San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

Economic History and
the Economy of Hungary

Ancient History of the Magyars

The Magyars were one of those martial peoples who marched out of Central Asia into the pages of European history. Actually they mainly rode in from the far east of Europe, just west of the Urals. That migration occurred just about 900 A.D. when they conquered the plains of what is now Hungary and Transylvania. They were seven tribes under the leadership of Árpád. It was not just a blatant invasion. The Holy Roman emperor Arnulf asked the Magyars to help subdue the the Moravians.

Long before the migration/invasion of the Magyars the territory had been occupied by Celts and Illyrians and later made part of the Roman Empire. It was a fertile territory on the margin of the Germanic territories so it was subject to attempted conquest by Germanic peoples. But another Asian nomadic tribe, the Avars, conquered the Hungarian plain and held it for two centuries, from 600 to 800 A.D. It was the Germanic Charlemagne who finally took control from the Avars.

When the Magyars settled in the Hungarian plain they raided far and wide in Europe for about sixty years until finally defeated by the German king Otto I. The Magyars accepted Christianity in the late tenth century and led a more subdued existence thereafter. The cost of the Magyar raids to Europe were offset by the benefit that Europe gained from having a martial people as a buffer against the invasions of other martial peoples from Asia. The Mongols spent some of their fury on the Hungarians, saving western European territories from the full brunt of their onslaught in the 13th century. When the Turks came knocking on Europe's door in the 15th century it was the Hungarians who again slowed the invasion. The Hungarians were not victorious against the Turks but they did limit the Ottoman advance.

Hungary in Medieval Times

After the Turkish invasion of the Hungarian plain the Hungarians lost control of their destiny until about 1990. First Hungary was divided between the Ottomans and the Hapsburghs. Once the Turks were driven out, Hungary remained under the control of Austria. World War I brought political independence from Austria, but the ties were still strong enough to bring Hungary into the Axis coalition. The defeat of Germany in World War II only transferred control to the Soviet Union. Hungary remained a conquered territory until the fall of Communism and the collapse of the Soviet Union.

Hungary Under the Soviet System

Hungary was an ally of Nazi Germany in World War II. With the collapse of the Axis Powers Hungary came under the occupation of Soviet troops. Stalin was not about to let Hungary emerge from occupation as anything other than a puppet Communist state, a satellite of the Soviet Union. Stalin permitted a period of transition from 1945 to 1947 in which Communist-dominated coalition governments ruled, but in 1948-1949 the Hungarian Worker's Party, the Communist Party in Hungary, became the sole political organization running the country. A constitution in 1949 gave the Hungarian Workers' Party an exclusive monopoly on political power.

During the period 1949 to 1953 a Stalinist system, political and economic, was put into place. In 1953 Imre Nagy was made prime minister and he announces intention of moving the country in a new direction, called the New Course. In 1955 Nagy was removed from power.

During the following two years after Nagy's removal there were growing dissension and protest. In October of 1956 the Hungarian Revolution breaks out. The revolution is initially successful and Imre Nagy assumes leadership, but the Soviets send in troops to suppress the rebellion and install János Kádár as prime minister. Imre Nagy, after being promised safe passage, is taken prisoner and executed. The Hungarian Workers' Party is renamed the Hungarian Socialist Workers' Party

After 1956, following the suppression of the Hungarian Revolution, there is severe repression of the Hungarians but this gradually gives way by 1966 to attempts at economic reform. Over the period from 1968 to 1972 a system of reform, called the New Economic Mechanism, is implemented. The is the beginning of what is sometimes called Goulash Communism.

Goulash Communism

Goulash is a delcious Hungarian beef stew made with vegetables and lots of paprika. The word has come to stand for a mixture of things. In Hungary Goulash Communism came to represent an attempt to introduce market economy elements without acknowledging that there had been any deviation from a socialist economy. The Hungarian Communist leadership recognized that any ideological dissent with the Soviet system would be put down brutally but quiet reforms would be allowed.

The increase in petroleum prices in 1973 brought a financial crisis to many place in the world and Hungary was one of them. The limited export earnings of Hungary could not pay for the higher cost of petroleum and the government leadership was forced to borrow. As the foreign debt piled up the government looked for ways to encourage more exports. Thus an economic restructuring was forced upon Hungary. Additional financial crises arose in 1979 with the rise in oil prices following the Irnina Revolution. Furthermore the political instabilities in Eastern Europe were resulting in reduced funds available from Western banks. All of this added up to a more desperate search for solutions to Hungary's financial problems. In 1982 Hungary joined the International Monetary Fund. This provided some security against balance of payments catastrophes but at the cost of complying with the IMF's economic programs.

In the 1980's the standard of living in Hungary deteriorated. Many Hungarians were working two jobs to make ends meet. By 1989 the proportion of Hungarians living below the poverty level was estimated to be between 25 and 40 percent.

In February of 1989 a new constitution was drafted which eliminated the special status of the Hungarian Socialist Workers Party. Independent political parties and labor unions were permitted. It was the end of the Stalinist political and economic system. The Communist leaders themselves called for a three-year transition to a mixed economic system. Democratic organizations debated on how many of the state enterprises were to be privatized.

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