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

4. Political Institutions and Hungary's Negotiated Transition

CHAPTER 4 Political Institutions and Hungary's Negotiated Transition In this chapter, I survey the institutional terrain of postcommunist Hungary . I begin by assessing how the institutional legacies of the communist period shaped the strategies of the successor government. I then examine the institutional outcomes of Hungary's negotiated transition to democracy , focusing on the problems of constitutional design, the formation of the party system and rules of electoral competition, and the role of intermediary institutions. I conclude by analyzing the structure of state institutions in Hungary's new democracy. I argue that, contrary to conventional wisdom about the impact of democratization on market reforms, Hungary's political transformation produced an institutional structure that facilitated marketization. The country's negotiated transition yielded a strong prime ministerial government , an electoral arena commanded by a handful of elitist parties, an ineffectual system of intermediary interest representation, and a state administration dominated by agencies of global economic regulation. These themes underpin my detailed studies of stabilization and adjustment policy in chapters 5 and 6. Institutional Legacies of Communism Hungary's experiment with market socialism had profound consequences for both the Communist Party and its democratically elected successor. Market reforms, originally intended to bolster the MSZMP's political position by raising economic growth and allocative efficiency, ended up hastening the Party's demise. The MSZMP's efforts to use market mechanisms as instruments of austerity stimulated local agents to behave in ways contrary to the aims of stabilization and adjustment policy while reducing the Party's capacity to correct those distortions via ex post recentralization . For the Hungarian Communists, the result was the worst possible combination of declining political authority, deteriorating economic performance , and mounting pressure by the Washington lending agencies. By 141 142 The Political Economy of Dual Transformations spring 1989, these factors compelled Party leaders to enter into negotiations with the political opposition over the terms of Hungary's transition to democracy. In fall of that year, the MSZMP itself broke apart. Ironically, the very same market reforms that led to the unraveling of communist power in Hungary eased the political burden of economic transformation confronting the successor government headed by the MDF. Price liberalization was essentially completed by the time of the political transition, lessening macroeconomic disequilibria and relieving the new government of the need to implement Polish-type shock therapy. The MSZMP's loosening ofwage controls and foreign trade and exchange regulations similarly lightened the new government's policy agenda. Its lifting of restrictions on nonstate activities fed the gradual expansion of the second economy, creating alternative supply networks that alleviated domestic shortages and promoting the formation of entrepreneurial and managerial skills vital to market development. Finally, the NEM beget an array of market-type institutions: legal procedures to govern the founding of new private enterprises, the privatization of existing state-owned enterprises , and the management of enterprises still under state ownership; a two-tiered banking system; an incipient capital market; Western-type systems of taxation and financial regulation; and Eastern Europe's most attractive foreign investment laws. As shown in part 2, the problem with these measures was not so much their technical design as the fact that they failed to produce the desired effects in Hungary's communist system, whose particularistic networks allowed local agents to negotiate exceptions to market rules. But because they established many of the institutional foundations of a full-fledged market economy, the reforms initiated by the MSZMP placed postcommunist Hungary at a comparative advantage vis-a-vis the rest of Eastern Europe. The institutional remnants of reform communism abetted the successor government in another way. While NEM did broaden opportunities for particularistic bargaining, it did not significantly expand means of collective political action. Indeed, in certain respects market reforms worked to demobilize Hungarian society-particularly insofar as the Communist Party's legalization of the second economy in the early 1980s induced many citizens to direct their attention away from politics and toward the entrepreneurial sphere. While Polish workers spent much of the decade organizing mass resistance to the ruling party, their Hungarian counterparts devoted their energies to activities generating personal income. Collective action did escalate during the final years of communist power in Hungary, as evidenced by the coal mining strikes in summer 1988, public demonstrations against the Nagymaros dam project in fall of that year, anticommunist protests in March 1989, and the mass demonstrations Political Institutions and Hungary's Negotiated Transition 143 attending the reburial ofImre Nagy in June 1989. But while...