Economic Reforms

INTRODUCTION

It has already been indicated that the socialist economic system was doomed to failure unless far-reaching changes in its working were carried out. And therefore it is no wonder that the politicians agreed to changes, first to ‘perfections’ of the management system and only later to major economic reforms.

In my opinion, economic reforms should be understood as changes which exceed the framework of the traditional economic mechanism, but which do not negate the socialist economic system. In the traditional system, which was based on almost complete collective ownership, the planners made not only macroeconomic, but also microeconomic decisions. Enterprises were assigned compulsory out­put targets whose fulfilment was measured by gross indicators. The market played only a limited role in this system. It was a system with a closed economy. As will be shown, the economic reforms of the 1960s (the Czechoslovak of 1966 and the Hungarian of 1968) eliminated to a considerable extent the characteristic features of the traditional system. They did not, however, touch ownership relations to any extent. In the 1980s, when more far-reaching reforms were carried out primarily in Hungary and Poland, changes in ownership relations were also included. Economic reforms can thus be understood as changes which exceed the framework of the traditional economic mechanism, whether or not they affect ownership relations too. In this sense my definition of economic reform seems to be no different from that of J.

The CPs agreed to changes in the economic mechanism because the working of the economy exhibited serious signs of crisis or actually was in crisis, reflected in a slow-down in economic growth and/or a declining (or stagnating) standard of living and/or shortages - mostly in a combination of all the phenomena mentioned. In most cases the CP leaders consented to changes under pressure from below: this was the case in Czechoslovakia in 1965^, and in all the three countries under review in the 1980s. The 1968 Hungarian reform was a reform from above, because the Hungarian leaders, still in trauma due to the 1956 suppressed uprising, realised that it was necessary to react quickly to the signs of the worsening performance of the economy and thus stave off the danger of a larger economic crisis which might provoke a political crisis.

Such pragmatic thinkers as the Hungarian communist leaders in the 1960s were an exception. As already mentioned, communist leaders in general were afraid of the ideological and political consequences of economic reforms. This is nothing unusual; ruling elites in capitalist countries do not behave very differently. For example, they are faced nowadays with high unemployment rates increasing at each business cycle, but they are reluctant to interfere with the system, even though, in my opinion, it is urgent for them to do so. They rely on the market to solve the problem eventually, an expectation which is not very promising. Communists have always believed in social engineering, and the socialist system was the product of such an idea.

The problem was that reforms had to be directed towards widening the scope of the market, combined with changes in ownership of the means of production, and these changes moved the countries in the direction of the capitalist system, an action which was not acceptable to the majority of communist leaders, who mainly in the 1960s and the 1970s believed that socialism must be different from capitalism in almost all important institutional aspects.

REFORMS AND THE COLLAPSE OF THE SOCIALIST SYSTEM Despite reforms - or because of reforms, as some would say - the socialist system collapsed. Some believed that the system was irreformable, and therefore the collapse was inevitable. However, nobody denies that the demise of the socialist system could have dragged on for many years to come. If not for the changes initiated by Gorbachev and his associates, the socialist system could still be around.

The irreformability of the system has been explained in different ways. One explanation, which had many followers before the collapse of the socialist system, was that the CP would never agree to the kind of economic reforms needed in order to make the system more efficient. The supporters of this view believed that the communist elites were determined not to give up the amount of power needed to make enterprises autonomous units. They did not have objections to the involvement of the central bodies of the CP as to the county, district and local organs of the CP. The lower bodies were the real meddlers in the affairs of enterprises, very often in petty matters. When making decisions about managerial appointments or even policy decisions, top managers had always to contemplate what would be the reaction of the local Party bodies. Many managers resented the Party’s meddling in enterprise affairs.

The followers of such a view were not against socialism; they were willing to accept market socialism with a certain limited role for the CP.²

At the other end of the spectrum, there were economists who believed that only a capitalist system could be an efficient system, and all efforts to reform the socialist system were futile. A good representative of such views is J. Kornai, who in his 1986 study had already characterised reformers such as Lange, Brus, Sik, Liberman etc. as naive, because, in his opinion, they wanted to make the impossible workable, to combine ‘indirect bureaucratic control’ with the market. He also expressed doubts whether under the political system existing at that time it was possible to restrict the bureaucracy to the set rules of the reform (1986, p. 1734). In his book Road to a Free Economy (1990) where he could more freely express his views, he indirectly made it clear that only the market based on private ownership can work efficiently.

Perhaps, if J. Kornai had written his verdict about socialism several years later when the Chinese boom was in full swing, he would have been more careful in his pronouncements. China has shown that even under a communist authoritarian system it is possible to introduce market relations with considerable success? Everyone who is familiar with the economic development in China admits that it has made considerable progress. To a lesser degree this is also true of Vietnam.

It seems that Z. Brzezinski (1989) was also of the view that the socialist system was irreformable when he stated, as already mentioned in Chapter 1, that economic reforms must destabilise the system politically. In other words, the avoidance of political destabilisation requires the shunning of economic reforms. Judging from his statement, one can speculate that had Brzezinski published his book several years later, he would have argued that economic reforms were one of the most important reasons for the collapse of the socialist system.

Kornai, as already indicated, believes that the reforms could not succeed because planning and the market are incompatible. He believes that market forces cannot be made an effective coordinating system if planning is allowed to play an important role in the coordination of economic activities. There were also economists who believed the traditional system should not be reformed because planning could not work effectively if combined with the market mechanism.

There are economists who believe that the reforms had gradually undermined the socialist economic system, and that, with the rise of the recession, the system necessarily came to an end. But they do not profess the idea that the system was irreformable; they take the position that the collapse was rather the unintended result of economic and political changes. Ellman and Kontorovich (1992) seem to belong to this group. They write about the Soviet collapse: ‘A major contribution to the economic collapse... was made by the unintended consequences of the systemic changes and economic policies pursued by the Gorbachev leadership. Gorbachev was quite successful in dismantling the old system, but failed to create a viable new one.’ Gorbachev contributed to the collapse by weakening or removing ‘three crucial load-bearing “bricks” from the building they tried to rebuild. These “bricks” were: the central bureaucratic apparatus; the official ideology; and the active role of the party in the economy’ (p. 31). They also mention a series of reform measures which contributed to the collapse. An expansion of enterprise independence is mentioned too; not only this, but it is listed in another place as one of the main contributors to the collapse (p. 7).

REFORMS OF THE 1960s AND THE COLLAPSE

I do not share the view that reforms brought about the collapse of the socialist system, though there is no doubt that economic reforms posed a danger to the socialist system, more so if they were combined with political reforms.

Nor do I share the view that the socialist system was irreformable. In my opinion, the reforms did not succeed first because they were not given enough time for their development and second they did not and could not go far enough as long as there was still relatively strong support for socialism. It is possible to argue that, considering the socialist camp as a whole, this was true for the second half of the 1960s and the first half of the 1970s. (Of course, if individual countries are examined separately, one can come to different results with regard to the proper time for reforms.) At that time the economy, as well as the standard of living, was growing relatively fast. This was the golden age of socialism. What is also important is that the socialist ideology still held sway over a large proportion of the intelligentsia. People still believed that socialism was a viable system.

Only Czechoslovak and Hungarian communist leaders took advantage of the favourable conditions for reforms, but these did not go far enough. What was worse was that the Czechoslovak reform was reversed as a result of the Soviet-led invasion, and, from the begining of the 1970s until the end of the 1970s, no reform activity took place in any country of the Soviet bloc. Even in Hungary the reform came to a halt. Precious time needed for the development of the reforms was lost.

It would be no exaggeration to state that in the 1960s most European CMEA countries (in one country more and in others less) came to the conclusion (many of them with regret) that the traditional system had not succeeded and that steering the economy in great detail from one centre had failed to make enterprises strive for economic efficiency; on the contrary, it encouraged waste, discouraged innovations and produced shortages. In the 1960s only in Hungary and Czechoslovakia did a situation develop which allowed a far-reaching reform. No doubt, other countries of the socialist camp, including the Soviet Union, also wanted to make planning more effective and enterprise activities more efficient and oriented to the needs of consumers, but were not willing to go beyond the centralised framework. They were not willing voluntarily to make economic reforms which might weaken the leading role of the Party and thus their own power. As a result, the 1965 Soviet reform was confined - to put it with some simplification - to improvement in methods of planning, reduction in the number of indicators and a new incentive system. (For more about this, including the reasons for different approaches to reforms, see Adam, 1989.)

In Czechoslovakia and Hungary the view prevailed that a remedy for the problems could only be found in a system in which planning is supplemented by the market mechanism, thus creating an environment in which enterprises would have to produce what the market required. In such an arrangement there can be, of course, no place for binding targets and allocation of inputs from the centre. This does not mean that the reformers wanted to expose enterprises to spontaneous market forces. At that stage, what most reformers wanted was a market regulated by the plan; they believed that society should determine its priorities in a planned way and that the market could be useful if it was regulated from the viewpoint of socialist principles (full employment, reasonable price stability, more equal distribution of income), all the more because some problems could not be solved by the market alone. The plan was not supposed to be simply the model of the future market (Kouba, 1968, pp. 222-31).

The plan was thus to remain the main coordinating mechanism; what was to change was the way the plan was drafted and primarily how the objectives of the plan were to be achieved. In the new system of management, enterprises were to be autonomous units for the most part, pursuing their own interests. The objectives of the plans were not to be imposed on enterprises; the central planners were supposed to create an environment equipped with incentives and disincentives, in which the objectives of the plan - of course, substantially reduced compared to the past since much of the supply could be left entirely to market forces - would be followed willingly because they were in the interest of enterprises. It was expected that enterprises would behave rationally because their possible expansion and the well-being of their employees would depend on how much they were able to realise from selling their products on the market. And therefore enterprises could be free to determine (with some exceptions) what and how to produce and where to buy inputs.

The reforms were to bring a redivision of decision-making between the centre and enterprises by allocating to each the sphere of decision­making which was close to its interests and which it knew best, namely the macrosphere to the centre and the microsphere to enterprises. Such a solution had to allow the benefits of both central planning, confined primarily to the macrosphere, and the market mechanism, applied to the decision-making of enterprises, to be combined.

The reforms of the 1960s brought about radical changes in planning. The annual plan did not cease to be compiled, but was no longer broken down into compulsory targets for enterprises. It was rather information for enterprises about intended government activities, resulting from the five-year plans. Enterprises had to work out their own annual and five-year plans; these had to reflect their own interests. The coordination of the government and enterprise plans was to be achieved by regulators. Not only was the system of assigned targets eliminated, but also a market for producer goods was introduced, though with many exclusions. These two important changes meant that the reformed system went beyond the framework of the traditional system.

The reforms made price determination more flexible and more market-sensitive. The number of prices directly determined by the price authorities was reduced substantially. The less important producer and consumer goods were sold at free prices, whose expansion was assumed with the entrenchment of the reform. There was some reduction in the huge number of turnover tax rates, as a step in restoring the linkage between different price subsystems, an important precondition for the working of the market.⁵

The authorities no longer assigned a wage bill to enterprises; enterprises had to earn it by their own economic activities. In order not to lose control over wage evolution and to protect the economy against inflation, the authorities determined terms under which wage growth was linked to performance. In both Czechoslovakia and Hungary taxes, though in different ways, were also used to control wage growth. It is not clear to what extent the change in wage regulation was also motivated by the desire to make a change in how employees viewed the responsibility for wage increases. Under capitalism employees in private enterprises blame the companies if they have wage grievances. It seems that the authorities wanted to achieve a similar situation to some extent.

The reforms increased the role of enterprises in decision-making about investment. The central authorities reserved their right to make decisions about major investment projects in the material sphere which had a great impact on the structure of the economy and technology and, of course, about the infrastructure. Other projects were left to the decisions of enterprises, which were supposed to finance them from their own resources and bank credit. However, taxes on enterprises were intentionally so high that enterprises were usually dependent on credit. And the banks, in making decisions about extension of credit, followed two criteria: the potential efficiency of the project and the extent to which it fitted in with the economic plan. In such a way the control of the authorities over investment was sustained.

The reforms also brought about a weakening of the state monopoly in foreign trade; a few enterprises in both countries were given licences to enter directly into trade relations with foreign countries. In addition, foreign trade corporations, which had a trade monopoly up to the reforms, became financially more independent.

The reforms also made some progress in linking domestic prices with world market prices. In Hungary, world market prices were converted into domestic prices for exporters as well as for importers by a multiplier which was calculated as a ratio of average domestic cost of exports and the receipts in dollars (or in rubles in trade with CMEA countries). Since the multiplier was based on average and not marginal costs, this meant that enterprises with higher than average costs were still dependent on subsidies in order to be able to continue exporting. In Czechslovakia, a uniform adjustment coefficient to the exchange rate, larger for dollar trade than for ruble trade, was applied. In both countries imports were licensed. (For more about the reforms see Sik, 1967, and 1990, pp. 89-143; and Nyers, 1988, pp. 50-110. The former was the architect of the Czechoslovak and the latter of the Hungarian reform.)

The question can be posed: what was the impact of the changes mentioned in Hungary and Czechoslovakia? I agree with Brus and Laski (1989) who argue that in evaluating reforms it is easier to examine the changes in ‘the conditions of economic activity and the behavioural pattern of economic actors’ (p. 63) than in the overall performance of the economy or its welfare effects.

In evaluating the reforms it is necessary, in my opinion, to deal separately with the economic reforms of the 1960s and the 1980s. Only such an approach can show how the reforms developed and their tendencies. Focusing primarily on the reforms of the 1960s and disregarding the reforms of the 1980s gives a distorted picture of the reforms. It is even worse when the macroecononomic performance for the whole period from the start of the reforms in the second half of the 1960s to the collapse of the socialist system is used for the evaluation of the reforms. It should not be forgotten that in the 1970s the reforms were at a halt and that the change in economic performance in the 1980s in Poland and Hungary was much influenced by external factors and huge indebtedness.

The reformed economic mechanism, no doubt, was progress compared to the traditional system. However, it was far from what was needed in order to bring about a turnaround in the working of the economy. It was an illusion to expect that one reform could do the job. This was impossible for economic and political reasons. The present transformation difficulties in the post-socialist countries show that considerable systemic changes cannot be absorbed in a short period of time. More about this later. First, I wish to discuss the shortcomings and inconsistencies of the reforms.

The autonomy given to enterprises was limited. The authorities could still interfere and did indirectly, directly⁶ and excessively, in enterprise affairs. Some direct interference was written into the reform blueprint. In addition, the branch ministries could use their right to nominate enterprise directors to exercise pressure on enterprises in the direction needed. Enterprises were dependent on the goodwill of the branch ministry in many respects, e.g. if they wanted to change the group production mix. In Hungary the authorities also used some very subtle methods, such as consultations in the presence of officials from the National Bank, to influence enterprises. And the fact that top managers felt that the reform was not irreversible made them even more vulnerable to pressure from above.

It was unrealistic to expect that enterprises could become self­financing units maximising profits, as the architects of the economic blueprint expected. For enterprises to become self-financed, they must have a considerable say in all the decisions affecting cost of production. And for profit to become a guide to decision making and an incentive, as was envisaged, there is a need for an environment in which increases in profit can mostly be achieved by better performance, which in turn requires rational prices and the elimination of monopolisation to a great extent. None of these preconditions existed.

In the 1950s and the 1960s the economies of the three countries underwent a process of industrial concentration. The motivation for this was the desire to simplify the administration of industry. It was believed that, with a lower number of enterprises, the hierarchical build-up would become more manageable. Some groups hoped that such a concentration would make economic reform superfluous. Some industrial concentration was justified by technological requirements, but most of it was an impediment to the development of competition since it intensified the monopolisation of the economy. The reforms brought changes to the concentration at the edges only.

One of the promised principles of the reforms was that the economic regulators would be applied uniformly as much as possible. This was important in order to put an end to a practice which allowed the authorities to withdraw funds from thriving enterprises for the purpose of bailing out poorly working enterprises. Needless to say, such a practice was an impediment to increases in economic efficiency and a damper on the desire to make enterprises profit maximisers. Both Czechoslovakia and Hungary promised to abandon this disincentive to financial economy, for which J. Kornai coined the term ‘soft budget constraint’; but not much was done to honour this promise. Implementation of such a promise would have required liquidating obsolete and restructuring inefficient enterprises and to do so on a large scale would have produced unemployment, at least temporarily, and dissatisfaction in the workers’ ranks, a situation which the political leaders wanted to avoid for political reasons.

The inability of the authorities to apply the regulators uniformly opened the door very soon for a new kind of bargaining: in the traditional system enterprises bargained with branch ministries over plan targets, while in the reformed system the object of bargaining became regulators, subsidies and everything which might affect the performance of enterprises.

The economic reforms of the 1960s limited the role of the market to the microeconomic sphere, but even there it was in rather a supplementary role. In the Hungarian concept of the reform, its role was to objectivise plans, to be a check on their practicality, to help to satisfy consumer demand (Hetenyi, 1969, p. 41; and Nyers, 1966, p. 58). Planning and the regulation system based on it had to determine the limits and the terms of the operation of the market.

In addition, the role of the market was limited to commodities; the introduction of capital and labour markets was not in the blueprint. At that time it was believed that the market could work without a capital market. In addition, a capital market was regarded as a capitalist institution, irreconcilable with the principles of socialism, mainly the principle of income distribution according to labour. The lack of a capital market forced enterprises to use their profit within their enterprises, even if there was a possibly better use for it outside the establishment, or as a deposit in the bank, and it was thus an impediment to an increase in economic efficiency. Not only that, but the lack of a capital market meant the continuation of the use of quasi- administrative methods in a very important segment of the economy. Brus and Laski believe that the exclusion of the capital market from the Hungarian reform was to blame in the first place for the failure of the reform to ‘subject the economy to a market coordination’ (1989, p. 85).

Though in practice market forces had some impact on the distribution of labour, the reforms were not intended to and did not introduce measures which would bring about a genuine labour market. In the 1960s, it was unthinkable to introduce measures which might undermine the principle of full employment, which was regarded as an inalienable right.⁷

At that time there was no noticeable challenge to the collective ownership of the means of production, and the communist leaders did not feel that anything had to be done; they acted according to the well- known popular saying ‘if it’s not broken, don’t fix it’. However, the reforms encouraged the rise of a limited number of private businesses. (For more, see Chapter 9.)

The development of the economic mechanism was hampered by the duality of regulations in foreign trade and their impact on the regulation of production. R. Nyers (1983) writes:

While in the CMEA it is essentially the state organs that do business, on the world market it is enterprises. Trade in the CMEA is settled bilaterally: on the world market it is settled multilaterally. Finally, within the CMEA, trade is transacted at contractual prices agreed by states, while with the West at market prices... It is not easy to bridge over the resulting difficulties; the dualism weakens the possibility of a consistent application of reform principles.*

The economic reform was not combined with a reform of the political system. In Czechoslovakia there were proposals in this direction, but they were rejected by the Party establishment. In Hungary the politicians, conscious of the Soviet attitude to political reforms, were very careful not to give the impression that they intended

to make any big changes in the political system which might lead to a weakening of the leading role of the CP. However, in both countries the reforms brought about a considerable political relaxation, an extension of freedom of expression (primarily in Czechoslovakia) and an expansion of human rights. But there were no changes aiming towards liquidation of the one-party state and its replacement by a multi-party system. Perhaps in Czechoslovakia some moves in this direction would have been made if the Soviet-led invasion had not put an end to the Prague Spring. But I doubt whether the Czechoslovak CP would have agreed to a pluralistic system; it could have used the Soviet threat as an excuse for maintaining a modified and more relaxed one- party system.

Interference by the Party apparatus in the affairs of enterprises, though reduced, was not abandoned. Mainly in Hungary, the CP leadership did not want to antagonise the local Party apparatus.

To understand the economic development in the 1960s, it is also necessary to consider the economic policy of the countries, which I have discussed in Chapter 3. Here I would only like to mention that the reforms did not put an end to the ambitious economic growth policy in which the stress was placed on heavy industry with all its consequences.

In Czechoslovakia the reform was, as has already been mentioned, short-lived due to the Soviet-led invasion. In Hungary the development of the reform came to a halt in 1972 and even some recentralisation occurred.Thc short-term nature of the reform and the acceleration of economic growth in all European CMEA countries in the second half of the 1960s make it very difficult to draw reliable conclusions about the effect of the reform on economic performance. Since in Czechoslovakia and Hungary the rates of economic growth during the reforms or closely following increased, it seems that the reforms had some positive effect (see SE, 1990, p. 2; Historicka statistickd rocenka CSSR_t 1985, p. 89).

It is possible to agree with Brus and Laski (1989) that the reforms (it is not clear whether they also include the changes in the 1980s) did not bring about a breakthrough. However, I do not agree with them that the reforms of 1968 brought no qualitative change to the operation of the economic mechanism (p. 66). There is no doubt that the 1968 economic reform took the Hungarian economic mechanism beyond the framework of the traditional system. I agree with T. Bauer (1983) who maintained that changes made in the economic mechanism - such as the abolition of plan targets, the establishment of a market for producer goods and that enterprises’ submission of their plans was only for consultation - ‘makes the system different from the traditional Soviet-type planning’ and, I will add, qualitatively different.

As has already been mentioned above, the 1968 Hungarian reform was marked by many shortcomings, and the role it allowed the market to play was quite limited; therefore I would not call the economic mechanism, which resulted from the 1968 reform, market socialism. The architects of the reform did not want market socialism and it was not market socialism. For this reason Kornai (1992) is not correct if he characterises the Hungarian reform from 1968 to 1989 as a type of market socialism (p. 479). He contradicts his own definition of market socialism. To him market socialism is ‘for the market to become the basic coordinator of the socialist economy, or at least equal in rank with the bureaucratic mechanism, augmenting central planning, while public ownership remains the dominant property form’ (p. 474). The 1968 reform did not enhance the role of the market - nor did it intend - to the point that it became equal with planning, let alone a basic coordinator.⁸ Therefore it would be wrong even to use the term ‘plan cum market’ for the characterisation of the Hungarian reform of 1968 without making clear that the market was in a subordinated role.

Brus and Laski (1989, p. 105) defined market socialism more precisely when maintaining that a reform ‘which includes a capital market along with the product and labour markets, [ they call ] market socialism proper'. However, their definition is not complete since they do not mention anything about ownership.

To me market socialism is a system in which the market is of more importance than planning and in which the dominant role of state ownership is maintained; therefore I would reserve this name for the system which started to develop in Hungary and Poland after 1987 and which will be discussed below. No objection can be raised at the new economic mechanism in Hungary, arising from the 1968 reform, being called indirect, as Antal did in his 1985 book. In his 1986 article Kornai also used the term ‘indirect’ too to characterise the 1968 reform, but complemented it with the words ‘bureaucratic control’. To him then the difference between the system after 1968 and the traditional system was that the former was an indirect bureaucratic one, whereas the traditional was a direct bureaucratic system.

Perhaps both reforms, the Hungarian and the Czechoslovak, could have gone further if not for domestic and international political reasons. Many of the politicians, the CP and the government bureaucracy were against reforms. The same is true of managers. All were afraid that reforms would affect their interests. Even workers did not favour reforms; they were afraid that the reforms would generate unemployment. For this reason alone, the leadership of the Hungarian Party was careful not to push too far and thus antagonise large segments of the population. This was also the reason why the reforms did not bring about a restructuring of the government administration and the Party bureaucracy.⁹ In Czechoslovakia, the CP leadership only reluctantly approved the economic reform. Only after Dubcek, who was elected to the post of first secretary of the CP in January 1968, did the scope of the reform extend and its implementation accelerate. However, he too could not ignore the domestic situation.

This was only part of the problem. The reformists themselves were uncertain of how best to combine planning and market without undermining the leading role of planning. This uncertainty stemmed mainly from perplexity about what the market could do and what should be done in order to make it function well. The relatively long isolation of both countries, particularly of Czechoslovakia, was not helpful. On top of this, the existing ideology was an impediment to radical reforms.

The domestic difficulties could probably have been gradually overcome if there had been no intervention from outside. However, far-reaching reforms, which can only be the result of trial and error, require time. And the reforms were not given the time needed for evolution.

REFORMS OF THE 1980s AND THE COLLAPSE

When discussing the economic reforms of the 1960s, my focus was on Hungary and Czechoslovakia, whereas in researching the 1980s, the focus is going to be on Hungary, which continued its reform, and Poland. The conditions in the 1980s were quite different in many respects from those pertaining to the second half of the 1960s and the first half of the 1970s. Both countries groaned under the burden of their huge international debt. The borrowing abroad did not have much to do with the economic mechanism, though the unproductive use of the loans certainly had. Both countries engaged in borrowing for economic reasons. They did not have, or at least not to the same extent, the kind of worries Czechoslovakia had of becoming indebted to the West. They did not fear that the West might use its loans to enforce systemic concessions. On the other hand, the West was not reluctant to lend funds, particularly to Poland and Hungary, where an opening in the Iron Curtain seemed to be the easiest. In a recent book, edited by I. Bodzaban and A. Szalay (1994), a former CIA agent explains that the purpose of loans to Hungary was to cause its economy to break down under the burden of huge credits. It is difficult to verify the statement of the agent, but, considering the American interest in bringing down the socialist system, it seems plausible.

In Poland and Hungary, especially the former, the economic situation worsened in the 1980s (for more, see Chapter 8). In addition, the West went through a deep recession in the beginning of the 1980s which had its impact on CMEA countries too, mainly on those which were in intensive trade relations with the West, such as Hungary and Poland.

In both Poland and Hungary, mainly the former, the standard of living was developing unfavourably as a result of the worsening economic situation. In Poland this brought Solidarity into being. At the end of 1981, as noted, Solidarity was outlawed, but in spite of that its influence had increased after several years. Growing opposition to the regime, led by Solidarity, was combined with fading belief in the reformability of the economic system. (For more about Solidarity, see Chapter 6.) In Hungary the opposition to the regime grew more slowly and was headed mostly by the CP intelligentsia.

In discussing the reforms of the 1980s one must distinguish those of the first half of the 1980s from those of the second half of the 1980s which culminated in the collapse of the socialist system. In the first half of the 1980s, the 1982 Polish reform and the reforms of 1981 and 1985 in Hungary were not reforms which intended to establish market socialism in the sense explained above. The objective of the reforms was to strengthen the autonomy of enterprises, thus giving a greater role to the market, and to create legal conditions for the expansion of the private sector. In order to strengthen the autonomy of enterprises, the rules which governed property rights were changed. The manage­ment of enterprises was given the right to exercise property rights with some restrictions, yet enterprise assets remained the property of the state. Top managers and their deputies had to share their expanded rights with the self-management bodies established in most enterprises. Self-management bodies received quite far-reaching decision-making powers with regard to basic policy problems of enterprises. This was more true of Poland than of Hungary. This does not mean that the founders of enterprises gave up all control over them. The founders had the right to veto top managers elected by the self-management bodies.¹⁰ In addition, the founders in Hungary had the right to evaluate the work of the manager when making decisions about his bonuses. (For more about self-management, see Chapter 9.)

The excessive interference of the authorities with enterprises, which the introduction of self-management had to cope with, was reduced but not eliminated. Enterprises were still dependent on the goodwill of the authorities (for subsidies and tax breaks) and thus gave the authorities a good opportunity to influence enterprise activities in the direction desired.

Though the role of the market was increased in the first half of the 1980s, it still remained a market for products; the policy makers did not intend to introduce a capital market. There was some movement in the direction of a labour market in Hungary in an effort to increase the economic efficiency of enterprises. To this end full employment was supposed to become the concern of the government, whereas enterprises had to handle employment from the viewpoint of efficiency (Havasi, 1984).

The reforms in both countries buttressed the private sector (see Chapter 9). However, they did not challenge the state sector and did not come up with suggestions for its privatisation. In Poland in 1981, even the reform proposals of institutions and collectives did not call for privatisation. This is not to say that all economists were against privatisation; no doubt, many were in favour. However, despite a more relaxed political situation, no public call for privatisation was voiced. After all, Solidarity committed itself in the Protocol of Understanding, concluded with the government, to a socialist system based on collective ownership, and it took a similar position at its first congress {Glos Vybrzeza₉ 1981, 1 September ; Program..., 1981).

In the second half of the 1980s the situation changed dramatically and this change had to do with many factors. The hopes in both countries that the economic situation would improve did not materialise. In Poland the 1987-8 attempt to bring about market equilibrium failed. In Hungary the foreign debt, which was high anyhow in 1985-7, doubled (see Chapter 8). The advent of Gorbachev to power and his commitment to a radical economic reform strengthened the hands of the radical reformers in both countries, and they used the new opportunity for new demands, in which the authorities reluctantly acquiesced.

In both countries in 1987-8 new reform measures were undertaken - which could be characterised as the first stage of market socialism - in the hope that these might bring about an improvement in the performance of the economy and pacify the growing opposition. In Hungary these were brought about by the government Action Programme and Party resolution, and in Poland these new measures were known as the second stage of the economic reform.

In September 1987 the government Action Programme adopted by the Hungarian parliament (Nsz, 19 September 1987) and based on CC resolution (Nsz, 4 July 1987) promised to improve the planning system and stressed the increased importance of medium- and long-term plans. It also promised to build up the regulated market and to create conditions for a freer flow of capital. A part of the programme was the further freeing of industrial prices, the overhaul of the tax system, the reduction of the budget deficit and the application of strict monetary policy. What was of special interest was that the government vowed to reduce redundant labour from the economy and not to bail out enterprises with government funds. There is no doubt that the Action Programme was much influenced by the study Turning Point and Reform (see Chapter 6).

Two months later, in its November 1987 resolution (Nsz, 13 November), the CP made a big jump in its approach to the restructuring of the economic mechanism. Perhaps a quotation from the resolution will show the change best. It reads

the socialist economy is such a planned economy, in which societal ownership of means of production plays the decisive role and which gives room to other forms of ownership and which is based on the regularities (tδrvenyszeruseg) of commodity production and applies market relations.

True, planning was still in the centre, but the market was no longer qualified by the usual adjective ‘regulated’, from which one can conclude that the CP leaders were reconciled with the idea of market socialism. What is also of importance is that the resolution promised that the government, parliament and interest groups could indepen­dently pursue their activities, a promise which at best meant that the Party would exercise its leading role in more subtle ways.

In April 1987 the Polish government published very detailed Theses of the second stage of reform (supplement to Rzeczpospolita, 17 April 1987) which were based on a Party decision. Soon the Theses were discussed by the sejm (Polish parliament) and approved (TL, 27 September 1987). The programme as laid out was intended within three or four years to pull Poland out of the economic crisis in which it found itself. To this end the renewal of market equilibrium was regarded as the first goal. Of course, the increase in economic efficiency was also set as an important goal. For this purpose the programme envisaged an increase in the autonomy of enterprises combined with some changes in the economic mechanism. In the sphere of annual planning, financial planning was supposed to be developed gradually at the expense of physical planning. Greater room for the working of the market was to be created also by gradually achieving equilibrium prices. The programme also promised to ease further entry into the private sector, which was to be concentrated primarily in retail trade and services.

The programme discussed cannot in itself be unambiguously regarded as a concept of market socialism. However, the changes suggested in the report of the politburo to the CC (TL, 18 November 1987) were of such a nature that if the socialist system had not collapsed before they were implemented they could have led to market socialism. The report criticised the practice of putting planning and market against each other. In certain areas long-term planning should dominate, whereas in others it should be the market mechanism. The criterion for the application of one of the two coordinating mechanisms in individual areas should be economic efficiency. From the foregoing the conclusion could be drawn that the two coordinating mechanisms were set on the same footing.

The report also suggested the need for changes in thinking about ownership relations. It continued to insist that collective ownership of the means of production was the foundation of socialism, but at the same time it claimed that the economic reform should create an atmosphere that allows different forms of ownership to exist side by side. It also promised that the main criterion in restructuring ownership relations would be the extent to which the restructuring contributes to the development of productive forces and the satisfaction of the needs of working people.

Let us examine to what extent the programmes were implemented. Both countries, primarily Hungary, took quite a stride. The role of the market was substantially expanded and conditions created for its application to capital and labour. In Hungary the monobanking system had already been liquidated in 1987; the National Bank was limited to the functions of a central bank in the West, and some of its departments were converted into commercial banks. Some banks started to sell bonds. The tax system was overhauled, and a value added tax was introduced in 1988. All these actions were implemented in Poland later. The private sector was also allowed to expand.

All these actions came too late really to lead to the rise of a fully- fledged market socialism. The economic situation and, with it, the political situation continued to worsen, and the regime plunged into a deep crisis. Sensing that the regime was no longer protected by the Soviets, that Gorbachev was no longer committed to Brezhnev’s doctrine, the opposition in Hungary and Poland was no longer interested in reforms which would salvage the socialist system; what it wanted was to bring down the regime. Its job was made easier because the crisis affected the CPs themselves in that they started to disintegrate rapidly. The Communist ideology had lost its hold over the supporters of the CP even earlier. In addition, the opposition had the support of the West.

CONCLUDING REMARKS

Though they did not bring a turnaround in the economy, the economic reforms of the 1960s in Czechoslovakia and Hungary had a positive effect on the economies of both countries and brought about political relaxation. Unfortunately for the socialist system, the Czechoslovak reform was brought to an end by military intervention and the Hungarian was stalled by internal and external pressures. When the economic reform started again in Hungary and was taken up by Poland in the beginning of the 1980s, the economic and political environment was worse for orderly economic reforms. This is in particular true of the second half of the 1980s. Though under pressure from the opposition, the CP leaders were willing to engage in reforms, but at the same time they were gradually losing control over the economy because of the nature of the reforms themselves, but mainly because a process of disintegration in the CPs themselves started. Due to the interruption in the 1960s reforms, precious time was lost, which negatively affected the further development of the reforms.

The introduction of market socialism had its beginnings when the socialist system came close to an end in Hungary and Poland and therefore it could not stand the test of time. To make a judgement about market socialism, to what extent it is a viable system, it would have been necessary to have such a system fully established and to let it function for some time. Of course, the establishment of market socialism could not be a matter of one or two years. In the history of mankind it would have been something new, never before experienced, and therefore the introduction of market socialism had to be the result of the method of trial and error.

Kornai always took the position that market socialism was doomed to failure. He writes in his 1993 article (p. 47):

For example, compare East Germany, Czechoslovakia, and Roma­nia - countries whose political leaders stubbornly resisted all market­socialist reform - with Yugoslavia, Hungary and Poland, and the Soviet Union, which took the market-socialist road for varying periods. The macroeconomic situation on the eve of the postsocialist transition is clearly worse in the second group than in the first: the budget deficit is greater, inflation is faster (or the combination of shortage and inflation more acute), and debt is higher. The market­socialist experiments led to a situation in which the leadership lost control.

I assume that J. Kornai’s verdict refers to market socialism, though he uses the term market-socialist reform in the quoted sentences, because several paragraphs below he writes: ‘The main proposition in this study is that the blueprint of market socialism is doomed to failure* (P∙ 47).

With the exception of Yugoslavia, Poland and Hungary took only the first steps towards market socialism, and therefore it was too early to make a judgement about it. Kornai would certainly object if I were to say that the deep recession which affected post-socialist countries in transition to a market economy is proof that a market economy is not good for the countries. Furthermore, to make a judgement about why countries which resisted economic reforms fared better with regard to macroeconomic equilibrium would require a deep analysis of the countries’ economic policies besides their economic mechanism. In addition, in talking about macroeconomic equilibrium Kornai forgets to consider equilibrium between aggregate demand and aggregate supply. Everyone knows that Hungary’s record for this indicator was the best and Rumania’s the worst.

Besides the argument that countries which did not experiment with market socialism fared better than those which did, Kornai presents further arguments which are supposed to back up his proposition. It would exceed the scope of this study to engage in a detailed analysis of his arguments, and therefore only some will be touched on briefly. He combines market socialism with communist monopoly rule, which is in accordance with his definition (sec p. 129). But market socialism does not necessarily need to be linked to one-party rule. When it started in Poland and Hungary the one-party rule was much undermined, and if the socialist system had survived, the communists would have probably shared power.

His further argument is 'there is no real decentralization without private ownership³ (p. 52). No doubt private ownership can ensure more decentralisation than state ownership. But private ownership is not necessarily superior to state ownership with regard to performance. (Before proceeding let me make clear that state ownership needs to be changed from what it was under the traditional system, where the state bureaucrats micromanaged state enterprises. It is imaginable that enterprises remain in the hands of the state, but the management of enterprises is privatised in different ways or made public.^1, Such an arrangement can eliminate the deficiencies which the traditional system generated.) As is known, ownership alone does not determine economic efficiency. The Economic Survey of Europe (1992), discussing the experience of market economics, writes that ‘the superiority of private enterprise depends critically on the degree of competition prevailing in the market, the incentive structures in alternative organizational forms, and the coherence of regulatory policies’. When all this is in place, still ‘the key factor determining the efficiency of an enterprise is not whether it is publicly or privately owned, but how it is managed’ (pp. 196-7).

The statement that ownership alone docs not determine economic efficiency is indirectly backed up by experience with privatisation as evaluated in three articles and reported by the Economic Survey of Europe (1992, p. 196):

divestment of state-owned assets in market economies has not unambiguously led to lower product prices, improved allocative efficiency, ameliorated internal efficiency in privatized enterprises, brought about people’s capitalism, or generated better service or quality of delivery. Moreover, public enterprises were often divested well below their ‘market value’ thus generating sizable short-term capital gains at the expense of the state - ultimately the taxpayer at large.

I agree, however, with Kornai that market socialism was doomed to failure, but not for the reasons he mentioned. In my opinion, such a system in small countries had no chance of survival because multinational corporations and financial markets, which manifested their economic power and solidarity more than once, will not put up with market socialism, seeing in it a danger to their interests.

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