Hungary Pushes on with Reforms Country Leads the Former Eastern Bloc in Attracting Investment, but Change Is Not Easy

Article excerpt

EVEN 10 years ago, food and consumer goods were available in Budapest in greater quantities than elsewhere in the Soviet bloc.

With its "goulash communism," Hungary was for years well in advance of its partners in the now-defunct Council for Mutual Economic Assistance (Comecon).

Even so, two years after the country's first truly democratic elections, the change on Budapest's streets is palpable. Where Communist Party slogans once predominated, there are advertisements for Western firms. Gas stations sport BP and Shell insignia. Three McDonald's restaurants do a booming business and the only line a reporter saw during a recent week-long visit to the Hungarian capital was outside the just-opened Pizza Hut.

The feeling of bustle is everywhere, from new hotel and business construction in the center of Pest, to the brisk transactions being written in the lobby of the Thermal Hotel Aquincum on the Buda side of the Danube.

But the picture is far from entirely rosy. Like elsewhere in the former Comecon counties, a wide disparity is opening up between the well-off and those at the bottom of the economic scale. Unemployment has become a new fact of life for many who are not yet used to the idea. More economic disruption is in the offing as the government tackles the privatization of heavy-industry dinosaurs.

"The biggest problem in general is a very big drop in the domestic market," says Balazs Botos, undersecretary of state at the Ministry of Industry and Trade. "It's a problem of competitiveness and the general level of Hungarians' purchasing power," he says. "The majority of people can't afford to buy what they did two years ago."

Hungary's gross domestic product dropped about 8 percent last year, while consumption fell 6 to 7 percent. Industrial output dropped 21.5 percent, but the volume of private firms and cooperatives rose 50 percent. A new challenge

Unemployment is currently about 8 percent, or 500,000 people. "This is not too high relatively, but for Hungarian society, in which unemployment has been unknown, it is a social shock," Mr. Botos says. Government officials and Western diplomats agree that unemployment could rise to 12 or 13 percent by the end of this year as the government continues to privatize state-run heavy industry or as some factories simply go belly up under a new bankruptcy law.

Botos is optimistic about the future, however. He predicts that inflation will fall from last year's level of 35 percent to the 20 to 25 percent range in 1992. In addition, a senior Western diplomat says there is "a reasonable chance" that Hungary's economy will grow a bit in 1992.

Botos says that by 1993 there may be enough growth to begin reducing unemployment. "We have to have entrepreneurs and enterprises able to create new jobs," he says. "That is the first priority." So far, things appear to be going well. Registered private firms jumped 76 percent in 1991 to almost 52,000. More than 500,000 people work in the private sector.

The government's privatization program is another key element in Hungary's economic future.

The government's critics, here and in the West, charge that the State Property Agency (SPA) has proceeded too slowly in selling off state-run enterprises. After two years, 85 percent of the economy is still state-owned. The government is trying to give new impetus to the process. "A quick pace is natural in the first two years, when we could privatize the best enterprises," Botos says. "Now we must privatize the mediocre ones; there is not as much interest there."

The government's goal is to reduce state ownership to below 50 percent by the end of 1994. Botos notes that foreign capital is essential to the process, since Hungary does not have enough domestic capital to privatize on its own. What Hungary does not want, he says, is to privatize without capital, as has been done elsewhere in Eastern Europe. …