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When Socialist Hungary Went Neoliberal

Adam Fabry

The events of 1989 are usually remembered as an unprecedented extension of the “free market” to formerly socialist countries. But as the history of 1970s Hungary shows, neoliberal restructuring had never been limited to the West — and spread East long before the fall of the Berlin Wall. 

Budapest, 1968. Wikimedia Commons

Interview by
David Broder

Thirty years ago, the revolutions across the Eastern Bloc brought the end of Soviet-style socialism in Europe. With the defeat of those who sought to reform the system from within, it was the partisans of liberal democracy and “free-market” economics who most shaped the years that followed. The neoliberal restructuring that spread from East Berlin to Vladivostok brought profound social shifts. And yet it wasn’t wholly unprecedented.

We often think of the neoliberal revolution of the 1970s as a Western phenomenon. With the decline of the rapid growth that had marked postwar decades, the rising neoliberals went on the offensive against the public sector and labor movements across the core capitalist countries. But as a new book argues, this neoliberal revolution wasn’t limited to the West – for the “reforms” that the neoliberals pushed were also adopted by self-described “socialist” regimes in the Eastern Bloc.

Adam Fabry is author of The Political Economy of Hungary. From State Capitalism to Authoritarian Neoliberalism. He spoke to Jacobin’s David Broder about the early forms of neoliberalism under the one-party regime, the factors that brought this state to collapse, and the combination of neoliberal restructuring and nationalist authoritarianism under Viktor Orbán’s rule.


DB

1989 saw the end of one-party rule by the Hungarian Socialist Workers’ Party (MSZMP). This is often seen as the moment when bureaucratic elites realized that Eastern Bloc socialism was no longer functioning and thus threw in the towel. However, you date the start of the shift far earlier, citing not just the existence of a private sector, but antecedents of neoliberalism.

What’s the difference between these two things — and what sense does it make to say that an early form of neoliberalism existed in a “socialist” country?

AF

Of course, 1989 is a decisive turning point in history. Having said this, I don’t think that a term such as the “private sector” is very helpful to us if we want to understand the transition towards neoliberal capitalism in Hungary (and elsewhere in the Soviet bloc).

The private sector basically refers to the part of the economy in which privately owned businesses operate, principally driven by the profit logic. (These can range from small businesses owned by one or a few people, such as your local coffee shop or plumber, to large transnational enterprises, such as Audi or Facebook.)

In the case of the Soviet bloc regimes in Eastern Europe, the private sector was formally banned following the introduction of socialism (or, as I argue, “state capitalism”) in the late 1940s. Hungary, of course, stood out as the most liberal regime in the Soviet bloc. So although the Sovietization of the economy was declared with great fanfare in August 1949 (when the People’s Republic of Hungary was established), small pockets of the private sector survived. In fact, as the regime wore on, the private sector gradually mushroomed (in particular following the introduction of the New Economic Mechanism, NEM, in 1968).

As a result, by the mid-1980s, research by Hungarian sociologists showed that as much as 70 percent of all households in the country were earning part of their income from the private sector. However, the existence of a private sector (even if relatively small compared to Western standards) does not tell us very much about how or why neoliberalism developed within Hungary.

Indeed, “neoliberalism is a much broader concept than “private sector.” I think it needs to be understood in three, mutually interrelated ways.

Firstly, it denotes a relatively loose set of economic ideas, including a strong ideological commitment to the efficiency of private enterprise, yes, but also the “self-regulation” of markets and tariff reductions, and a monetarist analysis of inflation. As Pierre Dardot and Christian Laval demonstrate in The New Way of the World, the origins of these ideas date back to the interwar years and can be found on both sides of the Atlantic.

Second, neoliberalism represents a class project, aiming not so much to “restore” the power of economic elites (as argued by David Harvey in A Brief History of Neoliberalism), but instead to re-establish the conditions for capital accumulation following the global crisis of capital accumulation (1968-75).

Third, and finally, as neoliberalism gradually gained traction amongst ruling classes across the world it has come to represent the current phase of global capitalism. In this regard, neoliberalism is, among others, characterized by a structural reorientation of the state towards export-oriented, financialized capital, open-ended commitments to market-like governance systems, privatization and corporate expansion, a deep aversion to social collectives and the progressive redistribution of wealth on the part of ruling classes, etc.

Following this three-way definition of neoliberalism, the regime change in 1989 comes into a completely different light. It has less to do with the replacement of one system for another (i.e. “socialism” with “capitalism,” or “planned economy” with “market economy”), as suggested by mainstream readings of the transition. Instead, it has much more to do with the preservation of class power, in this case the technocratic elite of Hungarian state capitalism, which sought to save its own dominant role after it becomes clear that the centrally planned system is no longer sustainable within the context of an increasingly globalized capitalist world economy.

This point is usually missed even by critical readings of neoliberalism in Eastern Europe and the former Soviet Union, such as those of the late Peter Gowan or David Harvey, who see the ascendancy of neoliberalism in the region as a result of external pressures, such as hegemonic Western powers, global and regional bureaucratic organizations, such as the IMF or the EU, Western-based neoliberal think-tanks, etc. Instead, I argue that we can trace the origins of “proto-neoliberal” ideas in Hungary to the mid-to-late 1970s, when the MSZMP leadership attempted to steer the Hungarian economy away from the Soviet bloc and further integrate it with the capitalist world economy, in response to the negative impacts of the global crisis of capital accumulation. In this regard, I agree with the likes of Johanna Bockman, Gil Eyal, and Agnes Gagyi, who perceive Eastern Europe as an important laboratory for neoliberal ideas during the Cold War and emphasize the interaction between reform economists and policymakers in the region and the West.

DB

1956 and 1968 saw large-scale social revolts in Eastern Bloc countries, but there is no clear link attaching the demands raised at the time and the particular economic liberalization measures like the New Economic Mechanism of the 1960s. In what sense were these latter a response to popular pressure — perhaps in some diffuse form, for instance the concern to satisfy the population with more consumer goods? Did these and other reforms pose ideological problems — and encounter opposition — within the MSZMP and Hungarian society?

AF

The introduction of economic reforms, such as the New Economic Mechanism (NEM) in Hungary, was first and foremost an attempt by the leadership of the Soviet bloc regimes to overcome the structural limitations of Soviet-style state capitalism. The reason for this was straightforward: throughout the Soviet bloc, economic growth and investment in the period between 1961 and 1965 was decelerating compared to the previous five-year period, as well as compared to the “capitalist” economies in the West.

At the same time, you are right in that there was also a genuine attempt to cater to the material and political demands of the population. In the case of Hungary, the dual logic behind the NEM is very clearly demonstrated in the internal documents of the MSZMP. For example, a 1966 Central Committee document that I cite in my book states,

[I]ts [the reform program’s] economic necessity is rooted in the fact that the past sources, reserves of economic growth are being depleted. Hence, rapid growth in the future is only possible through a more intensive exploration of our internal economic reserves and by accelerating technological development. The political importance of the reforms lies, above all, in the fact that it seeks to ensure a rapid increase in the living standards of the masses and strives to ensure that the living standards of each worker will be more dependent on the social usefulness of his or her labor, individual performance, and collective productivity.

Of course, the embrace of economic and political reforms posed difficulties for Soviet bloc leaders, such as János Kádár, and they often had to draw on their linguistic creativity in order to legitimate the reforms. In terms of opposition, the NEM was opposed by Stalinist “hardliners” within the party-state (e.g. Béla Biszku, Zoltán Komócsin, Árpád Pullai and others) and managers of big state-owned enterprises.

More interestingly, however, from a left-wing perspective, is that it was also opposed by sections of the working class, in particular industrial workers, who complained of falling living standards, increasing over-time work, and the emergence of a “new class” comprised of enriched managers and party intelligentsia members in the years following NEM’s introduction. Unfortunately, however, their protests did not find wider audiences in society.

DB

You like other scholars identify a link between the end of three decades of postwar growth in the West — the so-called Trente Glorieuses of 1945 to 1973 — and the crisis (or overthrow) of the Keynesian model in the West. In David Harvey’s analysis, the subsequent years saw business elites and neoliberal think tanks try to “restore” the power of economic elites, or as you have it, re-establish profitability after the 1973 crisis.

What was the effect of the crisis on the Eastern Bloc countries (or Hungary specifically), and why did it impose changes in its own productive model?

AF

Yes, I think it is important to relate the ascendancy of neoliberalism with the demise of the various statist forms of capitalism (Keynesianism in the West, import-substitution in the Global South and state capitalism in the Soviet Bloc) that had dominated between the 1940s and the early-to-mid-1970s. Having said this, while I think that David Harvey’s work has greatly contributed to our understanding of neoliberalism, I don’t agree with his reading of neoliberalism as an attempt to “restore” the power of economic elites. There are two reasons for this.

On the one hand, in the West, the power of economic elites was never “lost” in the first place in the West, even during the heyday of Keynesianism. Sure, the working class in the West won a number of important concessions during this period (e.g. nearly full levels of employment, pensions, public healthcare and housing, etc.), but at the same time, this was also a period when capital recorded historic levels of economic growth.

On the other hand, Harvey’s claim also runs the risk of endorsing the Stalinist myth that the Soviet bloc regimes were somehow “post-capitalist” societies, in which a new capitalist class (or “economic elite”) had to be created anew after their demise. However, rather than perceiving these societies as fundamentally different from their competitors in the West, I agree with those Marxist activists and scholars (like the works of Chris Harman, Gareth Dale or G.M. Tamás) who point to the striking similarities shared between the two systems (e.g. the separation between producers and the means of production, the persistence of wage labour and exploitation of workers, the persistence of a money economy, and the ferocious drive to accumulate capital, etc.).

From this perspective, the Soviet bloc regimes remained capitalist societies, with the difference that the means of production were nominally owned by the state and in practice controlled by an ideological bureaucracy. As the late Chris Harman argued, the ruling bureaucracy of the Soviet bloc regimes “were members of a capitalist class, even if it was a class which collectively rather than individually carried through exploitation and accumulation.” This, in turn, also explains the decisions taken by central planners in the wake of the 1973 crisis.

In the case of Hungary and other Soviet bloc countries, the crisis of the 1970s was a stark reminder of the grim realities of the world market and the limitations of COMECON integration. In order to overcome the sclerotic characteristics of their economies and avoid the introduction of unpopular and potentially explosive austerity measures (as pursued by governments in the West), most Soviet bloc regimes sought greater integration with the West.

This was to be achieved by importing advanced machinery and technology, financed by loans provided by Western states, banks and international financial institutions (IFIs), such as the IMF and the World Bank. In Hungary, this policy shift was approved by the MSZMP Central Committee in 1977. However, the plan backfired, as Hungarian exports failed keep up with a rising current account deficit and state debt.

The problems were compounded by Moscow’s decision to impose world market prices on oil (from 1975 onwards) and Washington’s decision to spike interest rates in 1979 (also known as the “Volcker Shock”). As a result, inflationary pressures went through the roof and by the early 1980s the country’s foreign debt was reaching precarious levels.

As access to credit dried up on global financial markets, the Kádár regime faced a liquidity crunch in the spring of 1982 (indeed, Hungary’s debt crisis was similar to the fate of many other ‘developing’ countries in the 1980s), a situation that was only solved by further loans from Western banks, World Bank and the IMF (which Hungary had joined earlier in the same year). From then onwards, the fate of the Kádár regime was sealed.

DB

If neoliberalism is a class political project — not simply the opening up of the economy to the free market, but rather the active creation of a new order – what kind of figures, or forces, drove this process Hungary in the late 1970s and early 1980s? Were the “reform economists” involved in dissident circles? And if they could travel relatively freely to the West, in what sense were their ideas informed by – or even developed thanks to the active intervention of – their US counterparts?

AF

In Hungary, the molecular forces in favor of proto-neoliberal reforms were an “unholy alliance” that included radical reform economists, enterprise managers, technocrats within the MSZMP, and dissidents. In my book, I focus in particular on the role played by an influential group of young, radical reform economists at the Financial Research Institute (Pénzügykutató Intézet, FRI), the official research institute of the Ministry of Finance, as the “organic intellectuals” of proto-neoliberalism in Hungary.

The members of this group included the likes of Lajos Bokros, György Matolcsy, and György Surányi, all of whom would go on to have important careers as ministers, bank executives, and power figures following the transition. The FRI economists were well-trained in neoclassical economics (the lingua franca of neoliberalism) and harbored close connections with both “reform communists” within the party-state and the nascent democratic opposition in Hungary, as well as international financial circles (many of them were fluent in English and/or German), which provided them with a heightened level of authority in reform debates in the 1980s.

In 1987, after having received the green light from reformers within the MSZMP (e.g. Rezső Nyers and Imre Pozsgay), the FRI economists published a renowned economic manifesto, “Turnabout and Reform” (Fordulat és Reform) in a samizdat journal named Medvetánc. The document was officially edited by five members of the FRI but, in fact, involved contributions from more than fifty economists, political scientists and sociologists (some of whom were reform-minded MSZMP members).

The document outlined the central ideas of the transition: e.g. the liberalization of domestic prices and trade in order to promote export-led growth, the pursuit of macroeconomic stability in order to reduce foreign debt and wages, and the privatization of state-owned enterprises (although the latter was only implicitly stated). It became a massive hit in reform circles: the first edition was printed in 17,000 copies. While the MSZMP leadership first attempted to sabotage the publication of “Turnabout and Reform” and subsequently criticized its proposals as “too simplistic,” the ideas contained in the document would soon become hegemonic among policymakers in Hungary and elsewhere in the region.

DB

You portray similar economic reforms across the Eastern Bloc countries in the 1980s. But why did none of them pursue something more akin to the Chinese model? What precisely caused the bureaucratic elite to crack apart in 1989, rather than continue with reforms or integrate dissident forces?

AF

By the early 1980s, the Soviet bloc regimes faced increasing signs of crisis: deepening economic stagnation and indebtedness, growing political opposition to Soviet-style ‘socialism’ (in the case of Poland the political crisis was only ‘resolved’ through General Jaruzelski’s imposition of martial law in December 1981), and environmental degradation (as manifested by the 1986 Chernobyl disaster). In response, most Soviet bloc regimes promoted a new wave of economic reforms (the notable exception was Romania).

However, the green light to break politically with the Soviet Union was only provided after Gorbachev decided to abandon the Brezhnev Doctrine [of using military interventions to hold together the Eastern Bloc] in 1988. As the ruling parties rapidly disintegrated from within, there was no support for the pursuit of Chinese-style reforms within the state apparatuses. Also, we have to remember that the ‘success’ of the Chinese model was only achieved following the brutal repression of the Tiananmen Square demonstrations, a policy that most Eastern European leaders refused to pursue. The only leader who in the region who attempted to repress anti-government protests was Nicolae Ceauşescu in Romania – and he ended up paying for it with his life.

DB

You cite 1989 comments by the writer and politician Miklós Vásárhelyi to the effect that neoliberalism would take Hungary “back into Europe.” This conforms to a common trend in CEE countries (and indeed some Southern European ones) to see Europe as a beacon of modernization and civilization, an “external bind” that could reshape their societies. To what extent can we characterize Europeanism in Hungary as an elite project — or is it more transversal than that?

AF

Hungarian elites have long seen Europe as a beacon of modernization and civilization. Indeed, this idea can be traced all the way back to the foundation of the Hungarian state in the Middle Ages, when King Stephan I (975-1038 AD) broke with the pagan traditions hitherto practiced by Hungarian tribes and enforced Catholicism on what became the Kingdom of Hungary. This view has been reinforced by the historical “tragedies” suffered by Hungarians over the centuries, such as the Tatar-Mongol invasion (1241), the Ottoman occupation of Hungary (1541-1686) or, most importantly, the short-lived Hungarian Soviet Republic in 1919 and Soviet-style “socialism” between 1949 and 1989.

In the late 1980s, the period of Vásárhelyi’s comments, the notion of Europe became synonymous with the introduction of what G.M. Tamás has termed the “triple shibboleths” of free market capitalism, liberal democracy and membership of Western institutions, such as the EU and NATO. Back then, this shift was not only supported by political and economic elites, but also many workers, who welcomed the attainment of political freedoms and genuinely believed that the transition would bring higher living standards. Twenty years later it had become blatantly evident that this idea was only a mirage.

DB

Viktor Orbán and his Fidesz party looked like other liberal parties in 1989 but today is clearly of the far right. You portray this as an authoritarian-ethnicist version of neoliberalism. But faced with the “family-values” and “patriotic” conditioning of even his fiscal policy – and his apparent defiance of the “rules-based” order dear to neoliberal institutions — is this term really useful for understanding what is taking place in Hungary today? If he is today part of a global rise in the far right, to what extent are his base the “losers” (the “left-behind?”) of neoliberalism in Hungary?

AF

I think that the depressing state of world of affairs at present clearly shows the intimate connections (both in theory and praxis) between neoliberalism and authoritarian-ethnicist ideas. On a theoretical level, we can see this, for example, through the influence that Carl Schmitt’s state theory had on neoliberalism. Similar to Schmitt, key neoliberal thinkers such as Friedrich von Hayek, Wilhelm Röpke, and Alexander Rüstow had an aversion for “mass democracy” and believed that a “strong state” was necessary in order to maintain capitalist “law and order.”

In practice, ever since the coup d’état against Salvador Allende in Chile in 1973, neoliberal economic policies have always been enforced through methods of state violence, dispossession, and death, although this element was downplayed from the late 1980s onwards, during the period that Neil Davidson calls “social neoliberalism,” when neoliberalism was “rolled-out” globally.

As for Orbán, I think that he is an extremely shrewd politician, who sensed that the neoliberal pendulum was swinging towards the (far) right long before the rise to power of Trump, Bolsonaro, or Modi. In fact, he already attempted to combine a right-wing, authoritarian rhetoric with neoliberal economic policies during his first period in power (1998-2002) and was only held back after suffering a narrow defeat to the socialist-liberal coalition in the 2002 general elections. However, since having obtained a two-thirds supermajority in the 2010 general elections, he has moved with a swiftness and assertiveness akin to Louis Bonaparte himself, in order to restructure the Hungarian state along authoritarian-ethnicist lines.

Sure, his anti-establishment rhetoric and “unorthodox” economic policies (e.g. breaking with the IMF in the summer of 2010, the introduction of so-called “crisis taxes” on banks, telecommunications and large retail corporations, the renationalization of Hungary’s private pension system, etc.) nominally seem to go against Hungary’s previous pro-Western course, and appeals to many people who have been declassed as a result of neoliberal restructuring (and rightly feel that the parties of the socialist-liberal opposition do not represent their interests).

Yet, it is crucial to remember that the Orbán regime has skillfully combined these policies with extremely regressive fiscal and social policies (like the introduction of a 16 percent flat tax on personal income, increasing VAT to 27 percent, or the implementation of what has become known as the “Slave Law,” which allows corporations to demand their workers to work 400 hours of overtime per year, while delaying payments up to three years), which have benefited the wealthiest and most powerful sections of Hungarian society and transnational corporations (who remain ardent supporters of the Orbán regime). At the same time, the government has erected a razor-wire fence along Hungary’s borders with Croatia and Serbia (to keep out “illegal” migrants and ensure the “ethnic homogeneity”of Hungary), while any non-conformist voices in society have been openly persecuted or meticulously silenced.

In this regard, the Orbán regime is a vanguard example of the wider shift towards authoritarian-ethnicist neoliberalism across the world.

End Mark

About the Author

Adam Fabry holds a PhD from Brunel University in the United Kingdom. He sits on the editorial board of the Journal of Contemporary Central and Eastern Europe and on the corresponding editorial board of Historical Materialism.

About the Interviewer

David Broder is a historian of French and Italian communism. He is currently writing a book on the crisis of Italian democracy in the post-Cold War period.

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