Hungary's Bold Experiment

By John S. DeMott

Let a hundred flowers bloom, plus capitalist carrots and corn

The shops along the streets of Budapest bulge with fresh apples, lettuce, cucumbers, carrots and cabbages. Meat shelves are well stocked with beef, poultry and pork. Why does such plenty elude other Communist countries but grace small, landlocked Hungary, one of the most resource-poor nations in Eastern Europe? The answer lies in the government policy of emphasizing investment in all forms of agriculture and in the thousands of small family plots that citizens till after their shifts on state and cooperative farms. Profits from their off-hours efforts are theirs and theirs alone, and high vegetable prices keep them happily gardening. Says Odoen Kalloes, co-president of the Hungarian Chamber of Cormmerce: "Now we not only tolerate family plots, we encourage them."

The privately grown produce is part of the "new economic mechanism" that has made Hungary the Communist world's best-run economy. For the past dozen years the nation's planners have been gradually loosening the state's once rigid grip on the economy and even adopting some trappings of Western-style incentive-based capitalism.

To be sure, Hungarian free-marketeering has not reached the point where Monetarist Milton Friedman has become a regular guest at the Budapest Hilton. But some of the changes are dramatic. Hungarian economists, for example, openly deride the socialist pricing mechanisms that set the cost of goods by bureaucratic fiat rather than by supply and demand. The price of more and more items, including vegetables, meat and about 60% of manufactured goods is now allowed to rise with demand.

Incentives are most attractive down on the farm. Managers of collectives are told to run their operations like businesses, with profits rather than production quotas as the goal. The program has worked well: Hungary is the only major consistent net exporter of wheat and corn in Eastern Europe. At the Soviet Party Congress last month, Chairman Leonid Brezhnev told delegates that the whole Communist world should learn lessons from Hungary's agricultural policy.

Industries are also now allowed to have more flexibility. Managers are forced to earn a profit, and that dictates a number of capitalist management techniques that heretofore have not been a part of any Communist "workers' paradise." Year-end bonuses, usually automatic, have been withheld from lazy workers. At the Raba Works, a heavy-machinery factory in Gyor, several hundred people were fired for inefficiency, although all were quickly placed in new jobs at nearby plants. A few concerns have even gone bankrupt Hungarian-style; a tractor factory near Budapest was liquidated by the government after heavy flows of red ink.

In January the government made its biggest jump toward private enterprise. The rights to run restaurants and other small businesses that were losing money were auctioned to the public for as much as $100,000. This is high in a country whose 1979 per capita annual income was $3,042. The enterprises remain the property of the state, and their managers must pay a monthly fee to cover social insurance and equipment and building rental. They must also pay competitive wages to workers. But after taxes, the new entrepreneurs may keep whatever profit is left. The system is very similar to that used by McDonald's and other franchised food chains in the U.S.

The man behind much of Hungary's economic decentralization is Janos Fekete, 62, first deputy president of the National Bank of Hungary. Vigorous, fluent in five languages as well as economics, Fekete is one of the few Communist bankers who move easily in Western financial circles. Last week he was in the U.S. and visited with Federal Reserve Chairman Paul Volcker and members of the Reagan Administration. He also met with Citibank Chairman Walter Wriston and discussed final details of a new $400 million loan from private American and European banks.

Fekete dresses, talks and acts like his admiring Western counterparts, belying his Marxism and dedication to Hungary's Communist system. One of the few giveaways of his Eastern European background: an iron tooth (in the early postwar period, gold was so scarce in Eastern Europe that iron was normally used to replace missing teeth).

A primary goal of Fekete's tinkering is to establish a uniform rate of exchange for the forint, Hungary's monetary unit. Hungary, like all Eastern European countries, has traditionally had two rates of exchange, one for tourists and one for foreign trade. Fekete says that establishing a single value of the currency, which will be set primarily by world money markets, will make Hungarian businesses more efficient and profitable. Says he: "This will force our companies to work better. Marx never talked against profit but only who got the profit." The ultimate objective is to make the forint convertible with the U.S. dollar and other Western money.

Hungarian officials believe that a partially convertible currency will encourage more trade with the West and reduce Hungary's dependence on the Soviet Union and other Comecon countries, which still buy roughly 40% of the nation's exports. Some impressive examples of Hungarian products are already being exported to the West. Portland, Ore., San Mateo, Calif., and Louisville, Ky., will soon have Hungarian-American-built Crown-Ikarus buses rolling down their streets. Hungarian officials hope the Soviet Union will recognize that it has the choice of letting its satellites improve their economies--or risking a Polish-style blowup. --By John S. DeMott.

Reported by Richard Hornik/Budapest

With reporting by Richard Hornik/Budapest

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