Hungarian transition after three years

Abstract

THREE YEARS AFTER THE SYSTEMIC CHANGE in 1990, followed by continuing assiduous reforms under a stable new government, the economy is still being held back by severe crisis. On the surface, judging from shop windows, things might seem to have turned for the better, but the harsh economic indicators signal a deep crisis. It is not simply that the euphoria after the turning-point has disappeared. Figure 1 and Table 1 reveal that GDP and real incomes are still declining, industrial output was 40% less in 1992 than in 1988 and agricultural output dropped to less than half its earlier level. The trend is continuously down, suggesting that the decline still continues. Temporary positive developments, like the balance of payments surplus, are now turning negative, and seem to follow a downward spiral. Unemployment is still high (13%) and slightly growing, with a similar trend in crime rates. Looking at the indicators after three years, the question inevitably arises: what are the reasons for such a crisis? The question is the more interesting since Hungary, after a long period of step-by-step reform preparation, transformed peacefully in 1990. That there is a severe crisis is obvious. It is no exaggeration to say that the present crisis is greater than the great depression (1929-33). Then national product dropped by 7%, now by 19%, industrial output decreased by 12% then, while now by 36% (Korai, 1993). Also, there is a general understanding that the newly liberalised market and the monetary mechanism do not work (Erd6s, 1993(a)). Expectations before the systemic change were not optimistic either but the gravity and duration of real developments surpassed the expectations even of those who tried to estimate the effects of the transformation. In retrospect, some of them are now blaming Western economic theories for lacking any advice on transformation. These theories, they say, tell us only that the predominance of private ownership and restriction of the redistributory role of the state budget are necessary conditions for a market economy, but do not provide answers as to what to do in a not-underdeveloped post-communist society where private ownership is rather limited and all public services are financed by the state budget (Tardos, 1993(a)). In addition to inadequate theories, Komai also blames the politicians and the new government for not preparing the public for such difficulties.1 Politicians, however, were not aware of such a danger, and a look at the new