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CHAPTER 2 Macroeconomic Stabilization under Reform Communism In January 1968, Hungary launched NEM. Like other market socialist reforms, NEM was premised on the assumption that devolving decisionmaking authority to factory-level agents would heighten allocative efficiency. At the same time, maintaining the dominant position of socialist ownership would promote social equity and preserve the Communist Party's political hegemony. The original intent of NEM was to spur economic growth and thereby bolster the ruling MSZMP, whose post-1956 strategy of consolidation hinged on improvements in the population's standard ofliving. For a brief period, the reforms fulfilled this objective, as the Hungarian economy enjoyed robust growth between 1968 and 1972. But subsequent upheavals in the world economy transformed the political economy of Hungary's market reforms. The Party's initial response was to halt NEM and raise large amounts of Western credit to insulate the economy from the external shocks. But this strategy of recentralization did not succeed, and continued deterioration of Hungary's balance of payments compelled the MSZMP to resume economic reform in 1979. The emphasis of this second phase of NEM was export expansion aimed at arresting the decline of Hungary's terms of trade. Communist Party leaders hoped that the new round of reforms would generate a growth of exports sufficient to correct the country's external imbalance without resort to macroeconomic restrictions . Until early 1980, the reforms appeared to have met that objective. Yet this optimism was short lived, as flaws in the reform program and further setbacks in the international economy halted the surge in Hungarian exports. The country was soon mired in a severe liquidity crunch, and in spring 1982 it came very close to depleting all its hard currency reserves. Meanwhile, developments in Poland and Romania prompted Western banks to cut their credit lines to Eastern Europe. Hungary, despite its reputation for financial probity and commitment to avoid debt rescheduling, was included in the credit embargo. 55 56 The Political Economy of Dual Transformations These circumstances made clear that export promotion alone would not enable Hungary to overcome its balance-of-payments problems. In the wake of the 1982 liquidity crisis, the focus of reform policy shifted from economic growth to austerity. That year, Hungary joined the International Monetary Fund (IMF) and World Bank, under whose auspices the MSZMP initiated macroeconomic stabilization and structural adjustment programs. Thus began the third and final phase of NEM, whose key feature was the fusion of stabilization, adjustment, and market reform. The transformation of NEM from an agent of growth into an instrument of austerity had major consequences for the Hungarian economy and the Communist Party. In this chapter, I examine the political economy of stabilization policy during the final decade of communist power in Hungary. I argue that NEM, while achieving important efficiency gains over the pre-1968 system , proved ineffective as vehicle of economic stabilization. The failure of NEM to stabilize the economy reflected the institutional logic of Hungary 's market socialist model. Far from suppressing distributional conflicts, reform communism fostered them by providing local agents with institutional channels to secure compensation for the effects of austerity. Decentralization of microeconomic decision making induced enterprise managers and workers to bid up domestic purchasing power. The resultant deterioration ofthe balance of payments created pressure on the politicalleadership to restore central controls in order to meet the conditions of IMF standby agreements. But full restoration of the status quo ante was no longer possible, as the prior devolution of authority gave factory-level agents the means to resist recentralization. Thus, market reforms simultaneously prompted local actors to behave in ways contrary to the aims of stabilization policy and weakened the center's ability to correct those distortions via ex post administrative measures. This distinctive push-pull dynamic played a central role in the demise of Hungarian communism in the late 1980s: the socialist halfway house of NEM deepened Hungary's economic problems while accelerating the progressive unraveling of the MSZMP's political authority. I focus on the following dimensions of stabilization policy: wage liberalization , monetary control, and fiscal policy. All three cases illustrate how the institutional structure of Hungarian communism defeated the MSZMP's efforts to use market mechanisms as stabilization instruments. Wage liberalization, the sine qua non of a real labor market, induced workers and enterprise managers to bid up wage rates, compromising macroeconomic stability and compelling the Party to recentralize incomes policy in the face of growing resistance from below. Attempts by the National Bank...

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