of social life. This period was then followed by a U-turn under the Socialist PM Gyula Horn when members of the old guard returned to the civil service, and the economic policy strategy was geared to win over the voting base of the Socialists rather than strengthen the middle class. A series of harmful privatization deals (including selling the public utilities cheaply to foreign investors) were also made under the second government. But the significant differences between the two parliamentary cycles show that it is a mistake to regard the two decades after 1990 as a homogenous period. Certain students of the Hungarian system change (such as the authors of the book titled Hungary – Today and Tomorrow /Magyarország ma és holnap/ edited by Gy. Granasztói and Gy. Kodolányi) will not argue, however, with one important element of Orbán’s letter. Hungary clearly failed from economic, social structure and value system aspects to get through the interim post-communist period, as it is referred to in Western political science. The time elapsed since the change of the socio-economic system at the beginning of the first decade has not been sufficient to leave behind all of the regrettable legacies of the former regime. The PM’s letter registers this unfortunate fact when he refers to the unresolved nature of Hungary’s social development path.

Is it not though somewhat naive and even impatient to expect to leave behind in one or two decades the consequences of four decades of Communist rule? A quick regional overview can be useful here. Looking at the Baltic countries, for example, while problems of course persist, the Estonian system is clearly of a new quality, one that represents a clear break with the past. Similarly, the Czech and Polish societies have managed over time to put behind them the social mechanisms of the old regime not to mention the personnel of the former nomenclature. Poland’s case was the first to show in 1993 that a return of the old guard can happen even in a country that experienced one of the heaviest versions of Communist rule: the legacy party of the former Communists was voted back to power democratically in the fourth year of the regime change. The same party, not dissimilar to Hungary’s MSZP, would sink into insignificance by the mid-2000s. In contrast, the former Hungarian establishment party first returned to power in 1994, managed to win two more elections; and only suffered an election collapse in 2010, some years after its Polish counterparts. The political history of other nations in the region reveals the idiosyncrasy of the Hungarian transition in that the legacy party of the former Communist establishment party managed to spend twelve years out of twenty in office.

It is a feat that would have come as a surprise for many; yet at the time József Antall was aware of the possible return of the former Communists even if right after 1990 it was another opposition party, the liberal Free Democrats (SZDSZ), and not the Socialist Party, that was seen as having the best chance to win in the second free election. Antall, a historian familiar with cases in which social upheaval caused by political transition pushes voters back to an ugly past, tried to convince figures within the SZDSZ of the probability of such an outcome. And so it happened. The nominally liberal SZDSZ was not only unable to block the re-entry to government of the Communists’ legacy party but would then decide, albeit after much deliberation, to join forces with the Socialists. This strategic choice by the SZDSZ was a critical factor in the prolonging of this interim “post-communist” period.

Saying that the process of regime change has not yet been properly concluded is one thing, but the verdict of populists on both the left and the right that “there has not been any transition at all here” is quite another. Such views, common among the disenchanted, discontented and economically insecure social strata, are frequently coupled with blame directed at the first governments. “Antall’s lot messed it up, this is why we are in such a mess now” – goes one mantra. Blaming predecessors is, after all, a well-known mechanism for self-exoneration in this part of the world. That the first four years could have led to a more profound transformation is hard to deny. Critics of the Antall era point to property restitution and privatization programmes, liberalization of the domestic market, and the decisions to join international security, economic and trade blocks as strategic moves that have determined our current economic realities.

Posterity may conclude, however, on the basis of objective economic and social science analyses, that during the first four years the Antall cabinet and the short-lived Boross cabinet for the most part gave at least adequate answers to the strategic challenges presented by the historic changes. Taking the property issue first: in contrast to what happened elsewhere, most notably in Russia, Ukraine, and Romania, the Antall cabinet put an end to so-called “spontaneous privatization”, – the illegal or semi-legal hoarding and grabbing of state assets. Privatization in Hungary was relaunched in a transparent and organized fashion. The restitution process, meanwhile, was carried out effectively and quickly, and resulted in a largely orderly return of agricultural land, houses and small properties to private ownership.

Most Hungarians though are not so positive. Privatization is considered in many quarters as a failure, while restitution is often viewed even more critically. Neither issue helped the MDF-led governments in the early 1990s; but should the immediate political gains in subsequent elections settle the verdict of the success or failure of such systemic issues? People’s low opinion of both privatization and restitution is probably more determined by what happened afterwards. Many of the entrepreneurs who benefited from the small property privatization scheme and business-support policies of the Antall government later went out of business. Similarly, there is evidence that much of the land obtained via restitution would later be poorly used by their new owners. Such types of failures should not always be directly attributed to the decisions taken during the first government cycle, nor should they refute the necessity and soundness of the original strategies and policies.

In fact, had the Antall government slowed down the process of ownership reform in the Hungarian state sector or the conclusion of the restitution procedure, it almost certainly would not have served the long-term interest of the Hungarian economy. The so-called voucher (“coupon”) privatization approach adopted by the Czechs and Slovaks was in fact a distribution of property titles and looked fine at first, but soon backfired. In comparison, the Hungarian initiative of offering state assets through competitive bidding to those with cash was deemed by the government as the only appropriate policy choice under the specific Hungarian conditions. The majority of the firms thus privatized at that time are still up and running, for example, the oil and gas conglomerate MOL, banking group OTP, pharmaceutical group Richter, and steel maker Dunaferr. The material loss of public assets did not occur when businesses were sold to private investors but rather when state owned corporations, for various reasons, were allowed to continue until ordered reorganizations or privatization took place.

If this is the case then, why is there such strong anti-privatization sentiment in Hungary? Are those who trace the roots of the present problems to the Antall years no tright? Are authors today trying to glorify the past quoting other countries’ mistakes as counter-examples? Was it not during the first government that numerous cases of large-scale corruption and wealth accumulation by dubious persons occurred, as did the peculiar enrichment during the opaque privatization processes at that time of leading politicians on the left (for example Mr Gyurcsány and Mr Bajnai)? Obviously, there were serious mistakes and untransparent business practices in the first four years, although the deluge of unclear (or rather, clearly criminal) transactions would take place later during the second and subsequent governments. For a proper ex-post analysis, it is helpful to compare the image of the country at the time with others in the region, since the restructuring of the Hungarian ownership pattern, the institution-building and other structural changes took place in the face of the same challenges and circumstances that others elsewhere had to face as well. Comparative figures on the transition countries by institutions such as the European Bank for Reconstruction and Development and the World Bank indicate that the transformation of the property sector in Hungary had a cleaner and more efficient start under the Antall cabinet than in most other countries in the region.

This positive verdict is reinforced by capital inflow data at the time, as well as reports in the business press – even if the neutrality and objectivity of the latter is never beyond doubt. The Czech voucher privatization scheme may have been temporarily the headline story for the foreign political press, favoured over the so-called “statist” and slow Hungarian method of selling state assets case by case through old-fashioned competitive bidding. While the press will latch on to chosen darlings or model countries, investors on the other hand vote with their money. In terms of investment flows, Hungary was the regional champion for a long time in the wake of the political changes, and, significantly, most of the funds invested here did not come to cream the market. The new foreign owners were instead building plants from which they would export their products.

The opening of the domestic market turned out, undeniably, to be too fast. The penetration of foreign capital in some key sectors (for instance in utilities during the Socialist government of Mr Horn, or later in the retail sector) was excessive. There are two explanatory factors here to be taken into account. The first unfortunate reality is that at the very moment of the political changes, the larger Hungarian companies (mostly state owned enterprises or cooperatives) and the nascent small private businesses proved to beless competitive internationally than hoped for. The proponents of the Hungarian reform-socialist path after 1968 believed that the planned-cum- market system could compete with proper capitalism; but the legacy of the “Goulash Communism” model proved to be disappointing to say the least. Secondly, the Antall cabinet, just like other governments of the region, came under intense pressure from business circles, academia, and Western capitals to internalize the values of free markets and open up domestic markets. In this context, the government’s inability to slow down the opening of the markets should be interpreted less harshly.

With the benefit of hindsight, PM Antall’s decisions to promptly realign Hungary’s participation in strategic alliances (leaving the Warsaw Pact and the so-called Council of Mutual Economic Assistance, a Moscow-run economic association) also earn high grades. At the time, these strategic decisions were fiercely criticized from all sides of the political spectrum, but what happened later in the post-Soviet region strongly suggests that any other solution (for instance half-way house compromises) would have cost Hungary much more in the long run.

WHY THE FORMER “NOMENCLATURE” STAYED ON FOR SO LONG

This brief review of the performance of the first democratically elected Hungarian government is not about doing justice to its personalities and policies: future historians will judge it based on their own criteria and methodologies. We remain too close in terms of both time and personal involvement to offer an objective and authoritative conclusion. Still it is important to scrutinize the socio-economic tendencies of that early and critical period of the transformation – to see in a clearer way what happened later and why. The early 1990s may already be ancient history for many, but what happened at that time shaped the views and attitudes of many in society including today’s decision makers.

Having witnessed the travails of the Antall cabinet, politicians on the right appear to have concluded that if or when they win elections again, then they must also make a breakthrough in terms of material resources and control over the bureaucracy. Thesecond centre-right coalition (1998 to 2002) did indeed enjoy a broader margin of manoeuvre than the first due to the improvement in economic conditions, but that cabinet was also working within the confines of a coalition government, as well as under the restrictive presence of the ever present social structures. The members of the previous regime still maintained huge influence in the fields of the economy, culture, media, diplomacy and foreign relations, and in the civil service. In short, Hungary continued to function as a post-communist society throughout the eight years of non-socialist governments.

This begs the question: how could the former structures survive for so long? Interestingly, compared with transition countries with orthodox communist antecedents, it is Hungary’s reform-communist past that seems to have been responsible for the lingering survival of the old values, structures, networks and personnel in positions of influence. In the former cases, the old communist guard was unable to reinvent and rejuvenate itself in the new era of democracy. Where the transition was gradual – as in the case of Hungary – the most flexible members of the establishment party were given enough space to find jobs in the emerging business sector and in civic society. There existed no legal ground in 1990 to remove the old guard from key positions. In addition, public opinion, with the exception of a noisy radical minority, would not have supported any forceful removal of the old elite.

Though many (mostly on the radical right) still believe that the first conservative government missed a historic opportunity to fundamentally shake up society, the reality is different: such a moment never existed. Nor did it exist in 1998, when the first Orbán government managed to prune the state bureaucracy and public sector, but then proceeded to hire from within its own circle of supporters.

In Hungary, supporting the middle class has been much talked about but it was not until the second Orbán government that determined measures (such as changes in taxation) were taken. In some ways, this marks a return to the strategic policy goal of József Antall who framed the issue within the concept of Social Market Economy with its emphasis on strengthening the middle strata that would provide the foundation for a competitive and efficient economy and a strong civic democracy. Time will tell if the extraordinary situation which occurred in 2010 (that is a governing party unrestrained by any effective opposition to slow down or block government initiatives) will result in success. What is clear though is that government measures meant to strengthen the Hungarian entrepreneurial class will clash with the rules of the European Union which sanctions discrimination on grounds of nationality. What was possible before 2004 and Hungary’s entry into the EU, may not be allowed now that Hungary is a member state.

Inner constraints exist too. The public mood, as is well-documented by polls, became very negative and pessimistic by the end of the second decade of transformation, in part due to material reasons, and in part due to the survival of the structures and networks of post-communism through the two decades. The political regime change was unable to destroy the networks of the former establishment at the beginning of the process, while the Socialist Party, who returned to power four years after the watershed changes and later secured two more stints at power, actually blocked changes that could have led to a clear break separating the world of the communist and post-communist past from the present. Such a division appears to have been clearer and come sooner in nations where transition coincided with nation-building (the Baltic states, Slovenia, and Slovakia).

In Hungary, unsolved issues abound. One of the most important take-aways from the Antall era is that his team did not baulk at the challenges of the age, but tried instead to give proper answers to the various problems. This is partly the reason why Hungary was seen by external observers as being in the vanguard of the transition. Hungary’s loss of momentum took place only when those in office began pretending to act, rather than actually acting on the challenges of the day such as preparing the nation for entry into the EU, using EU membership to maximum benefit, and later dealing with the financial crisis. It would be unfair to deny the first government of free Hungary the credit it deserves, but to blame the past for the unfortunate consequences of missed opportunities and unmet challenges would be an alarming mistake with potentially grave consequences.

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