The Political Economy of Dual Transformations: Market Reform and Democratization in Hungary

Introduction

Introduction Is political liberalization compatible with economic transformation? That question, long a central concern of scholars of Latin America, Southern Europe, and East Asia, has assumed special significance in postcommunist Eastern Europe. The socioeconomic costs of stabilization, adjustment, and reform pose serious challenges to the capitalist South, where market economies and private capital ownership long preceded political democracy . For the fledgling democracies of Eastern Europe, market reforms entail not merely price deregulation, trade liberalization, and similar policies but the thoroughgoing reorganization of entire systems of resource allocation and property ownership. Claus Offe succinctly describes the "vicious circle" of simultaneous marketization and democratization in the region. A market economy is set in motion only under predemocratic conditions . In order to promote it, democratic rights must be held back in order to allow for a healthy dose of original accumulation [emphasis added]. Only a developed market economy produces the social structural conditions for stable democracy and makes it possible to form compromises within the framework of what is perceived as a positivesum game. But the introduction of a market economy in the postsocialist societies is a "political" project, which has prospects of success only if it rests on a strong democratic legitimation. And it is possible that the majority of the population finds neither democracy nor a market economy a desirable perspective. If all of those propositions hold true at the same time, then we are faced with a Pandora's box full of paradoxes, in the face of which every "theory"-or, for that matter , rational strategy, of the transition must fail. I Recent developments appear to validate Offe's pessimistic scenario for the postcommunist countries: the rise of the nationalist right in Russia and Ukraine, armed conflict in Georgia and other Soviet successor states, the I. "Capitalism by Democratic Design? Democratic Theory Facing the Triple Transition in East Central Europe," Social Research 58, no. 4 (winter 1991): 881. 2 The Political Economy of Dual Transformations war in the Balkans, and the return to power of former Communists in Poland, Lithuania, Bulgaria, and Hungary. In this book, I explore the tension between political and economic transformation in Eastern Europe. How has the transition from communism to democracy affected macroeconomic stabilization, structural adjustment, and systemic reform in the region? I focus on Hungary, whose historical trajectory makes it an ideal vehicle for an intertemporal analysis of the impact of political change on economic reform. In 1968, the ruling Magyar Szocialista Munkaspart (Hungarian Socialist Workers' Party, or MSZMP) launched the program of reforms known as the New Economic Mechanism (NEM). While beset by periodic backtracking by the Communist Party leadership as well as the systemic constraints of "market socialism," NEM was the most ambitious economic reform program ever undertaken in a Warsaw Pact country. Indeed, many of the policies enacted by the successor government in the early 1990s followed the main lines of the program initiated by the Communist Party. Hungary's long history of market reforms thus allows one to trace the course of economic policy across the pre- and post-1989 periods.2 The Hungarian case defies conventional wisdom regarding the perils ofdual transformations: far from unleashing popular resistance to market reform, the transition to democracy subdued it. Hungary's ability simultaneously to pursue democratization and marketization stemmed not from the successor government's choice of a "gradualist" strategy aimed at softening the distributional impact of economic transition. In fact, data presented in the book show that the socioeconomic costs of Hungary's market reforms approached, and in some respects surpassed, those of the "shock therapy" programs launched in other former communist countries. I argue that the decisive factor in Eastern Europe's transition is not the sheer magnitude of the social costs of economic transformation but the 2. Other former communist countries are not as well suited for an intertemporal study of reform policy. In the 1950s, Yugoslavia began a series of market reforms that went well beyond Hungary's NEM. But the disintegration of the Yugoslav federation and the outbreak of the Balkan War in 1991 make it difficult to assess the impact of domestic political change on reform policy. Poland also launched a reform program of the "market socialist" type before the political transition. But the Polish reforms were initiated later than Hungary's and were never as far reaching or sustained. The market reforms undertaken elsewhere in Eastern Europe were either aborted (as in Czechoslovakia in 1968 and the German Democratic Republic in 1970) or limited in...