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Economics of Hungary in the Postwar Period

Updated on May 29, 2013

Economics and business went through radical changes in Hungary during the twentieth century. First communism and its collectivistic policies ruled over the lives of both businesspersons and the people. Since officially announcing the freedom of Hungary on October 23, 1989, Hungary is experiencing the longest and most democratic period of freedom in its twentieth century history.

Thanks to a so called three-year-plan, which was accomplished in only two and a half years, a tremendous growth resulted in the Hungarian economy, especially in manufacturing and other industries. The industrial production output in 1949 was 28% higher than that of the last peaceful year before World War II. Heavy industry grew by more than 66%. This growth of production is due mostly to the reconstructions. The main reason for it is the fast growth of the industrial assets, which was almost 20%, and two thirds of this growth from the growth of the number of workers. By 1949, the transportation system also recovered. Traffic on both railways and roads was 1.5-2 times as much as that before the war.

The improvements funded by the government regarded almost entirely the heavy industry. Ninety percent of all government expenditures went to this branch. MDP’s (Hungarian Workers’ party, which was the only party during the communist era in the country) favorite saying and policy was that Hungary should be made the country of iron and steel. At the same time, investment plans into agriculture were about 15%, of which only half was carried out.

This lack of investments into agriculture could be seen in the slow introduction of machines in the sector. This resulted in a reduction of production output of agriculture by 15 percents.

During the three-year-plan welfare and the standards of living also grew quite considerably, but, except for a few sectors, it was still lower than before the war. The main cause of this welfare improvement is undoubtedly due to the dramatic decrease of unemployment.

In 1949, the private sector was collectivized. An act in December of that year did this for plants employing at least ten workers, and regardless to the number of employees, all presses and electricity works. At the same time, the party and the government agencies tried to outdo the regulations and did the same thing for most of the retailers and the small-scale industries. Collectivizing these small companies was more of a political decision than an economic one. This is because by this time the governmental sector was so widespread, that it was not necessary to do it.

On April 3, 1949, the MDP, which was the communist party and also the only party, made the first five-year plan public. This plan wanted to further improve heavy industry in Hungary and catch up with the West’s industry. It calculated with 35 billion forints, of which 17 would have gone to industry, 6-6 to agriculture and transportation, 2.5 to construction of houses, and 3.5 for social and cultural purposes. Output of the industry had to increase by 80% in 5 years, which would have been 230% of 1938’s production. The standard of living was planned to improve by 35%. By the second half of 1950, due to the extensive investments into the industry, there was a shortage of workforce. Six hundred and fifty thousand people previously being in agriculture were forced to work in heavy industry. This resulted in a lack of workforce in agriculture, which was eased by women starting to work. Because living conditions were hard, these women sometimes took up jobs that meant strenuous work physically. Mobilization of the workers was not organized well, so only a small portion of the workmen stabilized and stayed at one workplace for a longer time. It caused productivity and output to drop considerably.

International events like the formation of NATO in1949, urged the modification of this five-year plan to be able to modernize the army in Hungary. Due to high expectations in Moscow of the quality of the army, investments in the army grew to 14.3% in ’49, 16.1 in ’50, and 18.2% in ’51. The investment plans into the war industry was actually higher than what could be carried out in reality, since these expenses exceeded GNP (which is the total output of a country) by almost 20%. After this, the party made one bad economic decision after another. This extensive improving of the army restructured economic policies. Heavy industry no longer enjoyed special treatment, except for those branches that were related to producing war and army equipment. This policy finally failed, because the plan to modernize the Hungarian army failed.

The forced industrialization had a very good effect in decreasing the economic gap between Budapest and other cities in Hungary. Also during this time several cities were founded, such as Dunaújváros, Komló, Kazincbarcika, Oroszlány, and Várpalota. Plants and factories were also introduced into cities that were underdeveloped industrially, such as Békéscsaba, Kiskunfélegyháza, Debrecen, Gyöngyös, Szolnok, Jászberény, Hódmezővásárhely, Zalaegerszeg, Nyíregyháza, Gödöllő, Veszprém, and Kaposvár.

On December 31, 1945, there were 180,087 private artisans with 141,955 employees. By February 1, 1953, their number reduced only to 46,199 and 5,212 persons. In Budapest, there were 11,396 and 34,803 in the country. In 1950, private entrepreneurs did 30% of all retail sales. By the end of 1952 this figure was only 1%.

During the first stage of industrialization the number of workers grew by about 400,000 people, which was about 50%. The previously unemployed masses, primarily women, started to work. More and more workers in agriculture started to work at industry. The percent of workers in five years decreased from 54.5 to 43%. Unemployment, a problem in Hungarian society for decades, was solved in only a couple of years. Besides employment, the introduction of waged vacations, family aid, social insurance, and pension was a major accomplishment.

In 1953 the overall production of agriculture was somewhat higher than the ten years’ average before the war, but in some cases it was lower. At the same time, during the years before 1953 the quality of production changed very unevenly. In1951 there were 9.7 tons of wheat, (7.1 in 1952), 9.3 tons of barley (7.5 in 1952), 14.1 tons of corn (6.4 in 1952), 58.1 tons of potatoes (30 in 1952), and 132 tons of sugar-beets (67 in 1952) produced per acres.The breeding of animals was even worse. Output of animal breeding mostly decreased between 1950 and 1953. In 1950 there were 23.8 domestic animals per a hundred acres. In 1951there were 21,4, in1952 22.6, and 23.9 in 1953, which is only a few more. The losses of 1951 and 1952 were mainly caused by the low prices of the domestic animals, and the lack of hay, which resulted in the mass starving and death of ten thousands of pigs and sheep, and thousands of cows and horses. This caused the inability of the producers to meet the demands, which in turn decreased the standards of living, which resulted in growing dissatisfaction with the system, causing more political instability. These problems of course could not be solved by mere strong governmental actions.

In 1957, after the revolution there were lots of changes in the policies of the government concerning Hungary’s economy. Politicians started to see that they cannot force the people to do everything the party wanted. There was a little more freedom and the WHOLE economy as a whole was planned to improve.

The government planned to help the formation of new “termelő szövetkezet” production organizations, or “tsz” as they are commonly referred to, and to strengthen the already existing ones both politically and economically. It was important that these organizations manage businesses better and provide higher standards of living for their members than the “private” businesses. The government worked out a plan to modernize and increase the production of agriculture. These new actions were welcomed and soon produced fruit. The production organizations had great accomplishments. They started to work the land by modern machines. This caused the production organizations to produce more than others by 10-20%.They were better in breeding too. While in 1957 there were 13.7 domestic animals per acre, in 1958 there were 17.3. In 1955 there were 1790 liters of milk per cow. In 1957 there were 1980, and in 1958 there were 2380 liters of milk from each cow. The living standards of members of these organizations in 1957 grew by 12% and by 11% in 1958. The production organizations started to have good a reputation. During the next few years hundreds of thousands of people became members of the production organizations. In 1960 there were 341,000 families, and 380,000 people who chose to be member of a production organization. Also, responsible people were named as heads of them. The government taught about disabled members too. In all of Europe, it was first introduced in Hungary to have the disabled receive monthly payments. Although originally it was only 260 forints a month, the psychological influence of being the first on the whole continent to receive aid was important. In 1961 237,000 more families and 268,000 more people entered the production organizations. By 1961 there were a total of 4,681 production organizations, or production organization groups.

The second three-year plan was formed in 1957, right after the production successes in agriculture. The authors of this plan still kept industrialization chiefly in mind, and as before the revolution, heavy industry was treated as the absolute favorite, but this time heavy industry did not mean only the mining of coal and metallurgy, but rather engineering, electric and chemical industry were the main targets of investments. So even before the plan’s details were decided all the authors silently agreed to give special attention to the manufacturing of diesel-engines, anti-friction bearings, and the research and development in the telecommunication and the instrument industries. Everyone also wanted to develop chiefly those industries that the country had sufficient enough raw materials for, and branches that required higher technical knowledge, and manufacturing industries of less need for raw materials.

The congress passed the second three-year plan on June 20, 1958 both in general and in details. According to it, the output of industry had to grow by 22% between January 1, 1958 and December 31, 1960. This also included capital goods, which had to grow by 28% and consumer goods, which had to grow by 20%. This has to be done by, “Az ipari termelés növelésének minden egyes iparágban együtt kell járnia a műszaki kultúra, a munka termelékenységének emelkedésével, a minőség javulásával, a kereslethez jobban igazodó áruválaszték kialakulásával”. (Pp. 441, The growth of industrial production has to go along with the improvement of technical culture, work efficiency, quality and the formation of a variety of goods adjusting itself more to the demand in all industries). The plan wanted 22% growth in mining, 31% in chemical industry, 35% in engineering industry, 60% in instrument manufacture, 70% in telecommunication industry. Thirty two billion forints had to be invested by the government in three years.

During the time of the plan 110,000new houses were projected to be built, 60% more than during the first five-year plan. This was planned to be done by loans and by guaranteeing building materials. Almost 2 billion forints went just for restoring houses. The plan also overtook the supplying of 220 villages with electricity. Trade balance was also improved. The pay off of loans from other communist states had to be started by 1959. Although this plan was designed well, since the methods of leaders and the way of carrying out the plan did not change, it actually did not accomplish most of what was planned in 1956 and 1957.

By 1960 the main projections of this three-year plan started to show signs of actually being met. Figures were as follows: the governmental and the organizations’ production grew by 39% in 1960, compared to the 1957’s figures. In three years the number of workers in the industry grew by 17%. Assets were higher by 24% than in 1957. Two electric power plants were built during this time. Some older ones were also renovated.

The second five-year plan was constructed in 1958. The main objective at this time too was to further improve the army-related industries. The party wanted to improve the production of such industries, again mostly heavy industry, by 65-70%. The output of agriculture had a projection to improve by 30-32%. Two hundred to two hundred and five billion forints were decided to be invested during the next five years. If the Gross National Product grew by 50%, and the efficiency of working by 37-40%, than the real incomes were to increase by 26-29%. In opposition to the other plans, this second five-year plan emphasized improving the efficiency of already existing plants rather than building new ones.

The next two decades resulted in the growth of discontent and a crisis in the system. The slowdown of economic growth, the lagging behind of transportation, the growing of international debt, and a decrease in the standard of living characterized these years.

The system of free, economy, which Hungary was forced to leave and exchange for a communist economy, was finally restored after four decades and a series of misdirected and misleading economic plans, which generally hurt the country’s economy more than it helped it. In 1989 the Hungarian economy went through radical changes. The politics, the laws, the ownership, the organizational structures, and the demographic pictures started to change and are still changing today. The first half of the 1990s was characterized by the breaking down of the socialist economic structures, and the second half was characterized by the stabilization and the stimulation of the new system. Up until 1993 the transition was characterized by the moderation of the economy (the bottom point was in 1991 when it was less than the previous year’s by almost 12%), but ever since the Gross Domestic Product grows every single year. Since 1997 this growth is above 4% yearly, so now it is higher than in 1989, when the country became an independent state. With the exception of a couple strategically important and large enterprises, by 2000 privatization has been finished. The increasing economic productivity, the becoming internationally more and more competitive, and a part of the privatization incomes were spent on decreasing foreign debt. The net liabilities were $11.3 billion, which was more than 23% of the Gross Domestic Product in 1999. The increased economic growth improves the situation of the country’s economy, but it is still far behind the most developed countries of the West. In terms of HDI (Human Development Index, which among others, also considers the demography and how educated the population of a certain country is) Hungary is the 43rd. (54) Not counting very small countries, in terms of Gross National Product per person, Hungary is the 21st. Compared to the EU 15, Hungary has a consumer spending rate of 48%. Including privatized enterprises; the country now has over 1.1 million registered companies, of which more than 20% does not actually operate. Over half of the operating companies (442,000) are private companies. There are also 15,000 social security and governmental budgeting organizations. Between 1990 and 1999 there were 21 billion dollars coming into the country as liquid investment. Two thirds were invested as a result of the privatization. The process reached its high in 1995, when $4.5 billion came into the country, due mostly to privatization of energy-providing companies. By 1998 there where almost 26,000 operating companies that had some foreign investors in them. Their total official capital was coming close to 3000 billion forints, of which investors outside of the country held 2400 billion.

Dominant (above 70%) foreign shares in companies are in the sectors of money and financing, in the sectors of chemical and instrument industries, in the food industries, in manufacturing of building materials and in the energy industry. On the other had their role in agriculture and mining is insignificant. In the aspect of foreign liquid investment per country, Germany leads the way with 25%, then America with 15%, and then France, Austria, Italy, Belgium, Holland, and finally Great Britain closes the list of the mayor investors into the Hungarian economy. More than half of the investments went to Budapest. Most of the newly constructed plants are built in western-, and central Hungary. The existence of the modern economic system can be seen from the fact that the major sector of the economic structure of Hungary is the servicing sector. Agriculture comes with 5.5% of the GDP, and then comes industry with 32.8%, then trade, tourism and transportation together with 23.4%, and all other services with 38.3%. Agriculture in Hungary employs 7.1%, industry employs 34%, and the services employ 58,9% of all active workers.

There are great differences between Budapest and the rest of the country. Fifty six and a half percent of the companies have foreign investors. 57,3% of all the Research and Development workers work in Budapest. Budapest is the city of the servicing sector; it produces only 16.6% of the industrial output of the country. The other region that was successful in changing is the northwestern region. On the other hand the changes took quite a time in the northeastern region. In the northwest the development can be seen even in smaller villages not just in the big cities. The development of each region shows a west-east slope, which means that as we move more to the east of the country, we see less development. Industrial parks were new things in the 1990. In 1999 there were 112 industrial parks in about 100 cities, of which is mostly in the western part of the country

After the World War II, for 40 years, Hungary went through a period of a command economy. In the early 1990s the country got rid of Marxist, and the communist ideas of how to manage the economy, and formed a free, market economy. Although still a lot has to be done, both in the field of legal control and regulation and on the field of economics, Hungarians are proud of their accomplishments. In the last years a lot of development can be seen.


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