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SÜDOSTEUROPA, 38. Jg., 5/1989 John Hall

Chinese and Hungarian Reforms: Parallels and Divergencies

Introduction

Reform has come to take on a significant meaning for the planned economies. When institutions such as production units or the banking system are reorgan­ ized, a market mechanism is introduced, or new price relations are establish­ ed, these characteristically develop first through reform discussions, and if they are approved by the ruling political party, are then introduced as de facto reforms. In this way, reforms have come to play the crucial role in the institu­ tional evolution of the planned economies. Of planned economies with reforms oriented towards the pragmatic task of improving economic performance, the programs in and have tended to be the most similar. The exaggerated differences in the two coun­ tries, arising from the disproportionate sizes of populations and geographical surface areas, have been offset by the parallel of the reform tendencies. Contributions by Balassa and Komai and Daniel have also emphasized the parallel direction of economic reforms in Hungary and China.1 However, the pattern appears to change in the second half of the 1980s as the reform programs in these two countries diverge. Divergence is largely a re­ sult of the increased pace of Hungarian reforms which have also taken on a substance and character heretofore unknown in the planned economies - to the extent that we can observe taking place in Hungary an actual shift to a new economic, social, and political paradigm. In contrast, the Chinese re­ forms appear to have run aground. The limits of Chinese reforms appear to be met at the points at which the economy can no longer effectively be controlled through central mandates. The problems of aggravated inflation, trade defi­ cits, unemployment, income inequality, and corruption are noted as associated side-effects of Chinese reforms. Both Koväcs and Harding write of reform “waves” in Hungary and China.2 Waves are argued to emerge as reforms are first introduced to solve problems

1 Bela Balassa: “China’s Economic Reforms in a Comparative Perspective”, Journal of Comparative Economics, Vol. 11 (1987) pp. 410-426. and J. Komai and Zs. Daniel: “The Chine­ se Economic Reform as seen by Hungarian Economists (Marginal Notes to Our Travel Dia­ ry)”, Acta Oeconomica, Vol. 36, Nos. 3-4/1986, pp. 289-305. 2 “Reform Bargaining in Hungary: An Interview with Jänos Mätyäs Koväcs”, Comparative Economic Studies. Vol. XXVIII, No. 3/1986 pp. 25-42 and Harry Harding: China ’s Second Re­ volution: Reform After Mao, Washington, D. C.: The Brookings Institution, 1987, see especially Chapter 4 “The Course of Reform.”, pp. 70-95. 2 6 0 John Hall in th e p lan n ed eco n o m ies, su ch as slo w g ro w th in n et n atio n al p ro d u ct o r stag n atin g h o u seh o ld in co m es. Y et, w h en th e n eg ativ e side-effects o f lib erali­ zatio n arise, e. g . in flatio n , unemployment, etc., th ere lik ew ise em erg es a counter-tendency: th at is, a retrenchment an d ev en backtracking to th e trad i­ tio n al p lan n in g m o d el. W h ile C h in a cu rren tly ap p ears to b e in th e m id d le o f a tro u g h o f a refo rm w av e, H u n g ary is sailing fo rw ard , w ith n o sig n s o f retrenchment in sig h t. In H u n g ary , u n lik e in C h in a, w e can o b serv e th at th e asso ciated side-effects o f refo rm s, su ch as in flatio n, unemployment, an d in co m e in eq u ality are n o t slo w in g d o w n th e p ace o f refo rm s th ere. Q u ite th e co n trary , th e refo rm s in H u n g ary are in effect creating a p arad igm sh ift to a d ifferen t socio-economic m o d el. In co n trast, C h in ese lead ers h av e essentially erected a w all d esig n ed to b lo ck fu rth er, substantial eco n o m ic refo rm s, an d to ex clu d e p o litical refo rm s altogether, at least fo r n o w .3 T h ese comparative developments are ex am in ed in th is p ap er. T h e p arallel development o f th e refo rm ten d en cies are traced in th e first p art. T h e seco n d p art ex p lo res th e d iv erg en ce as it h as ap p eared in th e seco n d h alf o f th e 1 9 8 0 s. T h e th ird an d fin al sectio n ju x tap o ses th e ad v an ces o f th e H u n g arian refo rm p ro g ram to th e slowed-down C h in ese refo rm s.

P arallel Developments

R efo rm s w ere first in tro d u ced to agriculture b o th in H u n g ary an d in C h in a. In b o th co u n tries, agricultural refo rm s so u g h t to en d th e p ro b lem s asso ciated w ith th e ex cesses o f collectivization p ro g ram s. In th e case o f H u n g ary w h ere agricultural refo rm s w ere first introduced, fo rced d eliv eries o f agricultural g o o d s w ere en d ed as early as 1 9 5 7 in th e w ak e o f th e H u n g arian u p risin g in th e A u tu m n o f 1 9 5 6 . W ith th e rev ersal o f collectivization p o licies, a sy stem o f w as o rg an ized b ased o n a profit-sharing p ro g ram am o ng its m em b ers (th o u g h th e state h as continually ex erted cen tral in flu en ce th ro u gh co n tro l o f p rices). P easan ts w ere also allo w ed to ex p an d p riv ate p lo ts to th e ex ten t th at a sig ­ n ifican t p ro p o rtio n o f fo o d su p p lies, o v er th irty p ercen t o f an n u al o u tp u t, is p ro d u ced in th e p riv ate secto r an d so ld o n free m ark ets. T h e availability an d variability o f th e fo o d su p p ly resp o n d ed p o sitiv ely to th ese refo rm s. H u n g ar­ ian agriculture is still distinguished to d ay as th e m o st su ccessfu l ex am p le o f so c ialist agriculture. In 1 9 5 7 , refo rm o f C h in ese agriculture w as h ard ly th in k ab le. It w as d u rin g th is tim e th at M ao Z ed o n g w as p ro m o tin g th e development o f agricultural co m m u n es as an alternative m o d el to th e S o v iet kholkhozes w h ich w ere o rigi­ n ally in trod u ced w ith th e first collectivization d riv e after th e fo u n d in g o f th e

3 N ath an G ard els: “T h e P rice C h in a H as P aid : A n In terv iew w ith L iu B in y an ” New York Review of Books, V o l. XXXV, N o s, 2 1 an d 2 2 /1 9 8 9 , p . 3 4 . Chinese and Hungarian Reforms: Parallels and Divergencies 261 Peoples Republic in 1949.4 The were to function as a quickened step in the direction of establishing in China. It was thought that the communal organization of agrarian production could effectively bypass the problem of a relatively undeveloped material basis in socialist construc­ tion. However, the failures were astounding during the years 1959-61 at the time of the . An estimated twenty million Chinese peas­ ants famished as a consequence of poor harvests and a backward distribution system which could not move grain fast enough to the regions where it was needed. The first serious efforts at reforming China’s economy could not occur until after the death of Mao and the jailing of the . Not until the re­ formers achieved dominance over the restorationists during the Third Plenum, towards the end of 1978, could the first reform movement promoting the de­ collectivization of agriculture get under way. What is interesting to note is that this reform movement was not initiated as a centrally inspired idea. Rather, the decollectivization program and the establishment of the production re­ sponsibility system was a favorable bureaucractic response to a movement ini­ tiated by the . In the 1970s, the collectivization program in Sichuan Province was breaking down through its own internal disfunctioning. Groups of peasants had left the communes and began to produce outside of the estab­ lished party-controlled, communal system. China’s program to decollectivize agriculture was a Party response to the gross discontent and corresponding in­ dependent initiative of the peasants.5 Chinese agricultural reform was a matter of formalizing this tendency and generalizing it for the entire agricultural pro­ gram. Under the production responsibility system, family units have among several options, the possibility to market the surplus remaining after fulfilling required state quotas.6 Reforming agriculture appears as the logical starting point for economic re­ form. Agriculture is relatively easy to reform, at least when compared with in­ dustrial reform. It amounts to little more than allowing peasants to return to what they were doing before the state sought to incorporate them as part of a larger program of socialist construction. We do find a turbulent history of resistance to socialist programs throughout the last seventy-two years, since the initiating of ‘real existing ’ in the . In selected cases, peasants unwillingness to cooperate with programs by not producing or not delivering agricultural products has aggravated the rela­ tions between party and peasants to the degree that collectivization has been regarded as the solution to food procurement. However, collectivization has

4 Stephan Feuchtwang and Athar Hussain (editors): The , New York: St. Martin’s Press (1983), pp. 1-12. 5 Marshal Goldman and Merle Goldman: “Soviet and Chinese Economic Reform”, Foreign Affairs, Vol. 66, No. 3/1988, p. 554. 6 Thomas Heberer: „Zur Problematik der gegenwärtigen Landwirtschaftsreform in der VR China“, Osteuropa-Wirtschaft, 30. Jg., 1/1985, pp. 34-36. 262 John Hall n o t f u l l y a n s w e r e d t h e agricultural q u e s t i o n . L o w productivity a n d b u r e a u ­ c r a t i c decision-m aking, c o m b i n e d w i t h a p o o r l y c o n c e i v e d s y s t e m o f i n f r a s ­ t r u c t u r e f o r s t o r i n g , transporting, a n d distributing f a r m p r o d u c t s , h a s e n s u r e d t h a t t h e traditional a p p r o a c h o f collectivization h a s r e m a i n e d t h e c r u m b l i n g cornerstone i n t h e developm ent o f t h e p l a n n e d e c o n o m i e s . I n t h i s w a y , agricultural reform tends to emerge as the first major compromise, f o r a p o o r l y functioning agricultural s e c t o r i s g e n e r a l l y responsible f o r c a u s i n g f o o d s h o r t a g e s i n t h e u r b a n a r e a s , a n d , s o m e t i m e s e v e n i n t h e countryside, t o o , w h e r e f o o d s t u f f s a r e p r o d u c e d . F o o d s h o r t a g e s c a n s t r a i n p a r t y i n t e r e s t s t o t h e d e g r e e t h a t a p r a g m a t i c s o l u t i o n i s c h o s e n : h e n c e r e f o r m . I n H u n g a r y a n d C h i n a , agricultural r e f o r m s h a v e s o l v e d t h e b a s i c p r o b l e m s o f p r o d u c i n g a n d distributing a d e q u a t e f o o d s u p p l i e s , p r o b l e m s w h i c h s t i l l r e m a i n i n s o m e o t h e r s o c i a l i s t c o u n t r i e s w h i c h h a v e n o t e m b r a c e d substantial agricultural r e ­ f o r m s . Reforming industry i s a d i f f e r e n t s t o r y . Industrialization i s historically o n e o f t h e c e n t r a l t a s k s o f p l a n n e d e c o n o m i e s , f o r t h e p r o g r a m s h a v e t e n d e d t o t a k e r o o t i n industrially b a c k w a r d r e g i o n s . T h e e a s t e r n p a r t o f G e r m a n y a n d t h e C z e c h p a r t o f Czechoslovakia s t a n d o u t t o g e t h e r a s t h e t w o e x c e p t i o n s t o t h i s g e n e r a l r u l e . I n d u s t r i a l r e f o r m , i n c o n t r a s t t o agricultural r e f o r m , i n v o l v e s m o r e t h a n a l ­ l o w i n g w o r k e r s t o r e t u r n t o w h a t t h e y w e r e d o i n g b e f o r e . T h e v e r y n a t u r e o f m o d e r n i n d u s t r y i m p l i e s p r o d u c t i o n u n i t s w i t h h u n d r e d s a n d s o m e t i m e s e v e n t h o u s a n d s o f w o r k e r s . I n d u s t r y a l s o d e m a n d s a h i g h e r d e g r e e o f coordination f o r t h e f l o w o f m a t e r i a l s i n t o i n d u s t r y a n d t h e o u t f l o w o f interm ediate g o o d s t o o t h e r i n d u s t r i e s f o r a d d i t i o n a l processing, a n d t h e distribution o f F i n a l g o o d s t o c o n s u m e r s . I n d u s t r y a l s o r e q u i r e s technological developm ent ( o r a t l e a s t i t s im portation) a n d i t s d i f f u s i o n a c r o s s s e c t o r s a n d r e g i o n s . I n Hungary, a f u l l t e n y e a r s p a s s e d b e t w e e n t h e r e f o r m o f agriculture a n d t h e f i r s t significant a t t e m p t a t t h e r e f o r m o f i n d u s t r y . T h e N e w E c o n o m i c M e c h a n i s m (N. E. M.) i n t r o d u c e d i n H u n g a r y i n J a n u a r y o f 1 9 6 8 s o u g h t t o r e ­ f o r m t h e hierarchical, m a t e r i a l b a l a n c e p l a n n i n g w h i c h H u n g a r y i n h e r i t e d f r o m t h e S o v i e t U n i o n j u s t a f t e r t h e s e c o n d w o r l d w a r t o f o s t e r Stalinist-type industrialization. I n 1 9 6 8 , enterprises w e r e m a d e i n t o autonom ous, p r o f i t - m a x i m i z i n g u n i t s . A decentralized p l a n n i n g s y s t e m w a s l i k e w i s e introduced. A c e n t r a l l y d e t e r m i n e d a n d u n i f o r m l y e n f o r c e d s e t o f f i n a n c i a l r e g u l a t o r s o f c r e d i t , w a g e s , s u b s i d y , a n d t a x e s , a n d l a t e r p r i c e s w a s t o c o o r d i n a t e t h e e c o n ­ o m y . C e n t r a l i n t e r e s t s i n t e n d e d t o i n f l u e n c e p r o d u c t i o n a n d t h e d i r e c t i o n o f t h e e c o n o m y t h r o u g h t h e a d j u s t m e n t o f t h e s e f i n a n c i a l regulators. 7 B e n e f i t s o f t h e N. E. M. c o u l d o n l y b e p a r t i a l l y r e a l i z e d , t h o u g h . T h e p r o b ­ l e m r e m a i n e d t h a t t h e hierarchical c h a r a c t e r o f t h e p l a n n i n g s y s t e m w a s n o t

M ä r t o n T ä r d o s : “ T h e Development P r o g r a m f o r E c o n o m i c C o n t r o l a n d O rganization o f H u n g a r y ” , Eastern European Economics, V o l . XXII, 3 - 4 / 1 9 8 4 , p . 7 . Chinese and Hungarian Reforms: Parallels and Divergencies 263 substantially altered.8 The outcome was that the central offices used extra methods such as ‘responsibility for supply’ for retaining control over enter­ prise production.9 On top of this, the financial regulators which were intended to be centrally determined and uniformly enforced, became the subject for ne­ gotiation between the central offices and the enterprises. The resulting tenden­ cies for such a reform were for enterprises to bargain with the central offices for more credits and subsidies, lower taxes, higher prices for their output and lower input prices. The central offices found themselves on the other side of the bargaining table.10 With the exclusion of a few priority sectors, such as raw materials and ener­ gy, Chinese planning was reformed along similar lines: away from centrally determined output targets to indirect, financial controls. Beginning with the Urban Reforms in 1984, Chinese enterprises were granted greater autonomy and a system of financial regulators similar to those used in post-reform Hungary were introduced. Just like in the Hungarian case, bargaining over the determination of these financial regulators came to play a major role in re­ source allocation in China. In both the Hungarian and Chinese cases, reforms did not effectively alter the deep set institutional structures of hierarchical, top-down planning. Even though financial regulators replaced the breaking down of the plan, these re­ gulators had to work against the contradictory forces of what Soos defines as informal pressures, mobilization, and campaigns. According to Soos, mobili­ zation tends to arise in planned economies because of the “declared unity of society.” This unity means that the population must “... identify themselves with the objectives declared by the leading organs of the society.”*11 The conse­ quence is that social control through such forces as mobilization and not the system of regulators have remained as the basic means of control in Hungary and China.

The Interchange

The parallel reform tendencies observable in Hungary and China between the years 1978 and 1985 are not a matter of coincidence. Diplomatic relations be­ tween China and Hungary became especially cordial after the War had ended, between the years 1979 and 1982. After more than thirty years of , the Chinese were ripe for changes. For obvious reasons Yugoslavia,

8 “Plan Bargaining in Hungary: An Interview with Dr. Laszlo Antal”, Comparative Econom­ ic Studies, Vol. XXVIII, 2/1986, p. 49. 9 Ivan Schweitzer: “Some Interrelations Between Enterprise Organization and the Econom­ ic Mechanism”, Acta Oeconomica, Vol. 27,3-4/1981, pp. 289-300. 10 “Plan Bargaining...”, op. cit., p. 50. 11 Käroly Attila Soos: “Informal Pressures, Mobilization and Campaigns in the Manage­ ment of Centrally Planned Economies”, Working Paper, 86/246, Florence: European Universi­ ty Institute (1986), p. 23. 264 John Hall at first, provided a useful reform example for China. Yugoslavia, just like Chi­ na, is an independent, non-alligned communist nation. The Yugoslavian so­ cio-, generally termed ‘workers’s self-management,’ has long emitted a favorable ring for planned economies seeking a solution to the prob­ lems of hierarchical and authoritarian planning. However, Yugoslavia’s chronic economic problems of inflation, foreign debt, and internal imbalances combined with the additional and related problem of political instability and ethnic strife, steered Chinese researchers towards other models. Hungary offered a more useful example. By 1978, Hungary already had ten years of experience with attempted decentralization of what prior to 1968 had been a centralized planning system, quite similar in structure to China’s. This appealed to Chinese researchers and policy-makers beginning in 1978. Chi­ nese delegations visited Hungary, quizzed reform economists, and brought back home those ideas which most appealed to them. The concept of the “planned economy” was transfered directly from Hungary to Chi­ na. This concept played a key role in 1984 when the Chinese Central Commit­ tee Plenum abolished mandatory plans and substituted indirect controls. In such a manner, knowledge about the Hungarian reform experiences was trans­ ferred directly to China. By invitation of the Chinese in the Autumn of 1982, Rezsö Nyers, former head of the Institute of Economics and noted reform economist, led a Hun­ garian delegation largely composed of officials, and, in particular, representatives from the Price Office. A similar visit to study Chinese joint ventures took place in October of 1988. But this visit was for the transfer of knowledge back to Hungary. The success of Chinese special economic zones is based on the inviting of overseas Chinese who maintain a personal desire to contribute to the development of China through sending back home their cap­ ital and expertise. This strategy appears to have had a positive effect in in­ creasing the level of economic activity, particularly in coastal China. The Hun­ garians have been influenced by this strategy and are making a similar attempt to encourage those Hungarians living outside of Hungary to channel some of their business back home. Parallels also appear to be emerging in the reform of the system of property ownership. Economists Märton Tärdos of Hungary and Li Yining of China have succeeded in shifting the reform discussions in their respective countries away from questions related to the system of regulators, to questions related to the separation of ownership of property from management, and specific forms of property ownership. Though Li Yining does not reference Tardos’s impor­ tant contributions towards these recent advances in reform thinking, the simi­ larities in reform concepts can lead one to conclude that there is a continuing transfer of reform thinking between Hungary and China.12

12 Li Yining: Shijie Jingji Dabao, May 23, 1988; Ferenc Bänhidi: “Discussions About the Strategy of Economic Reform”, Paper presented at the 31st EACS Conference, Weimar, GDR, September 5-10,1988. Chinese and Hungarian Reforms: Parallels and Divergencies 265

Divergent Tendencies

Even though there exist striking parallels at the level of reform thinking in both Hungary and China, at the level of practical reform implementation we find a tendency for divergence.13 a) In China, mandatory plans still cover 30 to 40 percent of production. As the influence of industrial plans have been reduced, the power of the territori­ al organizations has been increased. Since 1968, the Hungarians have no mandatory plans. b) The plan mechanism and market regulation in China is called the “double track system.” For example, steel now has two or more prices. The plan price is the lowest price, that is, 40 or 50 percent of the market price. Moreover, this market price is bargained. In China there are also different dis­ tribution channels such as the central organs, the territories, and the free mar­ ket. c) In Hungary there is one price for commodities, and materials are con­ trolled through a material distribution office. In contrast, China has a well de­ fined territorial subsystem, which include special economic zones in the coas­ tal regions. Because the territories have special decision-making power, the mix of plan and market is different in every territorial sub-system. In contrast, Hungary is a unified country with no special zones or territories. d) In China, every enterprise has a different tax rate. The enterprise has to bargain with the officials over taxes and subsidies. Bargaining plays a role in Hungary, but the tax system is officially more unified. Enterprises are obliged to pay fifty percent of profits in taxes. e) In China’s price system, especially for raw materials and energy carriers, we can still find prices of the 1950s. Essentially, China has a New Economic Mechanism a la Hungaria, but without a price reform. In contrast, Hungary’s pricing system has been reformed to better reflect world prices.

The Paradigm Shift

The Stalinist model of which was transferred to Eastern Europe and China in the 1950s is still a popular whipping boy, there to take the blame for the relatively poor performances of planned economies. The Stalinist model which can be generalized to include a program of collectivized agriculture, hierarchical and centralized industrial planning, disproportionate investment into heavy industry at the expense of wage-goods industry and ag­ riculture - has proven incapable of producing modem, efficient economies. Decentralization and liberalization are thus advocated as the means to solving

13 The following points were elaborated in an interview with Ferenc Bänhidi, Institute for Economic Planning, Budapest, November 29,1988. 266 John Hall the economic problems associated with the rigidities of the Stalinist model. This perspective is voiced by Milovan Djilas, a Yugoslavian social scientist, who is representative of a collective sentiment shared by reform economists concerned with the relatively poor performances of the planned economies.14 Yet, both Hungary and China challenge Djilas’s argument. Because of the comparatively short length of time of reform experimentation in China, Hungary serves as a more useful example, and will hence be discussed more extensively in this section of the paper. In the case of Hungary, we can observe that twenty one years of decentrali­ zation and liberalization since 1968 have not produced any sort of a socialist economic miracle. Quite the contrary, Hungary has the highest per capita for­ eign debt in all of CMEA Europe, higher than in Poland and Yugoslavia, two cases which are often used metaphorically for contemporary European eco­ nomic and social catastrophies, bordering on political chaos. Hungary has an official annual inflation rate of 20 percent, higher than in any West European country. Hungary’s total investments decreased by an average of 5.5 percent a year for each year from 1980 to 1985.15 Unemployment which has been con­ cealed for the last forty years is now so severe as a result of the pressing need to restructure heavy industry, especially coal and steel, and technically lagging manufacturing industries, that workers’s dislocation can no longer be effec­ tively hidden. While Hungary’s socialist welfare-state has rested its legitimacy on the promise of providing its population with public goods such as educa­ tion, health care, and old age pensions, the system is currently unable to deliv­ er these and other needed services at a respectable level. One pressing and growing social problem demanding solution is that the incomes of an increas­ ing portion of the mass of pensioners is falling below the poverty line. If Djilas is correct in advocating decentralization and liberalization as the solution for solving the problems associated with the legacy of the Stalinist economic model, why, then, is it that we do not find a better performance in Hungary? In comparison to , another European CMEA country and one noted for touting the achievements of its traditional planning model, decentralization and liberalization have only wrought havoc to Hungary. Djilas questions whether the Stalinist model is actually reformable at all.16 But is the Stalinist model, or the legacy of the Stalinist model, the only prob­ lem in the planned economies? Should we not also include the Leninist legacy here? A reexamination of the Leninist legacy is needed because its reformabil- ity plays a critical role in the prospects for change in the planned economies, including the Soviet economy under the leadership of Mr. Gorbachev.17

14 “An Interview with Milovan Djilas” by George Urban, Encounter, Sept., Oct. 1988, pp. 3-19. 15 This point is developed in my forthcoming (1989) article: “Liberal and Decli­ ning Capital Formation in Hungary”, American Journal of Economics and Sociology. 16 See FN 14. 17 Though this point has already been established, the tendency is for critics such as Djilas to continue citing the enduring effects of and not to focus on the problems associated Chinese and Hungarian Reforms: Parallels and Divergencies 267

The Leninist-Stalinist Legacy

The basic political and economic model or paradigm of planned socialism did not “spring full-grown from the head of Lenin,” as Maurice Dobb reminds us.18 Rather, the model which we can still observe today, and which we refer to as the traditional Soviet-type planning model, i. e. the model which devel­ oped in the Soviet Union and diffused to Eastern Europe and even to China during the 1950s, began its essential formation and experienced its critical de­ velopment under the eight years of Lenin’s revolutionary leadership.19 Cen­ tralized, topdown, hierarchical, industrial branch planning was initially devel­ oped during Lenin’s period of strongest influence in the nascent Soviet Union. At the time of Lenin’s leadership, the Party Program of March 1919 urgently encouraged “the greatest possible concentration of the whole of economic ac­ tivity of the country into a unified plan worked out for the whole State.”20 The present day institutional machinery for formulating and implementing plans clearly had its beginnings in Lenin’s day with the foundation of the fa­ mous GOELRO, or State Commission for Electrification. In March of 1920 before the end of the Civil War, Lenin stressed the importance of GOELRO and its role in the building of communism in the Soviet Union, for in Lenin’s eyes, Soviet plus electrification would equal communism.21 The second and equally important legacy which Lenin and the period of the Leninist leadership contributed to the Soviet model concerns the structure and role of the communist party in the control and management of the economy and society. The principle of , initiated by Lenin, re­ mains as one of the distinguishing features of the Soviet-type political model. Democratic centralism essentially closes the doors of economic and social control to all but a small core of selected party members, characteristically working as a . Taking this core for decision-making, control is wielded with strict discipline through the layers of the party hierarchy. On top of this, the party has assumed the key role in controlling resource alloca­ tion, thus making the economy an extension of the political apparatus, fully dominated by party influence and party interests. Also characteristic of this Leninist political model is that other political parties, and non-party associa­ tions such as independent trade unions, have had their influence completely excluded up until recently, in the decade of the 1980s. In the early 1920s after the end of the Civil War, Lenin experimented briefly

with the Leninist legacy. 18 Maurice Dobb: Soviet Since 1917, Sixth Edition, London: Rout- ledge and Kegan Paul, 1966, p. 337. 19 The essential features and functioning of this model is elaborated in J. M. Montias: “Plan­ ning With Material Balances in Soviet-Type Economies”, American Economic Review, Decem­ ber 1959. 20 Dobb, op. cit., p. 338-339. 21 Ibid., pp. 338-339. 268 John Hall with privatization and decentralization under the . Nevertheless, the original ‘Soviet-type’ model re-emerged after 1928 and has remained largely untouched by reforms ever since, save some cosmetic changes. Up until recently this has been the case for China and Hungary, too, where decentralization of the planning system has been based on a power struggle between the reformers and traditionalists. While reforms have imple­ mented some changes, what has endured is the uncertainty of the reforms. The consequence is that at any point, a traditionally minded leadership has the possibility to take power in a Soviet-type economy, close off the country from the rest of the world, and begin a program of so extensive that reform advances and even reform leaders might be reduced to little more than a curi­ osity for historians. Czechoslovakia serves as one well documented case in point. This enduring sense of uncertainty has its roots in the closed political struc­ ture justified by Lenin. This political feature affects economic outcomes by causing a perpetual uncertainty for economic activity. Thus, those small entre­ preneurs who might come forward and establish their small enterprises know that they always stand on shaky ground. With one swoop of a counter-reform wave, they might loose their entire assets and end up on a political black list. The recent counter-reform moves in the Soviet Union, against newly establish­ ed cooperatives, is exemplary of the uncertainty for conditions of economic activity in a Soviet-type economy. Stalin’s contribution involved some modification of the Leninist economic and political model. Stalin pushed for a “fast rate of development of industry in general, and of the production of the in particular.”22 He, likewise, promoted collectivization as a solution to the backward “techni­ cal and cultural level” of agriculture.23 Though this program, as he rightly pre­ dicted, did lead to a state of tension in plans, he pressed forward with collecti­ vization of agriculture and priority planning for capital goods and heavy industry at the expense of light industry.24 Of course, Stalin also emphasized the importance of war preparedness and introduced to the Soviet-type system the use of draconian methods for ensuring party discipline. Under Stalin’s in­ fluence, the Soviet-type system became noted for resorting to the liquidation of proclaimed enemies of the state. With the exception of these above men­ tioned contributions, though, Stalin essentially extended the Leninist planning paradigm, and firmly institutionalized it to the degree that nations inheriting the Leninist-Stalinist legacy are, without exception, faced with trying to solve the problems which Djilas so clearly points out: that this model has proved in­ capable of producing modem and efficient economies.

22 Josef Stalin: “Industrialization of the Country and the Right Deviation,” Foundations of Soviet Strategy for Economic Growth, Edited by Nicholas Spulber, Bloomington: Indiana Uni­ versity Press, 1964, p. 266. 23 Ibid., p.270. 24 Ibid., p.266. Chinese and Hungarian Reforms: Parallels and Divergencies 269 Djilas’s question is thus more relevant when it is broadened. Might we ask: Is the Leninist-Stalinist economic and political paradigm reformable? If we go so far as to assume that it is reformable, then how far does the paradigm have to be reformed before a system is created which fosters an efficiently func­ tioning economy? Would it be the case that if we do indeed take reform of the Leninist-Stalinist model this far, are we then talking about a paradigm shift? In The Structure of Scientific , Thomas Kuhn defines “paradigm” circularly. According to Kuhn (p. 186), a “... paradigm is what the members of a scientific community share, and, conversely, a scientific community con­ sists of... (those) who share a paradigm.”25 According to Kuhn, scientific re­ volutions are then “inaugurated” by a growing sense, “... that an existing par­ adigm has ceased to function adequately in the exploration of an aspect of nature to which that paradigm itself had previously led the way.”26 There are indeed signs that such a paradigm shift, in the Kuhnen sense, might indeed by taking place in the Soviet Union. In his review of the Central Economic Science - Text Book on Political Economy, Hans-Hermann Höhmann notes significant changes in Soviet think­ ing, especially at the level of (p. 268). Höhmann conveys that the So­ viets now accept that the demise of is not going to occur in the near future. Instead, they acknowledge that monopoly capitalism will likely be around, maybe even for a long time. With respect to the development of socialism, the official ideology now ad­ vocates restricting the “leading role” of the Communist Party to political tasks and giving economic science a greater role to play in the running of the econ­ omy. The principles of property ownership have also undergone changes. Through decentralization and extensions of forms of self administration, state ownership of property will be shifted towards societal ownership.27 With re­ spect to the sphere of planning, reference is now made to the role played by de facto markets in the economy. The concept of market is to no longer be dressed in red clothes and posed as a “socialist” market. The harmony postu­ late has also been changed. No longer is the “unity” of society’s interests seen as the dominant . The new ideology now admits that contra­ dictions and interest conflicts are part of the structural elements of society. Fi­ nally, differentiation of wages and compensations are thought to better reflect and encourage varying levels of work performance. Though, in spite of these ideological changes, Höhmann emphasizes that this revised official textbook offers no new, alternative models of socialism.22. In sum, Höhmann regards the

25 Thomas Kuhn: The Structure of Scientific Revolutions, Second Edition, Chicago: Univer­ sity of Chicago Press, 1970, p. 186. 26 Ibid., p. 92. 27 Hans-Hermann Höhmann: „Umgestaltung erfaßt sowjetische Wirtschaftsideologie. Neues Lehrbuch für politische Ökonomie4 in Vorbereitung“, Osteuropa-Wirtschaft, 33.Jg., 3/1988, p. 268. 28 Ibid., p. 270-273. 270 John Hall ideological developments as important, but they do not fully constitute the ad­ mission of a paradigm shift. Thomas Sauer argues that at the level of Soviet social sciences, a “paradig­ matic” shift is currently taking place: a shift at the theoretical level which ac­ companies and is closely tied to the practical implementation of perestroyka?9 Sauer describes the pivotal point of the emerging paradigmatic shift as exem­ plified by an increasing “subject oriented” approach (p. 50), meaning that ide­ ology is no longer as independent as before, but must, to a greater degree, conform with reality.30 Sauer qualifies this pivoting of Soviet social sciences by adding that the acceptance of new paradigms depends largely on the success of the overall economic reform course and of perestroyka. The paradigm shift which I am arguing is presently occurring in Hungary is qualitatively different from these “changes in heart” in Soviet ideology and so­ cial sciences, argued by Höhmann and Sauer. The Hungarian paradigm shift is also different from Kuhn’s understanding, though some Hungarians probably once realized that .. an existing paradigm has ceased to function adequately.”31 For the Soviet case, the paradigm shift amounts to little more than making an official acknowledgement of common knowledge, i. e. that capitalism is not self-destructing, that markets exist and can be used to improve resource allo­ cation, even in planned economies, that conflict of interest may actually exist under socialism. The paradigm shift in the Soviet Union presented by Höhmann and Sauer is essentially based on a “change of heart” which is now reflected in the ideology. In contrast, the paradigm shift taking place in Hungary can be better ob­ served at the level of economic, political, and social practice than at the level of scientific theory. This curious phenomenon is related to the historical pro­ clivity for official control over ideas and their dissimination. In the planned economies, generally, we can find a record which shows that variation from official positions can produce costly consequences for individuals, groups, and even whole societies and nations. Hungarian reform discussions have tended to developed with this history in mind. In Hungary, we currently find a paradigmatic shift, but nothing is being elaborated at the theoretical or ideo­ logical level. This is not to imply that the Hungarians are ‘acting without thinking.’ Rather, they are ‘acting without advertising.’ In short, in Hungary we can currently observe a paradigm shift at the level of practice and applica­ tion which avoids straining the sensitive ideological relationship with the So­ viet Union which the Hungarians have been coerced to respect since 1948. To understand what is occurring in Hungary we need to move away from

29 Thomas Sauer: “Paradigmenwechsel in der Politischen Ökonomie des Sozialismus? Zu einigen Grundlinien des neueren gesellschaftswissenschaftlichen Denkens in der UdSSR“ Köln: Berichte des Bundesinstituts für ostwissenschaftliche und Internationale Studien, No. 46/1988, p. 47; see also T. Sauer: „Ein neues Paradigma in der politischen Ökonomie des Sozialismus“, Osteuropa- Wirtschaft, 34. Jg., 2/1989. 30 Ibid., p. 50. 31 Kuhn, p. 92. Chinese and Hungarian Reforms: Parallels and Divergencies 271 Kuhn and define ‘paradigm’ more simplistically as a model or example. In its most basic sense the paradigm shift taking place in Hungary consists of a fun­ damental alteration of the traditional Leninist-Stalinist paradigm at the level of application. While the New Economic Mechanism brought about some changes in the traditional Soviet-type planning practice, the 1968 reforms, themselves, never changed the original model. By the same token, the expansion of second econ­ omy activity in Hungary since 1982 was little more than a compromise meas­ ure designed to solve problems of a stagnating state sector. Yet, this also did not significantly alter the Soviet-type model. More recent institutional reforms move Hungary closer to a paradigmatic shift. These include reforms affecting property ownership which provide the preconditions for a significant level of privatization; the adoption of proposals advocated by Märton Tärdos which make provisions for capital stock holding institutions; and privatization of the housing construction sector, meaning that the state has largely divested itself of the responsibility for the constructing and maintaining of housing. However, such reforms do not alter the model fundamentally. The imple­ mentation of the Income Tax Law in 1988 is a less noticed yet more substan­ tial element contributing to a paradigm shift. The planned socialist economy bases state-led accumulation on an attempted high rate of exploitation of the workforce. Integral to this strategy is a system of wages in which workers never know their income earned and how it is being divided between take- home income and that portion to be accumulated by the state and then used (or wasted) on the relatively high rates of investment. With such a system of wages, the socialist worker has had no knowledge of, and hence, no basis for questioning such social phenomena as national budgets, success and failures of investment programs, inter-sectoral and inter-industrial income transfers, military spending, and the like. Since the beginning of 1988, Hungary made the shift to an income tax sup­ ported system. Though there existed complaints such as “a Swedish income taxation program based on Ethiopian wages,” the outcome is that income tax­ ation is promoting a fundamental shift in the relationship of the individual-cit­ izen to the larger economic and political program. Along with the transforma­ tion by which the individual works, earns, and supports the state, the “dominant role” of the Hungarian Socialist Workers Party (HSWP) is now ad­ mittedly open to changing and it appears that this will be protected by the new constitution currently being debated and drafted.

r Discussion

While economic reforms play a necessary role in a paradigm shift taking place in a , such reforms, in and of themselves, do not provide the sufficient conditions for a paradigm shift. Political reforms remain as the cru- 2 7 2 John Hall c ia l v a ria b le . T h is is th e p o in t o f d e p a rtu re fo r C h in e s e a n d H u n g a ria n re ­ fo rm s . T h o u g h C h in a o ffic ia lly h a s a multi-party s y s te m , o p p o s itio n p a rtie s s e rv e little m o re th a n a s s h o w -c a s e d ip lo m a c y fo r th e W e s t. C u rio u s ly , in H u n g a ry a fte r 1 9 5 6 , p o litic a l p a rtie s w e re n o t b a n n e d , b u t its w a s c o n s id e re d a fo o lis h ris k to e x p o s e o n e s e lf a s a m e m b e r o f a n o p p o s itio n p a rty . T h is is c h a n g in g n o w a s p o litic a l p a rtie s a re “reactivated.” A s H u n g a ry o p e n s u p a s a g e n u in e ­ ly pluralistic p o litic a l s y s te m , b o th th e p ro s p e c ts fo r re c u rre n t s w in g s b a c k to th e traditional m o d e l, a n d th e accompanying p u rg e s o f re fo rm a d v o c a te s , c o m e to a n e n d . In s h o rt, th e re fo rm w a v e s s e ttle d o w n to a c a lm s e a , c o n d i­ tio n s w h ic h a re lik e ly to fo s te r e c o n o m ic p ro g re s s . S z e le n y i w rite s th a t a “ c ris is o f tra n s itio n ” fa c e s H u n g a ry a n d o th e r p la n n e d e c o n o m ie s . 3 2 T h e le g a c y o f th e Soviet-type m o d e l is to le a v e th e “ a d o p to rs ” w ith e c o n o m ie s w h ic h c a n n o t, b e c a u s e o f in te rn a l s y s te m ic constraints, m o v e fro m th e e x te n s iv e to a n in te n s iv e p h a s e o f industrialization. T h e q u e s tio n to n o w a n s w e r is : W ill a p a ra d ig m s h ift fro m a p la n n e d to a m ix e d m a rk e t e c o n ­ o m y a n d fro m a o n e p a rty to a multi-party s y s te m h e lp in s o lv in g H u n g a ry ’s p re s s in g e c o n o m ic p ro b le m s ? T h e fu tu re is d iffic u lt to p re d ic t, e v e n fo r s o c ia l scientists. H o w e v e r, th e re a re p o s itiv e e x a m p le s to o b s e rv e , a n d e x a m p le s w h ic h H u n g a ry m ig h t e m u la te . U n d e r p o s tw a r s ta b ility , W e s te rn E u ro p e a n c o u n trie s h a v e te n d e d to m a k e p ro g re s s w ith re s p e c t to a c h ie v in g a d v a n c e d s ta g e s o f industrialization a n d in ­ c re a s in g le v e ls o f p e r c a p ita in c o m e : th is in c lu d e s F in la n d , a c o u n try w h ic h s u ffe re d a c o lo n ia l h is to ry u n d e r th e S w e d is h c o n tro l; Ita ly , a c o u n try w h ic h th ro u g h u p w a rd s tru c tu ra l m o b ility is n o w a s s o c ia te d a s o n e o f th e G -7 ; a n d S p a in n o w s e rv e s a s a re c e n t a n d p ro m is in g e x a m p le o f a E u ro p e a n c o u n try w h ic h is m a k in g ra p id e c o n o m ic g a in s in in d u s try a n d fin a n c e . T h is h a s o c ­ c u rre d ju s t re c e n tly u n d e r s o c ia l d e m o c ra tic leadership, fo llo w in g th e d e a th o f F ra n c o . F o r th e E a s te rn E u ro p e a n c o u n trie s s u c h a s H u n g a ry , th e p a ra d ig m s h ift fro m a p la n n e d to a m ix e d m a rk e t e c o n o m y a n d fro m a o n e p a rty to multi-party s y s te m o ffe rs a p ro m is in g fu tu re . It in v o lv e s reactivating a n d revitalizing in s ti­ tu tio n s a n d strengthening lin k a g e s w ith th e W e s t. In th is re s p e c t, th e p a ra d ig m s h ift fo r H u n g a ry , a n d potentially P o la n d , w ill b e a m u c h e a s ie r p ro c e s s th a n fo r C h in a , w h e re th e pre-socialist institutional development w a s predominantly fe u d a l a n d th e h is to ric a l connections to th e W e s t h a v e te n d e d to c lo s e d o w n w h e n fe a r o f th e n e g a tiv e e ffe c ts o f “ westernization ” h a v e b e c o m e to o g re a t.

3 2 Iv a n S z e le n y i, “ E a s te rn E u ro p e in th e C ris e s o f Transition” , in B ro n is la w M is z ta l (e d .): Poland After Solidarity, N e w B ru n s w ic k , N e w J e rs e y : Transaction B o o k s , 1 9 8 5 , p p . 9 7 -1 0 2 .