PROBLEMS OF THE HUNGARIAN ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00935A000400170002-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: November 9, 2016
• Document Release Date: August 21, 1998
• Sequence Number: 2
• Publication Date: November 13, 1956
• Content Type: IM

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INTELLIGENCE MEMORANDUM
PROBLEMS OF THE HUNGARIAN ECONOMY
CIA/RR IM-440
13 November 1056
WARNING
THIS MATERIAL CONTAINS INFORMATION. AFFECTING THE
NATIONAL DEFENSE OF THE UNITED STATES WITHIN THE
MEANING OF THE ESPIONAGE LAWS, TITLE 18, USC,,SECS.
793 AND 794, THE TRANSMISSION OR REVELATION :OF
.WHICH IN AAY NIA .. TO AN UNAUTHORIZED,PERSO IS
PROHIBITED'BY LAW.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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FOREWORD
.Despite the confused situation in Hungary, this memorandum
assumes reestablishment of a Soviet-dominated regime. It is_fur-
ther assumed that.recognition will be given to the need for cor-
recting conditions which have led to recurring crises in the
Hungarian economy.
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CONTENTS
Summary and Conclusions . . . , . ? . . ?
I. Recent Developments 4 . a . . ? . . . . . . . . 3
.II. Internal Economic Situation ? . . ? ? ? . . 6
Resources ? . . . . . . .. . . . . . . . . . 6
B. First Five Year Plan (1950-54) . . ? . . . ? . 7
C. The New Courses" Policy . . . . . . ... . . . 9
D. Present Weakness of the Economy ... . . . . . 10
III. Soviet Domination of Hungarian Economic Affairs . 12
A. Hungarian Economic Policy . . . . . .. . . . ? .
B. Trade and. Economic Collaboration ? .
,C. Financial Assistance . . ? . , ? ? . ?
D. Soviet Ownership of Hungarian Industry
E. Armaments Production . . ? . . . ? .
IV. Evidence of a New Look for the Hungarian Economy
and Possible Consequences . ? . . . . . . . . .
A. Reorientation of 'T'rade Toward the West Despite
the Impact on Other Bloc Countries . .. . . . ? ,
B. Emphasis on Consumer Goods in Relation
to Heavy Industry . . . . . . . . . ? .
C. Collectivization Program . . ? . . . . . ,
D. Adherence to CEMA Agreements ? . . . . . .
E. Hungarian Activity in the Underdeveloped Areas
F. Increased Economic Cooperation with Yugoslavia
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(ORR Project 16.1656)
PROBLEMS OF THE HUNGARIAN ECONOMY*
Summary and Conclusions
Any Hungarian regime installed under.-the-aegis of the USSR prob-
ably will be committed to the preservation of a Communist economic
program, It isalso likely that, as a result of.the deep-seated
national.ism.displayed -during the recent-uprisings, Soviet policy-
makers will insist that a more strict discipline be imposed on
Hungaryls political and economic policies. When the Soviet forces
have reestablished order, when the extent of physical damage is
ascertained, and when measures are initiated to restore the normal
operation of the economic system, the USSR may apply.a formula for-
future Hungarian development consistent with the current policy of
amelioration which the USSR is purveying to its . own-people, to.the
other Satellites,. and to the Free World. Under.this policy it is
likely that the Hungarian regime, with Soviet consent, will attempt
to return to.a -policysomewhat similar to that of-the Pinew course"
.of 1953'-55, under which efforts will be made to.,eliminate dispro-
portions in the economy in orderto improve the supply of basic ma-
terials and food,--reduce production . costs,., and avert. the repetitive
crises to which Hungary has been subject.-This policy may be sup-
plemented by progressive.. decentralization of economic planning and
-perhaps-some increase in worker participation in plant management
along Yugoslav.-lines. -
Under these conditions the economic policies toward which Hungary
may move are, in general, as follows-: -
1. Reduction of the rate of growth in heavy industry and
acceptance of greater dependency on imported raw:materials,.because
of the paucity of natural resources.
2. Reallocation of investment funds, materials, and labor
force from heavy industry to consumer goods and agriculture.
* The estimates and conclusions contained in this memorandum repre-
sent the best judgment of ORR as of 13 November.1956.
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3, Efforts to increase the availability of consumer goods
and lower retail prices.
If. Continued development of trade with underdeveloped coun-
tries outside the Sino-Soviet Bloc as a means of obtaining certain
raw materials in exchange for Hungarian manufactured products.
.5. Development of cooperation with the Yugoslav government
on the basis of mutual advantage.
6. Development of Hungarian. agriculture to provide for total
requirements of the country's own population and to furnish some of
the exports necessary to obtain foreign exchange..
.7. Incentives to private farmers in the form of fewer
.exactions, greater facilities for production, and deemphasis of.
forced collectivization.
Regardless of the policies of the new regime, Hungary's economic
problems cannot be solved at once. The manner in which the uprisings
were repressed will make it difficult for the regime to.win the co-
operation of the people. In contrast to the Nagy government, a
Hungarian administration dependent on Soviet force is less likely to
take a ,strong position on behalf of Hungarian economic interests.
The USSR, in order to maintain its own prestige,. may retain to itself
the right to aid in rehabilitating the economy and providing emer-
gency relief. Even if the USSR and the Hungarian regime revise the
Hungarian Second Five Year Plan (1956-60) in accordance with Hungarian
capabilities, readjustment of industry and rehabilitation of agri-
culture will require time.
Perpetuation of the Nagy government might have led to a reorienta-
tion of trade toward the West, with a corresponding change in the
internal Hungarian. economy. If, because of the violence and national-
ism of the Hungarian uprising, the independent action advocated by
the Nagy regime is curbed, then Hungary probably will be tied,more
closely to the economies of the Soviet Bloc, Yugoslavia, and the un-
derdeveloped areas.
It is within this framework as well as in the context of its
internal shortages and capabilities that Hungary may have to approach
its economic problems. Next to the smallest of the European Satellites
in area,. with but 9.9.million persons at the beginning of 1956, Hung~iry
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accounted forabout 10 percent of the population of the European
Satellites, but only 6 percent of the.gross national product. Except
for abundant ' supplies of bauxite, Hungary is deficient in the mineral
resources necessary to support an engineering industry. Despite
these deficiencies, Hungary attempted to build a steel industry and.
to increase its machine=building potep.tial to the detriment of the
development of consumer goods and agricultural production. Resulting
disproportions forced a recasting of these plans under the "new course"
in 1953-155 and have contributed to the recent popular upheaval.
Under Soviet domination, Hungary's trade was reoriented away.
from the Free World. Soviet takings from Hungary in reparations
and unfavorable terms of trade have been considerable, and Soviet
financial aid. to.Hungar.y has been limited. Under the 1956-60 plans
of the European Satellites, as coordinated by the Council of Mutual
Economic Assistance (CEMA), Hungary is scheduled tooccupy a position
in the,Bloc more in keeping with its economic capabilities. Hungary
is deficient, however, in the minerals in which the other Satellites
are also deficient, and depends on the USSR for iron ore. Although
Hungary can.,exchange certain manufactured products with the other
European Satellites, .it may find more profitable trading partners in
underdeveloped areas of the world.
I. Recent Developments
Political changes and the related economic policies of Hungary
during the last few years have generally followed the line laid down
by the USSR,.but at the same time Hungary has reacted in a more ex-
treme manner than other Satellites to successive changes in policy.
At the time of Stalin's death in early 1953, Hungary, along with other
Satellites, effected a separation of Communist Party officials and
government officials. Matyas Rakosi was both Premier and First Party
Secretary at that time. He retained his job as First Secretary of
the Hungarian Workers Party (Communist) but stepped out of his posi-
tion as. Premier. When Imre Nagy became.Premier on 4 July 1953, his
first act was the announcement of the "anew course" economic policy,
which had been approved by the Central Committee of the.Communist
Party in June 1953. -Although the Central Committee had endorsed the
change in policy before its announcement, Nagy became identified
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with the "new course" in a peculiar way. Realizing how inadequate
'Hungary's resources were to support full-scale industrialization,
Nagy stated that Hungary must "cut the garment to fit its cloth,"
thus supporting a modification of heavy industry goals. ?He also
advocated that the country should not attempt to build a monolithic
economic structure but should revive trade with the Free World. Nagy
also stood for liberalizing state controls to permit a higher level
of consumption to be supported by increased production of food and
consumer goods. Rakosi, on the other hand, as a Moscow-trained Com-
munist and as a strong man in the execution of Soviet policies, has
been identified in the popular mind with the earlier. economic policies
of the Communists, The First Five Year Plan (1950-54) and especially
the 1951 revision of that Plan, which placed an intolerable burden on
the economy, were manifestations of the earlier economic policies.
Although Rakosi ostensibly endorsed the Party resolutions of June
1953, he took the platform 1 week-after Premier Nair had announced
the "new course" to place restrictions on the policies announced.by
Nagy concerning the right of members to withdraw voluntarily from
agricultural cooperatives. The "new course" policy was not accepted
by all members of the Hungarian Workers Party, and when industrial
production not only failed to improve but actually worsened during
1954, Rakosi took the lead in the condemnation and removal of Nagy
from office. The Party resolutions condemning his policies were cen-
tered on his "rightist deviation" in failing to place primary emphasis
on production in heavy industry and in not emphasizing the necessity
of increasing labor productivity. Rakosi was in control of Hungarian
economic policy from January 1955 until 18 July 1956, when he was
forced to resign as First Secretary of the Hungarian Workers Party.
During 1955 and 1.956 the economic policy of Hungary did not
totally revert to the pre "new course" pattern of exaggerated in-
dustrialization, but there was a partial return to emphasis on the
development of heavy industry. Rakosi also instituted more severe
enforcement of discipline in.such areas as labor productivity and
the state collection of farm produce. He again brought pressure
to:bear on independent farmers to join the cooperatives,
Rakosi was supported by Moscow, and.it was believed to be in
deference to Tito's wishes that the Soviet officials finally ceased
to sustain him in office. The strong division of opinion within
the Hungarian Workers Party, which made a unified political or eco-
nomic policy impossible, doubtless had its influence on the Soviet
decision to discontinue its support of Rakosi. On 18 July 1956y
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another Moscow-trainedCommunist, F ?no Gero, who had served the Party
in Hungary from.early postwar days, was appointed to the vacancy as
First Party Secretary, and Andras Hegedus,. suppot.teabyRakosi.but
more or less a figurehead,,remained as Premier. On 23 October 195
fallowing popular riots and demand for a return of Nagy, it was
announced that he would become Premier again. This followed Nagy's.
recent rehabilitation in the Party without recantation of the essen-
tials of his economic: beliefs.
Nagy.s second.term of office proved to be of shorter duration
than his first, Had he consolidated his position, it is probable
that he would have pursued his former course,. including the increase
of agricultural production by raising the income of independent far-
mers and deemphasizing collectivization, 'by the encouragementof
foreign trade with countries. outside the Sino-Soviet .Bloc, and-by a
general reorientation of the Hungarian economy away from the effort
to build up industry so rapidly that extreme restriction on consump-
tionwas forced on the people. Danger of effective opposition to
this policy by the Party was offset by the removal, in obedience to
popular demand, of First Party Secretary Gero on 24 October, and his
replacement by Janos Kadar, generally regarded as a Titoist, Like
Nagy, Kadar was ]mown as a dedicated Communist,. who differed from
Rakosi somewhat as the present regime in the USSR differs from the
position of Stalin.. Kadar, a member of the RaJk group which had been
condemned for defending Tito, had only recently been rehabilitated.
Nagy broadened.representation in the Cabinet to include non-Com-
monist members and negotiated for removal of the Soviet .forces; and
when that failed, he announced. Hungary?s repudiation of the Warsaw
Po-t, declared its.. neutrality, and appealed to' the UN for the support
of the Free World.. Striking in the early hours of 3;November,.the
Soviet troops quickly overran Hungary, placed Nagy under arrest, and
installed.a new puppet government headed by Kadar. Although placed
in power-by Moscow, future Hungarian regimes will not necessarily-
oppose the programoutlined above. An-independent.economic orienta-
tion toward Yugoslavia may, however, be held in check by the USSR.
An unknown quantity is the influence of Tito and the example of
Yugoslavia as a counter to the Moscow domination of the Hungarian'
Workers Party and the Hungarian government. The Yugoslav system.of
Communism, is more decentralized in its control of planning and
finance. Also, the collectivization of farming has, not been pursued
there as an.aim of the state.
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II. Internal Economic Situation.
A. Resources.
The population of Hungary as of 1 January 1956 was 9,.861,311.
The surface area of the country is 35,092-square miles. Estimated.in
US.dollars (1955 value),the gross national product (GNP),of the coun-
try was US $3.62 billion,* or about 6 percent of the total for the 6
-major European Satellites. The per capita GNP in 1955 was $370, loner
than the other European Satellites with the exceptions of Rumania,
Bulgaria, and Albania.
Hungary is grossly deficient in the mineral resources necessary
to support its metallurgical and engineering industries. Hungarian
planners have attempted to establish an iron,and steel industry in
Hungary, although 85 percent of the required iron ore and nearly all
of the metallurgical coke must be imported. Except for manganese,
Hungary also lacks alloying materials. Nonferrous ores, with the
exception of bauxite for aluminum, are not found in sufficient quan-
tit,-to supply Hungarian industrial requirements. Hungary is some
what-better endowed with brown coal, lignite, and petroleum, but even
the production of these fuels cannot meet the increasing requirements
of, Hungarian industry. Deficient in hydroelectric power potential,
the country depends on coal as the primary fuel for electric power.
Not only is coal insufficient in quantity but most of it is poor in
quality and decreasing in average energy content. The aluminum in-
dustry, in particular, has been limited in growth by lack of sufft
cien.t electric power. The petroleum industry has not been able to
make up for the deficiency in coal as was planned. The failure of
the petroleum industry to meet its planned goals in 1956 was largely
due to water seepage in the oil wells which in turn reflected previous
high rates of exploitation and a lack of adequate investment to pro-
test.the wells.
Hungary also lacks many other important raw materials for
supplying its industries, such as timber, pit props, wood pulp,
leather,. rubber, cotton and other fibers, pyrites, and.other chemi-
cal materials. It has been engaged in a long-term effort to increase
domestic production of raw materials. The Second-Five Year Plan
(1956-60) includes a program to produce substitute materials of
Unless otherwise specified, all dollar values in this memorandum
are in terms of US dollars.
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various kinds and a greater effort to find domestic sources for
imported raw materials and to develop. the necessary technology to
make possible their commercial processing.
Manpower is more abundant in relation to industry require-
ments in Hungary than In the more industrialized Satellite countries
such as Czechoslovakia. Hungary has long had a surplus of agricul-
tural labor and few industries to which farm labor could be trans-
ferredq. -Before the current uprisings,.technical personnel bad,not
been difficult to obtain, as Hungary had trained more engineers and
technical men.; than were needed. In order.to reduce "nonproductive"
work, cle?ical workers were frequently ousted from their jobs and
forced into manual work.
One of Hungary?s best resourcesIs good agricultural land.
.A report in 1955 claimed 91,7.percent of the land surface as agri-
culturally productive. About 15 percent of this agricultural land
is forest land,.and about 63.percent is arable. rIi recent years,
Hungary has failed to.utilize this resource up to its potentialities
partly because of poor management and partly because of the deteriora-
tion of the soil resulting from the lack of fertilizers.
B. First Year Plan (195Q-54).
After a Three Year Plan. (191+7-1+9) devoted primarlly to the
reconstruction of war-damaged industry and the restoration. of pro-
duction,.Hungary embarked on its first long-term plan-in 1950. When
the First Five Year-Plan (1950-54) started, Hungary had almost com-
plete state ownership and control of manufacturing, mining,trans-
porttion, banking,.and foreign and domestic wholesale trade. The
most important exception to Hungarian state ownership, was the Soviet
holdings of former German assets in industry. The only fields in
which private ownership was important were farming, crafts, and re-
tail trade, particularly farming.
The original version of the First Five Year Plan was ambitious
in its production,.investment~.and construction goals, but not com-
pletely unrealistic. The first year of the Plan had not been completed
before a revision was made which increased.the 5-year investment goal
over 10 percent, . from. 50.9 billion forints to 85.0 billion forints.
The goal for.the increase of 'g'"oss Industrial production over the 5-
year period was revised.upward,.from 86 percent to 210 percent. These
upward revisions were Soviet inspired and were officially justified
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as necessary to-meet the exigencies of the Korean War. The accom-
plishment claimed officially in both. investment and gross industrial
production -- investments of 67 billion forints and a gross industrial
production 155 percent greater in 1954 than in 1949 -- was somewhat
higher.than the original Plan but substantially below the revised
Plan. The growth rate for industrial production was very high at;the
beginning of the 5-year period,.but the rate of increase was lower
with each succeeding year of the Plana The growth rate for.A.ndus
trial production-during 1950-55 was as follows.;
Growth of Industry Above Previous Year*
Year Socialist Industry Total. Industry
1950
36.9
26.8
1951
34.1
27.5
1952
25.8
22.2
1953
11.9
11.3
1954
3.2
4.5
1955
8.5
9.6
Although a regressive rate of growth is to be expected from .a pro-
gressively higher annual base, the decline in rate. was unusually
severe. General economic disruption was threatened by the severe
imbalances that had-developed as evidenced by an absolute decline
in the output of heavy industry in 1954. Within the sector of heavy
industry the output of the machine industry and.the building ma-
terials industry declined in 1954, whereas the output of metallurgy
and mining,r.emainedabout the same as in the previous year. Only
the chemicals industry. showed a.significant increase in output.
Although the effects were most obvious in 1954, the real
breakdown of the productive machinery in Hungary had already oc-
curred in 1953,. and serious trouble was encountered in 1952. Com-.
pounded of many elements, the most immediate cause of the leveling
off of production was the chronic shortage of materials and power.
Most raw materials came from foreign sources, principally from the
USSR and from other European Satellites... Deliveries. were undependable
Based on19+9 prices.
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and of uneven quality, In addition to problems in the supply of
raw materials,.other obstacles to efficient production were obso-
lescent and poor equipment, poor technology, lack of trained
specialists, production for plan fulfillment goals instead of balanced
and useful production, low worker morale, and inexperienced management.
Tabor productivity instead of increasing actually declined in 1954.
In 1955,.productivity and output were considerably improved. In 1956,
however, the shortage of coal and oil caused a temporary suspension of
certain types of transportation. Until the raw materials supply is
insured and other inefficiencies are remedied, industrial production
is subject to interruption. Although production will be achieved at
a high cost, the products are not likely to be of a quality that can
be sold on a competitive world market.
Agricultural recovery and development haveabeen much more
difficult for Hungary to achieve than industrial development. Pro-
duction of bread grains has not equaled the prewar average in any
year.except 1951. It has been necessary for Hungary to import wheat
for its own use,; whereas in the prewar years, grain was exported.
Cattle numbers have not reached the prewar average,.but the hog-in-
ventory is higher than prewar. Production of sugar beets as the
basis of an export industry, has shown a sizable increase. Fodder
.crops are insufficient to maintain a flourishing livestock industry.
The problems of Hu(pgarian production in agriculture indicate
the lack of support given in the form of investment in buildings,
implements,.fertilizer, insecticides, and.soil and crop improvement.
The independent peasants have been unwilling to invest in their strips
of land, because they are uncertain of holding the same piece per-
manently. Reassignment of land frequently takes place when most of
the villagers form a cooperative farm. Independent peasants are like-
wise unable to obtain needed farm implements or building materials
for improving their farm buildings. The entire system of crop collec-
tion has forced peasants to enter the cooperatives. Because of heavy
taxes and.low prices paid.far their crops, the independent peasants
have had little incentive"to.farm the land productively.
The "New Course" Policy.
The "new course" was a policy of necessity and was intended
primarily to provide an interim irogram for the 2-1/2 years before
the Second Five Year Plan started in 1956. The new Plan was expected
to reemphasize heavy industry. The change in policy, however,
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constituted recognition by ,the Communists themselves of the dispro-
portionate development of the economy under the First Five Y'ear.Plan
and the resulting slowing up of production. Several types of im-
balance and error were to be remedied, as follows: .(i) the develop-
ment of the engineering industries without commensurate development
of their materials and power base; (2) the overemphasis on industry
in contrast to the stagnation of agriculture; (3) the failure, due
.in part to a heavy capital investment program, to supply consumers
with a sufficient quantity of consumer goods and food products;
(4) the failure to create conditions for, or give assistance to,..the
independent farmers; and (5) the failure to take advantage of trade
with the "capitalist countries." Hungary?s implementation of reform
from mid-1953 to the end of 1954 probably was as extensive as its .
means would allow. It was unevenly applied, however, and it granted
more concessions to farm cooperatives than to independent farmers.
There was a year and a half of welcome relief from pressure to join
cooperatives, after which a new drive was started to collectivize
the farms. Prices of consumer goods were reduced, but meat and fat
were generally omitted from the list of reductions. Investment in
such programs as irrigation projects, state machine tractor stations,
fertilizer plants, and the purchase of breeding stock for state farms
gave little immediate help to the independent peasants who tilled two
thirds of the land. More of the produce was withheld by the peasants
for private use or sale, and collection quotas were not fulfilled.
Labor discipline was poor, and productivity was not improved. After
a year and a half of the "new course" program, agricultural production
was still low, and consumer goods were still in short supply, with
very little decline in their prices.
D. Present Weakness of the Economy.
At present, the problems of increasing agricultural produc-
tion in Hungary have not been solved, crops are subject to frequent
drought, and insufficient reserves have been accumulated to provide
for crop failures. Consumer goods are scarce, poor in quality, and
high in price. The state reduced production in light industry dur-
ing 1956 in order to.save imported materials. The sale of machinery
and equipment abroad was described by the planning office as not up
to expectations, and the problem of obtaining sufficient foreign ex-
change to pay for required imports has been extremely critical. During
the past 3 or 4 years, Hungary has resorted to all kinds of devices
to obtain small amounts of foreign exchange. Hungary is indebted to
,several Western European. nations for trade credits and has earmarked
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its anticipated foreign trade assets in advance in order to.obtain
wheat andother,supplies. Total trade is in balance but not-trade
with countries outside the Bloc. Hungary also owes. the USSR for .the
purchase of the Soviet share in joint Soviet-Hungarian companies,
for occupation costs, and for credits for gold settlement of Hungarian
debts. Hungary has recently arranged to pay the Yugoslav government
its reparations debt -- an agreement calling for $85 million to,be
paid in exports over the next 5 years. It is estimated that, before
this settlement, Hungarian foreign debt amounted to at least $228
million (at the official rate of exchange).
Availability of food in Hungary during the consumption year
1 July 1955 through June 1956 has been measured in terms of the "food
balance," or the total energy output of calories in the food supplies.
This statistical device for measuring the level of living in respect
to food does not reveal disparities existing in consumption levels
between various population groups nor the respective quality of their
diet. The indigenous production of major. foodstuffs consumed at home,
measured in.caloric energy, was 79 percent of the prewar average level
in the food year 1953/5+ and 92 percent in 1951+/55. The level for 1956
is expected to be lower than that of 1955, as agricultural production
is reported to be 8 to 9 percent lower than in 1955 because of unfavor-
able weather conditions and delays in the supply of chemical fertilizer,
The index of average daily per capita caloric intake, a measure of
total food availability, compared with an average prewar period, is
estimated as follows.
Prewar (1933-37) .
100.0
1951/52
96..0
1952/53
88.0
.1953/51+
93.0
1951+/55
92.0
1955/56 (preliminary)
100.2
Average food consumption appears to have reached the prewar level
for.the first time in 1955/56. It appears that the average worker
can expect no.improvement and possibly a deterioration in his diet
during1956/57,,based on the current report on agricultural produc-
tion.
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Housing is in even more critical supply than food and.light
industry products. The rate of building from 1949 through l9,4
hardly met the needs of the growing population and has.not been at
all sufficient to take care of repair and replacement needs in the
existing stock of houses.
III. Soviet. Domination of Hungarian Economic Affairs,
. Hungarian Economic Policy.
The economic policy of Hungary has been directed by the Com-
munist Party, which in.turn is dominated by the USSR. Co parison
of the history of economic policy decisions in the Satellites_poiftts
to close coordination by Moscow. All the major policies are announced,
reversed, or otherwise changed at approximately the same time in each
of the Satellite countries after resolutions enunciated by the Central
Committee of the Communist Party in each Satellite. It was thus det r -
mined for the European Satellites that the new Five Year Plans would
.start simultaneously in the major industrialized Satellites and would
be coordinated.to attain a division of labor and industrial specializa-
tion in.each country. The Council of Mutual Economic Assistance (c MA)
was given the job of engineering this cooperative planning. A series
of meetings have been held by CEMA, and permanent committees have been
appointed tocoordinate different sectors of the Soviet Bloc economy.
These meetings are reported to be free discussions in which the tech-_
nical representatives of each country argue their own interests, but
the final decisions are said to be dominated.by the Soviet member.
Ex-Premier Hegedus recently announced the special areas of production
that had been assigned exclusively or in part to Hungarian industry.
The output of the country, or countries, assigned to these areas is
to be sufficient to supply all the European Satellites. Each member
of the Bloc thus becomes. obligated to purchase its import requirements
for these products from other Bloc members. Diesel railway loco-
motives and-buses of over 4 tons, for example, were to be exported-ex-
clusively by Hungary, and other Satellite countries would have their
own specialties. Other products were to be jointly produced by two
countries. According to,these plans, the Hungarian industrial struc-
ture would be rationalized along lines of comparative advantage.
Hungary has agreed,.for example, not to produce passenger automobiles
and not to increase its production of passenger, coaches and freight
cars. These arrangements, although advantageous in some respects,
may give more rigidity to the Bloc trade structure than in the past
because the agreements will limit trade outside the Bloc.
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Hdngary's principal problemof obtaining a dependable flow
of industrial raw materials was tackled by the Bloc conferences
arranged by CEMA. but was not solved for the immediate future. Two
.important arrangements discussed at the recent Berlin conference
sponsored by CLV'JA called for Hungary and other interested Satellite
countries to assist in the fu:?ther development of Soviet iron ore
deposits in return for a share of the ore, and of Polish coal deposits
"--on the same basis. Hungary found that it would be impossible to
undertake the latter obligations until 1959.
Trade and Economic Collaboration.
Soviet policy has dominated the reshaping of the geographic
pattern of Hungary's foreign trade Hungary formerly earned necessary
foreign exchange in the West by selling processed foods such as sugar,
flour,.and poultry for which its raw material supply was ample and
the products of a few industries such as electrical equipment in which
it had developed. competence. After World War II the USSR became the
chief market for? the foods and consumer.goods as well as for certain
industrial goods which Hungary produced. The USSR, by means of trade
agreements, reparations requirements, and other influences,. compelled
Hungary and the other European Satellites to change the pattern of
trade from a predominantly Western orientation to one in which Soviet
Bloc.trade prevails. The postwar shift in the flow of trade is demon-
strated in the following tabulation:
Percent
:Trade Movement 1949 1954 1955
Imports from
Soviet Bloc 46.2 68.o 54.9
Free World 53.8 32.0 45.1
Total 100.0 100.0 100.0
Exports to
.Soviet Bloc 51.9 73.6 66?5
Free World 4861 2644 33.5
Total 1100110 100.0 100.0
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The percentage of Hungarian trade with the Soviet Bloc was
much smaller in 1955 than in 1954. In 1955 the USSR changed, its
policy drastically by curtailing its orders to Hungarian industry
for textiles, foods, and other manufactures,.with a corresponding
diminution of raw materials shipments to Hungary. This; sudden change
created difficult transitional adjustments in the Hungarian economy.
Although 22 percent of Fun?y 4s total trade in 1955 wwas with the
USSR and its most readily saleable products are exported to the USSR
and the other Satellites, it does not obtain an equal percentage of
Its raw material and food needs from Soviet Bloc sources.
Hungary is linked with each co-try of the Soviet Bloc and
with many countries. outside' the Bloc through a series of bilateral
clearing agreements. Both a long-term master agreement and annual
agreements within the framework are executed with each member of
the Soviet Bloc. In addition, Hungary has other technical and eco-
.nomlc collaboration agreements with other Communist countrie,a,.imple-
mented.by a permanent Mixed Commission for Economic Collaboration.
In addition to,e:xchange of techpical documents and personnel, the
.collaboration includes joint investment projects which-are becoming
increasingly impgrtant to the economy.
The negotiation of special agreements for. collaboration on
development of various industries has frequently been arranged by
CEMA. Little..is known, however, concerning the authority which this
body has exercised in these negotiations. Most of the agreements
appear to make sense from the point of view.of economic advantage to
both or all countries involved.
The USSR has ranted Hungary 4 loans, totaling :$6k million,_*
1 each year since 1953, for the purpose of reducing the. chronic
Hungarian foreign exchange shortage arising :from the import of essen-
tial raw materials and food. The most recent of these loans, amount-
ing.to $25 million, was granted in October 1956. These loans are not
expected to be more than a stopgap for the foreign exchange shortage
which rises from.the inefficiency of Hungarian industry. The credit
extended by the USSR was one of the few instances of assistance given
Hungary. Other loans have been extended for military assistance or
* Conversion, of foryints to dollars at the official exchange rate of
1 forint = US $0.085.
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for the purchase of the joint companies and have constituted a drain
on the Hungarian economy without compensating benefit to production;
Altogether, Soviet loans to Hungary since the issuance of the first
credit in 19+9 have totaled $455 million* -- 8 percent of Soviet
loans within the Bloc.
D. Soviet; Ownership of Hungarian industry.
A large share of Hungarian industry was claimed by the USSR
after World War II under the Yalta agreement. The Soviet armies
stationed in Hungary dismantled and removed a great deal of indus-
trial equipment without permission of the Allied War Commission and
without recor?d.ing.it for reparations credits. The final policy of
the USSR was to take over and run those industries in which the
Germans had held stock. These companies were under absolute Soviet
control until October 1952,,when the USSR sold its holdings in many
of the companies and invested the amount realized in 1 large joint
companies, in each of which the USSR owned 50 percent of the stock.
'hese joint companies controlled the bauxite and aluminum
industry, petroleum extraction and refining, civil air-transport,
and inland water shipping. The last-named company owned some of
the principal coal mines in Hungary. The USSR exercised complete con-
trol over these companies until it decided. to sell its share of each
to the Hungarian government in late 1954. Technicians, managerial
personnel, and other experts from the USSR engaged in running the
plants returned home when the company properties were handed over to
the Hungarians`',. Until the joint companies were sold,,the USSR re-
tained ownership in a Hungarian bank which did all business for the
companies. This bank was sold to Hungary at the same time as the
joint companies were sold.
The compensation for the joint companies was reported to
total 2 billion forints ($180 million at the official rate of ex-
change). At the same time, a loan of equal amount was granted Hungary
to permit payment in installments, The first payment on account is
250 million farints, due in December 1956. One of the provisions of
the sale agreement of P?MASZOBAL.,?{ the bauxite and aluminum company,
was the provision. that the USSR retained the right to.import the best
quality of bauxite. Exports of bauxite to the USSR are believed to
be about 60 percent of the total production, thus leaving the poor
grade or ore for the Hungarian aluminum industry,
* .Conversion of forints to dollars at the official exchange rate of
1 forint = US,$0.085
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Although Soviet ownership of H-anga-rian, industry is technical.y
at an.end, it is reported that representatives of the USSR were to
be assigned to each coTany to.look after Soviet interests. The. USSR
frequently stations its own representatives in -Hungarian export in-
dustries to inspect the quality of exports to the USSR and thus has,a
choice of the best quality of prod-acts.
E. Armaments production.
Armaments production in the European Satellites is under
Soviet control. Hungnr'Y has certain reduction assignments for the
ins e an infantry rifle, an auto-
s whic~
European. Sate Mite mn
.matic rifle r?s, =;7,mn antiaircraft guns, and seam chlights . It
is probable t' t nga Y has also ~been assigned to the production of
small arms ammr ;s.ition.
IV. Evidence of a New Look. for the Hungarian Economy and Possible
Consequences
Although the new Hungarian regime may adopt a more liberal policy
toward consumer welfare, it may be i possible for the new government
to rehabilitate the langarian economy in a short period, and if so,
any spectacular change in the level of consumption is not to be ex-
pected. Destruction incident to the revolution, together with dis-
ruption of production, and the creation. of a hostile public. opinion
probably will binder fulllftl.vent of the existing economic plan and
retard any proposed reorientation of the economy.
A. Reorientation of Trade Toward tb.e West Despite the impact
on Other Bloc Co, .n.tries .
A reorientation of Hungarian trade toward the 'West started,
in a mild -way, in connection with the ??new course 0? policy. It was favored by the Nagy government as helping to solve Hungar rypS raw
materials problems . At that time, N3a'' favored building up agric
cultural production as a s.ou:fce of export commodities, but subsequent
governments em hasized.engi,neering products instead.. There is reason
to think that the USSR in 1955 encouraged the Satellites to increase
trade with underdeveloped. areas and to exchange manufactured products
for industrial raw materials and foodstuffs. It has been Hungary?s
intention to increase its trade with those areas. This policy would
therefore not be a new ora.e but might be given more support by the new
go-rernmen.t. Hungary is offering facts. ry and construction machinery
:j
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and equipment for export. It has taken contracts for entire projects
such as power plants and bridges. It plans to take raw materials and
food products in trade. The Second Five Year Plan calls for an over-
all increase in trade of I.O percent during the period 1956-60. The
plan rejects consumer goods as an economical field for exports because
of their costs in raw materials. Processed foods, however, would still
be exported.
Changes in this. general plan are likely to be small and a
matter of degree. If the new Hungarian regime succeeds in raising
,agricultural production to furnish a surplus for export, it will
accomplish what neither the old nor the "new.course9P policies have
been able to do so far.
Emphasis on Consumer Goods in Relation to Heavy Industry.
The emphasis on consumer goods in relation to heavy indus-
try in Hungary is involved with the export policy in that it would
be unnecessary to produce more textiles for domestic use if exports
of textiles are reduced, Consumer durables are still produced in
insufficient quantities to meet domestic demands. These articles
compete directly with heavy industry for steel and factory capacity.
It is probable that a government trying to improve popular morale
and productivity would plan to increase the production of these items,
,but in doing so it would run into scarcities of steel, coal, and
power as well as the necessity of paying for imported materials. It
is therefore unlikely that immediate plans for consumer durables will
be substantially increased.
C. Collectivization Program.
Unless the USSR adopts a punitive policy toward the Hungarian
.regime, it is probable that forced.collectivization will be postponed,
Only by such a policy, together with reduced taxes and incensed in-
centives, can the peasants be induced to increase production and de-
liveries of agricultural products.
D. Adherence to CEMA Agreements.
Under Nagy it appeared that Hungary would seek to develop
trading relationships outside the Bloc more profitable than those
inside the Bloc, Once an exporter of bauxite and grain, Hungary
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now has little to offer the West on c mpetitive economic terms. Any
effort to reorient substantially the fungarian economy toward the
West would strain CEMA agreements. It is doubtful if the new regime
would possess the political force to oppose future Soviet plans for
CEMA. Most of the CEMA. arrangements for Joint investment and use of
resources are valuable to Hungary and probably will be retained.:
E. Hungarian Actives in the Underdeveloped Areas.
Trade between Hungary and the underdeveloped areas of' Asia
and the Near East is likely to prove mutually advantageous and there-
fore will be continued under any new economic policy that may develop.
Even if further development of heavy industry is retarded, Hungary
.can produce a surplus of machinery and equipment, provided the ma-
terials and power situation, is stabilized.
F. Increased Economic Cooperation with Yugoslavia..
One of the principal developments likely to occur under
the new Communist leadership in Hungary is increased cooperation
with Yugoslavia in economic development. Several areas for this
cooperative development exist in the complementary resources of
the two neighbors. Yugoslavia has resources of iron ore which Hungary
once planned to use in its large steel combine, before the Cominform
break with Tito,. Hungary can use an additional source of iron ore.
The two countries will find it mutually advantageous to develop
Danube River shipping and also to cooperate in damming the river and
.building power stations. Yugoslavia is mountainous and has numerous
possibilities for the development of hydroelectric power. By co-
operation., the two countries can be mutually helpful -_ Hungary by
furnishing the machinery and technical ability for the development
of these sites. 'T'hus Hungary's industries could be supplied with a
larger amount of electric power. This development is incipient in
the exchange of consultation and agreements already begun under the
old government.
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