Transitions to Capitalism and Democracy in Russia and Central Europe: Achievements, Problems, Prospects

By M. Donald Hancock; John Logue | Go to book overview

CHAPTER 6
Foreign Direct Investment and
Privatization Policy: The Causes and
Consequences of Hungary's
Route to Capitalism

David Bartlett

Postcommunist Hungary's privatization strategy differed markedly from the strategies of other East European countries. In contrast to the Czech Republic and Slovenia, Hungary's successor governments rejected mass voucher schemes. And unlike Poland, which adopted a mixture of leasing, liquidation, mass distribution, employee share ownership, and managerial buyouts, Hungarian privatization policy emphasized direct sales of state-owned enterprises ( SOEs) to foreign buyers. From a programmatic standpoint, the country most similar to Hungary was the former German Democratic Republic, where privatization also took place via cash sales negotiated on a case-by-case basis by postcommunist authorities. But Hungary's direct sales approach differed in one, decisive respect from eastern Germany's: the presence of a preexisting, wealthy capitalist economy in the Federal Republic permitted the Trustee Agency (Treuhandanstalt, or Treuhand) quickly to divest most of the former state sector in the new federal states through sales primarily to West German buyers. Hungary's shortage of domestic buyers meant not only a much slower divestiture process but also far greater reliance on foreign investors.

My objective in this chapter is to explain the causes and consequences of Hungary's distinctive privatization trajectory. I seek to answer two fundamental questions: what factors led postcommunist governments to pursue a strategy based on cash sales of state enterprises to foreign buyers, and how did that strategy affect Hungary's macroeconomy, microeconomy, and domestic politics?

I argue that Hungary's privatization policy in the early 1990s reflected both the residues of reform communism and the institutional outcomes of the country's transition to democracy. As a result of reforms enacted by the ruling

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