The origins of neoliberalism in late 'socialist' Hungary: The case of the Financial Research Institute and 'Turnabout and Reform'.

Author:Fabry, Adam


The last three decades have seen the ascendancy of neoliberal ideology and policy across the world. While the geographical spread of neoliberalism--here conceived as an economic doctrine, a political project of the ruling classes around the world and the new modus operandi of the capitalist mode of production (Dardot and Laval, 2013; 'What was Neoliberalism?' in Davidson et al, 2010: 1-92; Ferguson, 2010; Harvey, 2007; 'Postface' in Mirowski and Plehwe, 2009: 417-455; Mudge, 2008; Peck et al., 2012, 2012; Saad-Filho and Johnston, 2005; Turner, 2008)--has been highly variegated, nowhere did it sweep aside competing paradigms so quickly and radically as in the former 'socialist' economies of Central and Eastern Europe (CEE). As one of the frontrunners of the transition to the market in the region, Hungary embraced neoliberal policies of liberalisation, privatisation and macroeconomic stabilisation in the late 1980s and early 1990s. Other countries in the region soon followed suit, and no matter whether their economic policies were located on the more 'radical' or more 'gradual' end of the reform spectrum, altogether the CEE transformations constituted what Murrell (1996) has described as 'the most dramatic episode of liberalization in economic history' (p. 31).

Yet, arguably one of the most puzzling questions of Hungary's 'double transformation' (1) for critical scholars and political activists is why policymakers in Budapest decided to abandon any experiments with 'market socialism' or a 'Third Way', favouring neoliberal restructuring instead? After all, they could have built on a strong tradition of reformist thinking, which was almost unique to the region (apart from Poland and Yugoslavia) and had inspired previous market reforms, contributing to Hungary's infamous epithet among Cold War commentators of being 'the happiest barrack in the East'. Moreover, neoliberal economic policies did not necessarily fit easily with the social bases and intellectual traditions of the political parties that were vying for power during the transition, meaning that, once in office, any government would have to have been willing to implement neoliberal reforms against the interests of its own electorate.

In order to address this question, this article argues that the development of reform economics needs to be understood in relation to Hungary's position in the capitalist world economy and the international state system between 1945 and 1989. To provide this context, the article draws on a broad literature, from a variety of theoretical approaches. The development of capitalism in the 20th century and the epistemic community in which dominant ideas about how to best operate it, the ascendancy of neoliberalism in international policymaking circles the 1970s and their influence on processes of globalisation, economic crises and restructuring, including the 'post-communist' transitions in the former Soviet bloc have been widely discussed (Aligica and Evans, 2009; Babb, 2004; Bockman, 2011; Bockman and Eyal, 2002; Drahokoupil, 2009; Fourcade-Gourinchas and Babb, 2002; Gagyi, 2015; Gowan, 1999; Mirowski and Plehwe, 2009; Seleny, 2006; Shields, 2012; Wagener, 1998). As for the economic, political and social history of actually existing socialism' in Hungary, excellent studies have been provided by Berend and Ranki (1985), Pittaway (2014) and Swain (1992). In addition to this literature, this article also draws on key reform proposals of the Hungarian transition, (2) as well as published and self-made interviews with Hungarian reformers. (3)

Against this background, the article sets out to show that the origins of Hungary's neoliberal transformation preceded the formal transition to a market economy and parliamentary democracy in 1989-1990 and need to be understood as part of a wider restructuring of the capitalist world economy from the early 1970s onwards. As such, neoliberal ideas and practices were not simply imported 'from the West' after the 'regime change' but emerged 'organically' in Hungarian society in the 1980s, as a response by domestic political and economic elites to the deepening crisis of the Kadar regime. The essential aim of the 'neoliberal turn' was thus to improve conditions for capital accumulation, while ensuring that the political transition went as 'smoothly' as possible. In this sense, while obviously a repudiation of past policy (on a politico-ideological level), policymakers in Budapest pursued the similar objectives as central planners under 'actually existing socialism' (on a socio-economic level).

This article is divided into four sections. The first section outlines the theoretical framework that informs the argument. The second section provides a historically grounded overview of state capitalism in Hungary, focusing on the contradictions of successive waves of market reform in nominally 'socialist' Hungary. Against this background, the third section shows how mounting external pressures (geopolitical and economic competition with the West, indebtedness and budget imbalances) and increasing disbelief in the Soviet model within the ruling Hungarian Socialist Workers' Party (4) (HSWP; Magyar Szocialista Munkaspart (MSZMP)) in the 1980s opened up a space in which 'proto-neoliberal' (Peck and Tickell, 2002: 384) ideas could emerge 'organically' in Hungary. As I demonstrate, a group of young, 'radical reform economists', well versed in neoclassical economics (5) and strategically located in the influential Financial Research Institute (FRI), became the conscious bearers of (neoliberal) capitalism in Hungary prior to 1989. Finally, the fourth section looks at how researchers at the FRI interpreted Hungary's deepening crisis and what policy proposals they offered to overcome it, by analysing in detail the contents of 'Turnabout and Reform', a document originally published in 1987 as a supplement to the samizdat journal Medvetanc (Antal et al., 1987) and widely acknowledged as the Absichterklarung of neoliberalism in Hungary (Andor, 2010: 160-161; Berend, 1990; Ripp, 2006: 27-30; Swain, 1992;Tokes, 1996).

Rethinking neoliberal transformation in CEE from the perspective of state capitalism theory

In order to explain the neoliberal transformation in Hungary and elsewhere in CEE, this article draws on Marxian political economy, in particular the theory of state capitalism. While the term has been employed in various ways over the years in Marxist debates, including anarchist, ultra-left, and social democratic interpretations, its usage here draws upon the works of the Palestinian-born British Marxist Tony Cliff (1996). (6)

First outlined in 1948, Cliff's thesis represented a means to maintain a revolutionary Marxist praxis in the context of the ideological rigidities that characterised world politics during the Cold War. Similar to other Marxists, the crucial question facing Cliff was whether the Soviet Union (USSR) and its satellite states in Eastern Europe represented a genuine 'socialist' alternative to the 'capitalist' West. In the specific case of the People's Republics, this meant, for example, asking whether socialism could be imposed by diktat from Moscow, or whether it necessitated the independent and self-conscious action of the working classes of those countries, in taking control of the means of production and the state?

The dominant view at the time maintained that the USSR and its satellite states were 'socialist' regimes since workers, through the vanguard party, had taken control of the state; private property had formally been abolished; and production was centrally planned. This position was officially propagated by the Communist Party of the USSR and its sister parties elsewhere (and incidentally shared by liberal critics (7)), suffered from theoretical and empirical inconsistencies. Theoretically, it was based on what Marx and Engels (1982; 99) described as a 'metaphysical or juridical illusion' that gives superiority to legal forms of ownership rather than effective ownership of the means of production. Moreover, there was also a noticeable tension between Stalinist propaganda and the fact that the liberation of Nazi occupying forces by the Red Army was not initially followed by socialist revolutions in Eastern Europe (Pittaway, 2004; Swain and Swain, 1993). (8) Having said this, to its supporters, the 'orthodox communist' position offered a straightforward political strategy: the task of the international proletariat was to ally themselves with the USSR and its satellite states in their struggle against imperialism and international capitalism (on the contradictions of this policy in the 'Third World', see Davidson, 2015: 128-133).

A second position built on (and attempted to vindicate) Trotsky's (1972) theory of 'degenerated workers' state'. While highly critical of the USSR under Stalin, it argued that the USSR and its Eastern European satellites constituted workers' states, albeit 'bureaucratically deformed' ones (Conner, 1973; Mandel, 1962). Finally, a third position, questioned altogether the idea that 'socialist' revolutions had taken place in Russia and elsewhere in Eastern Europe, arguing that the aim of Bolshevik Revolution of 1917 had not been 'the construction of socialism' but to promote rapid industrialisation. Popularised by the influential East German dissident Rudolf Bahro (1978), this position argued that 'actually existing socialism' was characterised by inherent contradictions, which, once the initial industrialisation drive fizzled out, would lead to a strengthening of social antagonisms, between the bureaucracy and technical-economic specialists, on one hand, and specialists and workers, on the other hand. However, contrary to Marx, Lenin and Trotsky, Bahro dismissed the revolutionary potential of workers, arguing instead that the only group capable of producing fondamental change were the middle strata of technical-specialists. As he put it...

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