# data[].attributes.headline
Hungary's Goulash Communism and its New Economic Mechanism  

# data[].attributes.subject
Hungary's Goulash Communism and its New Economic Mechanism  

# data[].attributes.body
The death of Joseph Stalin in 1953 provided an opportunity for countries within the Eastern Bloc to explore different forms of socialism, similar to what Yugoslavia had already done following its expulsion from the Eastern Bloc. In this changed setting, the Hungarian Party-state introduced a unique version of socialism with market elements, devised by economists, which became known globally as "Goulash Communism." Since Goulash Communism can be a broad topic with a significant time frame (1960s to 1989), I decided to focus my research on what I believe is the culmination of Goulash Communism: the New Economic Mechanism established in 1968.

The Genesis of Goulash Communism and the NEM:

The emergence of Goulash Communism, or Kádárism, in Hungary was a gradual process marked by the transformation of the country's economic and intellectual landscape.

The first key event was the closing down of capitalist economic institutions and the establishment of Marxist-Leninist institutions post-World War II. The aim was to create a generation of socialist economists to drive the country's Soviet-styled planned economy. However, this rigid implementation was met with criticism and resistance, and it sowed the seeds for a shift in economic thinking. A significant factor was the rise of Imre Nagy, who served as prime minister in 1953. Nagy's background as an agricultural economist, his experience in both academia and policy-making, and his connections in the economics profession made him a powerful ally for the "reform economists," who were beginning to question the rigid Soviet economic model. In return for their support, Nagy offered these economists opportunities and resources, thus creating an intellectual base for market-oriented reform in Hungary.

Nagy championed a new role for economists as independent researchers and advocated for scientific criticism and freedom of opinion. These principles marked a departure from the Soviet model and paved the way for the resurgence of empirical economic research. He established the Economic Science Institute (ESI) in 1954, which aimed to study the "scientific problems arising during the construction of socialism" through empirical research rather than theoretical Marxist-Leninist texts. It's important to note that the ESI became a hub for reform economists and provided an institutional base for them to influence their discipline.

Furthering the shift towards reform, Nagy closed the Hungarian-Soviet Economics Review and reestablished the prewar Economics Review. This action offered reform economists a professional forum to communicate their ideas, promoting empirical research and intellectual debate. Nagy also carried out significant reforms in the universities, with a focus on ending the dominance of theoretical political economy and Marxism-Leninism, and moving towards practical economic training that would better equip students for the workforce. This resulted in Hungarian students and Economist being exposed to neoclassical economic thought and contemporary wester

In essence, the emergence of Goulash Communism was a direct result of the transformation of the intellectual and institutional landscape in Hungary under Imre Nagy. His efforts in promoting a new generation of economists, encouraging empirical research, and instituting reforms paved the way for a unique blend of socialist and capitalist principles that came to characterize Goulash Communism. These shifts challenged the Soviet model's orthodoxy and allowed for the inception of a more market-oriented socialist system in Hungary.

What was the New Economic Mechanism (NEM)?:

In the early 1960s, Khrushchev's strengthening hold over the Kremlin set the stage for political reforms in Hungary, led by Janos Kadar. Taking over as prime minister and consolidating power, Kadar ushered in an era of flexibility and pragmatism, decreasing government oppression, and setting Hungary as a pioneer of reform within the Soviet alliance. He strived for regime stability based on strong economic performance, supported by the Soviet Union's decision to withdraw its advisors from Hungary.

Kadar aimed for a cooperative relationship with the Hungarian public, introducing the slogan "He who is not against us is with us". This new policy sought to remove party membership as a requirement for technical jobs and allow skilled individuals to contribute without compromising their beliefs. In 1962, during the Eighth Party Congress of the Hungarian Socialist Workers Party (HSWP), Kadar's supporters ousted Stalinists from key party positions, calling for higher recruitment standards and opportunities for non-party members. As a result, by 1963, Kadar had garnered significant public support.

Simultaneously, economic reform plans accelerated. Central Committee secretary Rezso Nyers led the economic affairs, advocating comprehensive reforms. Committees were formed to prepare reform proposals, identifying issues like overinvestment, agricultural shortages, and production inefficiencies by 1964. The government aimed to enhance trade with Western and Comecon countries to tackle the significant trade deficit. By 1964, it became clear that to boost exports, Hungary needed to meet the stringent demands of the global economy.

Goulash Communism culminated with the introduction of The New Economic Mechanism (NEM) which was a transformative economic reform implemented by the Hungarian Party-state on January 1, 1968. It aimed to shift away from strict central planning associated with Soviet-style socialism and introduce elements of market dynamics and decentralized decision-making into the economy.

Under the NEM, public ownership of production means was retained, but obligatory output targets for enterprises, a defining feature of Soviet central planning, were abolished. State planning was reduced to setting primary national economic objectives and the primary proportions of economic development, while indirect financial or economic incentives were introduced to encourage enterprises to align with these objectives. In contrast to administrative controls, these indirect means were used to motivate enterprises to fulfill the plan.

Reflecting market socialist models and textbook neoclassical economics, enterprises were granted autonomy, except for significant government-directed investments, and were encouraged to maximize profit. The profit-maximization drive was expected to serve as a performance incentive for the enterprises. The NEM also brought changes to the price control system. Some prices were freed from state control, allowing market dynamics to dictate their fluctuation, while others remained fixed by the state. Despite these reforms, the state continued to have a direct interventionist role in the economy.

The NEM sought to overcome the inefficiencies of central planning, stimulate productivity, make Hungarian products competitive in foreign markets, and establish prosperity that would underpin political stability. Central to these reforms was the shift of enterprises' primary goal from plan fulfillment to profit. The government's influence over enterprise activity was limited to indirect financial, fiscal, and price tools, referred to as "economic regulators." The NEM also introduced a profit tax, granted enterprises the liberty to decide their output, marketing, and sales strategies, and eliminated subsidies for most goods except basic raw materials. The decentralization also extended to the allocation of capital, supply, and partial foreign trade and investment decision-making. The focus of the economy shifted from heavy to light industry and infrastructure modernization. Agricultural collectives were given the freedom to make investment decisions.

Why the NEM did not work out?:

The Kadar regime committed to the execution of the New Economic Mechanism (NEM) between 1968 and 1972. However, opposition to this reform began gaining momentum in 1971, primarily from bureaucrats, large enterprises, and workers within inefficient industries. The bureaucrats felt threatened by the NEM's potential to undermine their privileges, while large enterprises experienced a reduction in income and were challenged by smaller competitors. Workers in outdated sectors resented the superior wages earned by counterparts in more advanced industries. This opposition managed to overturn the reform shortly after Moscow expressed skepticism regarding the NEM and concerns about emerging "petit bourgeois tendencies" in Hungary.

In an attempt to recentralize portions of the economy, the Central Committee introduced a series of extraordinary measures in November 1972, without formally relinquishing the NEM. Fifty large enterprises, responsible for half of Hungary's industrial output and 60% of its exports, were brought under direct ministerial control and supported by specific subsidies. New regulations were implemented for small enterprises and agricultural producers. Central control over prices was reinstated, wages were increased, and price supports were introduced. Subsequently, numerous profitable small firms were amalgamated with larger enterprises.

The worldwide oil crisis in 1973 and the ensuing Western recession considerably worsened Hungary's trade terms, amplifying resistance to the reform. As inflation loomed, counter-reformers advocated for the safeguarding of the working class's living standards against economic shocks originating from the capitalist world. The government stepped in, raising taxes on prosperous firms, augmenting government purchases, and increasing subsidies. Consumer prices eventually dipped below producer prices, leading Hungary to accept credits from Western banks. The reintroduction of centralized material allocation followed. Post the oil crisis, ideological opposition to the NEM and "bourgeois attitudes" intensified. This led to a crackdown on intellectuals and the downfall of NEM.

Bibliography:

Bockman, Johanna. "4. Goulash Communism and Neoclassical Economics in Hungary" In Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism, 105-132. Redwood City: Stanford University Press, 2011. https://doi.org/10.1515/9780804778961-008

Britannica Academic, s.v. "Hungary," accessed May 31, 2023, https://academic.eb.com/levels/collegiate/article/Hungary/108435#34820.toc.

Burant, Stephen R, Eugene K Keefe, and Library Of Congress. Federal Research Division. Hungary: A Country Study. Washington, D.C.: Federal Research Division, Library of Congress: For sale by the Supt. of Docs., U.S. G.P.O, 1990. Pdf. https://www.loc.gov/item/90006426/.

"Kádár, János (1912–1989)." In Europe Since 1914: Encyclopedia of the Age of War and Reconstruction, edited by John Merriman and Jay Winter, 1527-1529. Vol. 3. Detroit, MI: Charles Scribner's Sons, 2006. Gale In Context: World History (accessed May 31, 2023). https://link.gale.com/apps/doc/CX3447000500/WHIC?u=mlin_n_phillips&sid=bookmark-WHIC&xid=af0cd709.

KORNAI, JÁNOS. “Paying the Bill for Goulash Communism: Hungarian Development and Macro Stabilization in a Political-Economy Perspective.” Social Research 63, no. 4 (1996): 943–1040. http://www.jstor.org/stable/40971322.

Nyyssönen, Heino. “Salami Reconstructed: ‘Goulash Communism’ and Political Culture in Hungary.” Cahiers Du Monde Russe 47, no. 1/2 (2006): 153–72. http://www.jstor.org/stable/20174994.

Stacy, Robert. "Hungarian Revolt." Encyclopedia of the Contemporary World (1950 to Present). Facts On File, 2016. Accessed May 31, 2023. online.infobase.com/Auth/Index?aid=16412&itemid=WE53&articleId=244051.