LubyHungary - Matt Luby Econ 508 The Transition Experience...

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Matt Luby Econ 508 3-8-05 The Transition Experience of Hungary I. Introduction Hungary’s transition experience is unique and interesting thanks to a number of factors which first emerged under and out of the communist regime. Firstly, Hungary was one of the two most reformed countries among the communist bloc, a fact which was recognized by the West when Hungary and Poland were singled out for support by the European Community (EC) in 1989’s PHARE (Poland, Hungary, Assistance to Restructuring of the Economy). Secondly, as a result of these communist-era reforms combined with post-communist electoral politics, Hungary is often cited as the leading example of gradualism in transition. Lastly, Hungary has remained among the most successful of the transition economies, even after facing a number of serious problems since the fall of communism. It is for these reasons among others that the study of Hungary’s transition is especially rewarding. In this paper, I will begin by analyzing Hungary’s reform program under communism. This reform program, stretching from 1968 until the end of the communist regime in 1989-1990, is essential to understand because it set Hungary apart from so many of its neighbors, and helped determine the course of its post-communist development. Next, I will analyze the economic problems encountered by Hungary’s first democratic government and how the government responded. In many ways, the period of the first post-communist government (1990-1994) represents the most gradualist period Hungary’s transition. Then, I will analyze the problems inherited by the second government and the subsequent reform package settled upon in 1995, which is sometimes cited as shock therapy. Beyond the period of these first two governments, which represents the period of greatest transition, I will examine some statistics and
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Matt Luby Econ 508 3-8-05 trends, but it is the period from 1990-1998, the period of these first two post-communist governments, that I plan to focus on. II. The Communist Reforms In the summer of 1968, a budding reform movement in Czechoslovakia known as the “Prague Spring” was crushed by the Soviets. Just a bit south of Czechoslovakia, though, an equally ambitious reform program was taking shape in Hungary. Known as the New Economic Mechanism (NEM), it outpaced many of the intended reforms of Prague while avoiding overt hostility towards the Soviets and thus, Hungary’s NEM was never forcibly subdued. As Marie Lavigne writes, the NEM “did not meet with… objections from the Soviet…leaders, even when it proceeded much further in economic… liberalization than the Prague blueprint” (Lavigne, 1999, 30). The NEM came to symbolize a more decentralized economic order in Hungary. The controlling power of central ministries was relaxed, the compulsory nature of the plan was loosened and enterprises were given an increasing degree of autonomy (Lavigne, 1999, 31). From its inception in 1968 to roughly 1973, the NEM achieved its purpose and supported a strong annual growth rate in Hungary (See table 1). However,
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This note was uploaded on 07/17/2008 for the course ECON 508 taught by Professor Fleisher during the Winter '06 term at Ohio State.

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LubyHungary - Matt Luby Econ 508 The Transition Experience...

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