Some Macroeconomic Features of the
Hungarian Economy Since 1970
L. HALPERN and G. MOLNAR
In introducing the "New Economic Mechanism" in 1968, the reformers of the Hungarian economy hoped to solve the problem of efficiency in a socialist economy. We show that the survival of the structure of prices and accumulation that had existed before the reform, and the interrelationship between them--among other factors -- hindered the necessary transformation in the economic structure. In addition, slow adjustment, or in practice the refusal to adjust, to the explosion in world prices in the mid 1970s has led to a critical level of foreign indebtedness for the Hungarian economy. Cheap foreign loans financed investment projects of very low efficiency, while export capacity remained far below the level necessary for debt servicing. A critical point was reached in 1978, when economic policymakers decided to restrict imports, consumption, and investment to be able to service foreign debts. In 1980, simulation of world market prices was introduced to stimulate adjustment. Since then economic activity has been almost stagnant.
In this chapter we present the quantitative aspects of this process, using a closed input-output model to analyze the Hungarian economy since 1970. Simultaneous analysis of the primal and dual sides of the model provides relevant results. To apply the closed model to an open economy, we have added a foreign trade sector to the model using an exogenously given export-import ratio.
An index is defined to measure changes in the structural efficiency of the economy. This index helps us to demonstrate the efficiency profile of the Hungarian economy and its connection with foreign trade activity.
The well-known primal-dual model we used is as follows:
(A + λB)X = X (1)
P′(A + λB) = P ′ (2)