Revolution of 1956
On October 23, a Budapest student rally in support of Polish efforts to win autonomy from the Soviet Union sparked mass demonstrations. The police attacked, and the demonstrators fought back, tearing down symbols of Soviet domination and HWP rule, sacking the party newspaper's offices and shouting in favor of free elections, national independence, and the return of Imre Nagy to power. Gero called out the army, but many soldiers handed their weapons to the demonstrators and joined the uprising. Soviet officials in Budapest summoned Nagy to speak to the crowd, but the violence continued. At Gero's request, Soviet troops entered Budapest on October 24. The presence of these troops further enraged the Hungarians, who battled the troops and state security police. Crowds emptied the prisons, freed Cardinal Mindszenty, sacked police stations, and summarily hanged some member of the secret police. The Central Committee named Nagy prime minister on October 25 and selected a new Politburo and Secretariat; one day later, Kadar replaced Gero as party first secretary.
Nagy enjoyed vast support. He formed a new government consisting of both communists and noncommunists, dissolved the state security police, abolished the one-party system, and promised free elections and an end to collectivization, all with Kadar's support. But Nagy failed to harness the popular revolt. Workers' councils threatened a general strike to back demands for removal of Soviet troops, elimination of party interference in economic affairs, and renegotiation of economic treaties with the Soviet Union. On October 30, Nagy called for the formation of a new democratic, multiparty system. Noncommunist parties that had been suppressed almost a decade before began to reorganize. A coalition government emerged that included members of the Independent Smallholders' Party, Social Democratic Party, National Peasant Party, and other parties, as well as the HWP. After negotiations, Soviet officials agreed to remove their troops at the discretion of the Hungarian government, and Soviet troops began to leave Budapest. Nagy soon learned, however, that new Soviet armored divisions had crossed into Hungary.
In response, on November 1 Nagy announced Hungary's decision to withdraw from the Warsaw Pact and to declare Hungary neutral. He then appealed to the United Nations and Western governments for protection of Hungary's neutrality. The Western powers, which were involved in the Suez crisis and were without contingency plans to deal with a revolution in Eastern Europe, did not respond.
The Soviet military responded to Hungarian events with a quick strike. On November 3, Soviet troops surrounded Budapest and closed the country's borders. Overnight they entered the capital and occupied the National Assembly building. Kadar, who had fled to the Soviet Union on November 2, assembled the Temporary Revolutionary Government of Hungary on Soviet soil just across the Hungarian border. On November 4, the formation of the new government was announced in a radiobroadcast. Kadar returned to Budapest in a Soviet armored car; by then, Nagy had fled to the Yugoslav embassy, Cardinal Mindszenty had taken refuge in the United States embassy, Rakosi was safely across the Soviet border, and about 200,000 Hungarians had escaped to the West.
With Soviet support, Kadar struck almost immediately against participants in the revolution. Over the next five years, about 2,000 individuals were executed and about 25,000 imprisoned. Kadar also reneged on a guarantee of safe conduct granted to Nagy, who was arrested on November 23 and deported to Romania. In June 1958, the Hungarian government announced that Nagy and other government officials who had played key roles in the revolution had been secretly tried and executed.
The Revolution of 1956 discredited Hungary's Stalinist political and economic system and sent a clear warning to the leadership that popular tolerance for its policies had limits, and that if these limits were exceeded, popular reaction could threaten communist control. In response, regime leaders decided to formulate economic policies leading to an improvement of the population's standard of livings. Pragmatism and reform gradually became the watchwords in economic policy-making, especially after 1960, and policymakers began relying on economists and other specialists rather than ideologists in the formation of economic policies. The result was a series of reforms that modified Hungary's rigid, centrally planned economy and eventually introduced elements of a free market, creating a concoction sometimes called "goulash communism" .
In late 1956, the party named a committee of mostly reform-minded experts to examine Hungary's economic system and make proposals for its revision. The committee's report marked the first step on Hungary's road to economic reform. Its proposals presaged many of the changes implemented a decade later, including elimination of administrative direction of the economy, introduction of greater enterprise autonomy, cooperation between private and collective sectors in agriculture, economic regulation using price and credit policies, and central planning focused only on long-term objectives. However, the committee's proposals were never really implemented. Some observers suggested that the party had solidified its power so quickly that it no longer needed to enact such drastic measures; others claimed that Soviet leaders opposed such reform until they ensured that the party (on November 1, 1956, renamed the Hungarian Socialist Workers' Party--HSWP) had consolidated its power and demonstrated a clear need for a fundamental economic change. During the chaos of the revolution, Hungary's collective farms lost about two-thirds of their members. Many left to become private farmers. In July 1957, Kadar appeased hard-liners in Hungary and abroad by agreeing to recollectivize agriculture, and in early 1959 the drive began in earnest. The regime combined force and economic coercion with persuasion and incentives to drive peasants back to the collective farms. The government abolished compulsory production quotas and delivery obligations and substituted voluntary contracts at good prices. It also permitted profit-sharing schemes and programs to promote technical innovation. The regime allowed peasants to retain sizable private plots and ample livestock and to choose between collective or cooperative farms. The farms also received substantial government investments. As a result, Hungary became the only country with a centrally planned economy where crop output increased as a result of collectivization. By 1962 more than 95 percent of all farmland had been collectivized either in the form of state farms or cooperatives. The collectivization drive deflected the hard-liners' criticism of Kadar for his advocacy of reform, and problems with the program's implementation, including excessive coercion of the peasants, later helped Kadar oust the hard-line agriculture minister.
By the early 1960s, Hungary was ripe for a political shakeup . Khrushchev had consolidated his position in the Kremlin and had begun a second wave of de-Stalinization, thus leading Kadar to believe that the Soviet leadership would support political changes in Hungary. Kadar replaced Ferenc Munnich as prime minister (who had served in that position since January 28, 1958), and thus assumed the top government post, as well as the leadership of the HSWP. He then dismissed other hard-line officials. Kadar's consolidation of power led to a more flexible, pragmatic atmosphere in which persuasion took on greater importance than coercion. Kadar relaxed government oppression and released most of those imprisoned for participating in the revolution. Soon Hungary became the leader of the reform movement within the Soviet alliance system. Kadar intended to provide the regime with some legitimacy and political stability based on solid economic performance. The Soviet Union demonstrated its support with its decision to withdraw its advisers to the Hungarian government.
Kadar next sought a modus vivendi with the population, summarizing the new policy with the slogan "He who is not against us is with us." As part of this "alliance policy," in 1961 he denounced the practice of making party membership a prerequisite for jobs demanding specialization and technical expertise. Kadar sought to remove opportunists who had joined the party solely for the status and economic benefits that membership conferred. Rather, Kadar wanted to open the government and economic enterprises to talented people who were prepared to cooperate without adhering to party discipline or compromising their political beliefs.
At the Eighth Party Congress of the HSWP in November 1962, Kadar supporters replaced Stalinists and incompetent officials in leading party positions. The congress also called for higher party recruitment standards, for elimination of political and class considerations in university admissions, and for allowing nonparty members to compete for leading public positions. Although the party still had influential conservative members after 1962, the Eighth Party Congress removed them from the party's policy-making core. As a result of these changes, by 1963 Kadar had acquired genuine popular support.
Plans for reforming the centrally planned economy steadily took shape after the Eighth Party Congress. Central Committee secretary Rezso Nyers, who supported a comprehensive reform rather than continued piecemeal adjustments to the economic system, took charge of economic affairs. The regime also appointed committees to prepare reform proposals. By 1964 the government had identified problems in the economy, including excessive investment, decreases in output and labor shortages in agriculture, misuse of inputs, hoarding of materials, and production of unsalable goods. Since the Treaty of Trianon, Hungary had depended on foreign trade, and in the early 1960s the government placed top priority on improving the trade with the West and the Comecon countries. Despite improving the terms of trade, however, by 1964 Hungary had accumulated a serious trade deficit, and the government could not slow imports without cutting material supplies and personal consumption. Officials realized that because Hungary had to boost exports, it would have to meet the needs, quality standards, and technological requirements of the world economy.
New Economic Mechanism
Economic problems also continued to underscore the need for reform. Agricultural output fell by 5.5 percent. In addition, the government increased production quotas, cut wages, and announced price hikes. Popular discontent rose as a result.
In May 1966, the Central Committee approved a sweeping reform package known as the New Economic Mechanism (NEM). Although many of its elements could be phased in during a preparation period, the central features of the reform could be implemented only with the introduction of a new price system, which was set for January 1, 1968. With the NEM, the government sought to overcome the inefficiencies of central planning, to motivate talented and skilled people to work harder and produce more, to make Hungary's products competitive in foreign markets, especially in the West, and, above all, to create the prosperity that would ensure political stability.
The NEM decentralized decision making and made profit, rather than plan fulfillment, the enterprises' main goal. Instead of setting plan targets and allocating supplies, the government was to influence enterprise activity only through indirect financial, fiscal, and price instruments known as "economic regulators." The NEM introduced a profit tax and allowed enterprises to make their own decisions concerning output, marketing, and sales. Subsidies were eliminated for most goods except basic raw materials. The government decentralized allocation of capital and supply and partially decentralized foreign trade and investment decision making. The economy's focus moved away from heavy industry to light industry and modernization of the infrastructure. Finally, agricultural collectives gained the freedom to make investment decisions. The NEM's initial results were positive. In the 1968-70 period, plan fulfillment was more successful than in previous years. The standard of living rose as production and trade increased. Product variety broadened, sales increased faster than production, inventory backlogs declined, and the trade balance with both East and West improved. In practice, however, the reform was not as sweeping as planned. Enterprises continued to bargain with government authorities for resources from central funds and sought preferential treatment. The reform also failed to dismantle the highly concentrated industrial structure, which was originally established to facilitate central planning and which inhibited competition under the NEM.
The Kadar regime failed to understand that real economic decentralization required political reform to resolve conflicts that naturally arose between different interest groups. The government's problem was to expand "socialist democracy," that is, to build a system that would simultaneously resolve conflicts and maintain the HSWP's political monopoly. In fact, the government attempted some incremental changes. The courts gained greater independence in administering justice, and changes were introduced in parliament as deputies on committees of the National Assembly were instructed to examine and debate legislation more effectively. A 1966 electoral law created single-representative constituencies and contained a provision for elections with multiple candidates. However, the Patriotic People's Front (PPF) retained control of nominations. Even after a second electoral law in 1970 made it legal for other groups to nominate individuals, few multiple candidacies actually arose. These minimal changes quickly encountered resistance from entrenched party officials. The 1968 Soviet invasion of Czechoslovakia and suppression of the reform program there had also discouraged the HSWP from pursuing further political changes. However, Kadar was able to work out a modus vivendi with the Soviet leadership. The Soviet Union allowed Kadar leeway to implement economic reforms, develop some economic contacts with the West, and permit Hungarians to travel abroad as long as Budapest accepted Moscow's hegemony in Eastern Europe and adhered to Soviet foreign policy positions.
The Kadar regime gave serious attention to implementing the NEM from 1968 to 1972. In 1971, however, counterreform forces were gathering strength and calling for the return of central controls. The opposition arose from government and party bureaucrats and was supported by large enterprises and some workers. The bureaucrats perceived the NEM as a threat to their privileged positions. The large enterprises saw their income drop after the introduction of the NEM and were troubled by competition for materials and labor from smaller enterprises. Disaffected workers who were on the payrolls of outdated, inefficient industries resented the higher incomes earned by workers in more modern firms. This opposition successfully reversed the reform a few months after Moscow expressed reservations about the NEM and concern about "petit bourgeois tendencies" in Hungary.
In November 1972, the Central Committee introduced a package of extraordinary measures to recentralize part of the economy, but the regime did not formally abandon the NEM. Fifty large enterprises, which produced about 50 percent of Hungary's industrial output and 60 percent of its exports, came under direct ministerial supervision, supported by special subsidies. New restrictions applied to small enterprises and agricultural producers. Wages rose, prices came under central control, and the regime introduced price supports. In the following years, the government also merged many profitable small firms with large enterprises.
The 1973 world oil crisis and the subsequent recession in the West caused a drastic deterioration of Hungary's terms of trade and strengthened opposition to the reform. Inflation threatened, and counterreformers argued for protecting the living standard of the working class from an economic shock in the capitalist world. The government intervened by raising taxes on successful firms and increasing government purchases and subsidies. Consumer prices eventually fell below the level of producer prices, and Hungary accepted credits from Western banks. Centralized material allocation was reintroduced. After the oil crisis arose, ideological opposition to the NEM and to "bourgeois attitudes" arose. A clampdown on intellectuals began, and Nyers lost his Politburo position in 1974.
By 1978 Hungary's dismal economic performance made it clear even to the counterreformers in the leadership that a "reform of the reform" was necessary. Return to central control had only rewarded inefficiency and stifled innovation and initiative. Enterprises ignored market signals, and shortages plagued producers. Large amounts were invested in poorly conceived projects, and a trade deficit accumulated. Hungary's hard-currency debt reached US$7.5 billion by 1978 and had jumped to US$9.1 billion by 1980.
In 1978 the government admitted that its attempt to shield Hungary from world economic conditions could not be continued. Hoping to improve its trade balance with the West and avoid forced rescheduling of its debt, the government announced its intention to boost exports. This policy change marked the beginning of a new wave of reforms. First, the price system was restructured to bring consumer prices gradually in line with world market prices and to ease the burden of subsidies on the state budget. Next, producer prices were reformed to bring about more rational use of energy and raw materials. Finally, the government overhauled exchange-rate and foreign-trade regulations.
In 1979 and 1980, the government implemented a number of institutional reforms. The new reforms abolished branch ministries and replaced them with a single Ministry of Industry intended to act as a policy-formulating body without direct authority over enterprises. Large enterprises were broken up into smaller firms. In 1982 the government legalized the formation of small private firms, including restaurants, small shops, and service companies, and it permitted workers to lease enterprise equipment, use it on their own time, and keep the earnings from their products. In 1984 the regime introduced new forms of enterprise management, including supervisory councils that would include worker-elected representatives. New financial institutions also emerged, and a 1983 government decree allowed enterprises, cooperatives, financial institutions, and local governments to issue bonds.
In the early and mid-1980s, Kadar had encouraged a limited amount of political liberalization. The HSWP maintained its monopoly on political power, but the norms of democratic centralism were looser than in other countries of Eastern Europe. County party secretaries acquired the freedom to make decisions of local importance, including control of personnel. The government again exhorted delegates of the National Assembly to scrutinize laws and government policies more critically. In 1983 a new electoral law required a minimum of two candidates for each national and local constituency in general elections. Trade unions began to defend workers' interests more energetically. Journalists were urged to expose low- and mid-level corruption and abuse of power, although they could not criticize the regime's basic tenets. The leadership also bolstered economic reforms of the early 1980s with a foreign policy geared to a greater degree than before on trade with the West, and it maintained this course during the deterioration of superpower relations in the early 1980s. Thus, the economic reforms of the late 1960s had also come to provoke a measure of political reform and changes in foreign policy. These new departures were inspired in large measure by Hungarian nationalism, a force that had long encouraged Hungarians to control their own destiny and to resist the hegemony of their larger, more powerful neighbors.
SOURCE: Area Handbook of the US Library of Congress