The economics and politics of reform in Hungary

Reform of the domestic economic system is the distinctive element of Hungary's foreign economic strategy in the 1980s. The need for systemic economic reform stems from Hungary's status as a small country, heavily dependent on foreign trade, many of whose imports can no longer be met within the Council for Mutual Economic Assistance alone. The many obstacles to economic reform lie in a heritage of policy choices that responded to domestic and CMEA supply constraints rather than to principles of comparative advantage. Such policies undercut the initial economic reform in 1968 and contributed to a major economic crisis in 1979–82. The subsequent changes in policy priorities and institutional mechanisms prompted by this crisis aimed to reduce Hungary's insulation from the larger international economy and make the economy more efficient. Politically, economic reform is possible in Hungary largely because of the impact of the 1956 revolt on both the subsequent composition of the political elite and the norms and features of collective leadership that guided its decision making afterwards. Nevertheless, the political and economic structures on which collective leadership rests weaken reform advocates and obstruct consistent implementation of their policy preferences. Yet Hungary's economic situation in the late 1970s altered the political balance offerees in favor of reformists, permitting them to alter both economic structures and policies.