THE HUNGARIAN EXPERIMENT: KADAR'S NOT-SO-MIDDLE WAY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000110001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 21, 2016
• Document Release Date: May 25, 2006
• Sequence Number: 1
• Publication Date: August 29, 1998
• Content Type: MEMO

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Secret
MEMORANDUM
OFFICE OF
NATIONAL ESTIMATES
T he Hungarian Experiment. Kadar's Not-So-Middle Way
Secret
5 January 1970
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C i N T R A L I N T E L L I G E N C E A G E N C Y
OFFICE OF NATIONAL ESTIMATES
5 January 1970
SUBJECT; The Hungarian Experiment: Kadar's Not-So-Middle
Way*
Kadarr enjoys a well-earned reputation for caution and
pragmatism. He has repeatedly declared that he has no
intention of drastically altering the fundamental structure
of Hungary's socia,....~c system or of weakening Budapest's
ties with its Warsaw Pact partners. Nevertheless, the
pattern of economic and political reform in Hungary runs
sharply counter to current trends and practices elsewhere
in the Soviet Bloc. A degree of decentralization and
liberalization is involved which is likely to require a
substantial adjustment in the methods of control exercised
by the Hungarian Par*..;y. This is an especially delicate
matter since Moscow is clearly hypersensitive to any
appaxent weakening of the "leading role" of a ruling
Communist Party in Eastern Europe. But despite warning
flags from the Kremlin, Kadar has so far managed to avoid
compromise on fundamental issues. His persistence raises
certain questions: How sound are his reform programs?
If left to his own devices, how far is he likely to go?
What are the limits of Soviet tolerance and what is the
likelihood of Soviet intervention if these limits are
transgressed? Our principal conclusions appear in
paragraphs 19-25-
This memorandum was produced solely by CIA. It was
prepared by the Office of National Estimates and
coordinated with the Office of Economic Research
and the Office of Current Intelligence.
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Kadar's Approach
1. The ghost of Imre Nagy still packs a very earthly
impact in Budapest. Though Nagy and Janos Kadar dramatically
parted company in the midst of the Hungarian revolution,
Kadar continues to share Nagy's almost populist faith in
the fundamental wisdom and loyalty of the non-Party masses.
This attitude sets Kadar apart from such leaders as
uomulka, Ceausescu, and Ulbricht and -- despite clear
differences -- places him closer to Tito and Dubcek. All
the Communist regimes in Europe are attempting to rationalize
their economies and to consolidate the modus vivendi they
have achieved (Czechoslovakia excepted) with their respective
general populations. But there is a vast difference between
reforms which seek these goals within. the framework of -,he
paternalism of a narrow elite and progr&ms which allow for
a gradual increase of genuine popular participation in the
decision-making process.
2. Kadar's concept of a Hungarian model of socialism
clearly has deep roots. Indeed, foreign policy matters
aside, there is little in the spirit or general outline of
Huungazry's current economic and political reforms that
cannot be found in at least rudimentary form in the measures
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advocated before the revolution by the s ti1J, discredited
Nagy. But it took two rather traumatic &nq lopments to
focus Budapest's attention on the urgency of thorough-going
change. Oiie was the ouster of Kadar' s ps.tror_; Nikita
nrushchev, which impelled the Hungarian. '.eader to seek
additional domestic support. The other was the concurrent
appearance of serious economic difficulties.
3. Of course, Kadar's faith in the non-Party masons
and his co'.rmitment to the decentraliz=~tion and humanization
of the Hungarian economic and political system are far from
boundleja. The limits and directions of change must be
determined by the Party and the implementation of reform
must be kept under the Party's control. Yet, with the end
of the Dubcek era in Czechoslovak-!. a, Hungary stands alone
among the Warsaw Pact powers in cpenly acknowledging that
the Party does not embody the te)%ality of the general
popula"ion's legitimate interes?11-s. While a broad unity on
vital national questions is sail. to exist, Budapest holds
that natural conflicts of inte7'uast -- group and individual
-- with respect to lesser questions must, within limits,
be given an airing and, in some cases, institutional
representation. Kadar evidently believes that the Party's
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leading role can be effectively exere:.sed within the
framework of a relatively pluralistic system. What is more,
he seems to feel that such an arrangement is essential to
maintaining the degree of popular support needed to ensure
Hungary's economic and political development.
4. Here Ke.dar is R,ka'Ging on thin ice as far as his
Warsaw Pact allies are concerned, and he knows it. Perhaps
this is the main reason why Budapest has never developed an
overall ideological blueprint, in the spirit of Prague's
Action Program, for its economic and political reforms. The
lack of such a program deprives Kadar of the tangible
popular rallying point enjoyed by Dubcek and may render the
implementation of individual reform measures more difficult.
On the other hand, it permits particular aspects of reform
to be introduced, postponed, or modified according to
pragmatic considerations. This flexibility, combined with
concessions to the Soviets in the foreign policy field,
strengthens Kadar's hand against the Kremlin. It also
serves to head off the emergence of the type of internal
pressures, from both left and right, which eventually over-
whelmed Dubcek.
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Economic Reform
5. While forced to make some preliminary concessions
to conservative elements and initially upstaged by develop-
ments in Czechoslovakia, Hungary embarked two years ago on
what is now the boldest program of economic reforia in the
Soviet Bloc: the New Economic Mechanism (NEM).* There has
been a substantial decentralization of authority to the
enterprise level. Unlike the economic reforrs currently
being implemented in other Warsaw Pact countries, NEM does
not interpose a general administrative layer -- trusts,
combines, or industrial centrals -- between central
ministries and individual enterprises (most of which are,
in any case, quite large already).. Profits are to be the
main indicator of enrcerprise performance -- although
The process which led to NEM began in December 1964
when the Party's Central Committee established 11
expert working groups to investigate every aspect of
the economy. The resulting recommendations were
finally approved by the Central Committee in June
1967, but ample evidence of .onservative misgivings
emerged in the ensuing pub'..ic debate. The Pa.: ty sided
with the reformers, and Li late November it authorized
NEM to take effect on an economy-wide basis on 1
January 1968. But, in deference to the conservatives,
the originally-planned abrupt relaxation of some
central controls was placed or a gradual basis. Thus,
even without further delays, the full impact of NEM
will not be felt until 1970 or 1971.
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profits above an established percentage are confiscated to
reduce the temptation to change prices or product mix too
much. Pric~:s of nonessential consumer goods have been
freed, with about 30 percent of Hungary's retail trade
currently falling in this category. Other prices may be
freed as time goes on, but prices of foodstuffs and most
industrial materials are almost certain to remain under
some kind of control. Enterprises are responsible for
preparing their own annual plans and, interestingly,
salected firms (now numbering nearly 1+0) deal on their own
account in trade with the West.
6. NEM, alone among current blueprints for economic
reform in Warsaw pact countries, is openly predicated on a
"marriage" of the plan and the market. Perhaps this union,
as presently foreseen, is too unequal to justify even the
loose application of the term "market socialism." But
some new and distinctive label would seem to be appropriate,
for the Hungarians propose to go as far as they can in using
prices, profits, and competition to help in determining
what is produced. A number of considerations -- including
unwillingness to risk serious inflation, unemployment, and
balance of payments diseauilibrium -- will continue to set
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the limits within which the operation of even quasi-market
forces will be permitted. The Party's current position is
that if the market moves in a different direction from that
foreseen in the general plan, the plan will have to give
(albeit only so long as "the difference is not of great
consequence"). All this may seem pretty tame in terms of
Western economics, but even a limited reliance on market
forces as a corrective mechanism contributes to the erosion
of the Party's traditionally dominant role in the economy.
Given Moscow's sour reaction to the ideas put forth by
Ota Sik and the Yugoslav school of economists, NEM's
explicit market fringes are indeed striking.
7. NEM is essentially an open-.ended reform, and the
l".nes of its eventual development are difficult to predict.
But Budapest, generally pleased with progress achieved so
far, seems to believe that the concept 3s proving workable
and that only continued tinkering will be required.
Transitional disruptions were foreseen, but most of these
have so far proved to be somehwat less severe than originally
anticipatod. One admitted shortcoming, the failure of the
reform to register more positive results in the field of
worker productivity, is, however, viewed with some concern,
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and it reflects a new and significant phenomenon. Combining
decentralization of planning with broadened autonomy of
local governments and enterprises has crystalized and
intensified group conflicts throughout the society. By
creating competitive situations within a profit-oriented
economy, NEM has fostered open clashes of interest between
Party cadres and economic administrators or experts,
between enterprises and banks, and -- perhaps most important
-- between workers and management.
8. The Kadar regime feels that some conflicts of
interest -- such as those involving short-changing of the
consumer in pursuit of profit -- can best be resolved
through the exercise of political pressure or centralized
controls, but its approach to the problem of labor-management
friction is far less orthodox. Formalized in the Labor Code
adopted in September 1967 to pave the way for the implementa-
tion of NEM, this approach implies a fundamental transforma-,
tion of Hungary's trade unions from instruments of political
and economic policy into defenders of the workers' interests.
Collective agreements are now concluded between the enterprise
and the union at the local level, and the law requires tha.t
the enterprise director obtain the union's advice or consent
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with respect to actions which touch upon this agreement or
otherwise affect worker welfare. In fact, the union has
the right to "veto" (i.e. suspend) a managerial directive
until a decision is reached by higher organs (generally the
district council or the ministry concerned).
9. The unions have not taken easily to their new
role. The reluctance of the majority of union leaders to
take full advantage of their prerogatives has been born both
of political conservatism and of an understandable uncertainty
about the nature and limits of their mandate. But it is a
fact that increasing use of the veto has been made in recent
months. It is also a fact that "responsible" use of the
veto has received consistent encouragement in official
commentary. Beyond this, the local organs of the Party have
so far seemed to be generally content to play a passive or
secondary role in the settlement of labor disputes. Thus,
in effect, the economic interests of the "proletariat" are
gradually being accorded institutionalized representation
outside the Party.
10. The political implicatioiis of this could be
important -- and not only on the local level. The regime has
already yielded to worker discontent about one of NEM's
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original features by abandoning the incentive system under
which middle and top levels of management could receive
year-end bonuses many times higher than those paid to workers.
The unions were actively involved in the policy discussions
which preceded this decision. Whether or not they actually
carried much weight in this particular matter, it is
certainly conceivable that as Hungary's political reforms
progress, the unions could develop into an effective pressure
group at the national level. Of course, with Prague's
experience firmly in mind, the Kadar regime will almost
certainly intervene if the unions threaten to develop into a
genuinely independent political force.
11. NEM also raises some questions with respect to
Hungary's membership in the Council for Mutual Economic
Assistance (CEMA). Possessed of few natural resources, the
country is heavily dependent on foreign trade. About two-
thirds of this is currently conducted with Communist
countries, the Soviet Union's share alone amounting to
approximately one-half the Bloc total. Significant
reorientation of this pattern would be extremely difficult
for both economic and political reasons. But, under HEM,
Hungary's increasingly decentralized and market-oriented
foreign trade sector is becoming less and less compatible
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with CEMA's existing structure and method of operation. The
Kadar regime's proposals for the reform of CEMA, including
multilateralization of trade and the establishment of a
convertible CIMA currency, parallel those once voiced by
Ota Sik. Despite backing from Warsaw for some of its
proposals, the chances that the changes sought by Budapest
will materialize in the next few years are slim indeed.
Moscow remains unwilling to bear the political and economic
costs involved, including a more meaningful reform of the
Soviet economy. Thus Hungary's CEMA ties are likely to
exercise a restricting influence on the operation of NEM
for some time to come. Budapest has bowed to reality by
providing for central allocation of production (openly
acknowledged as a violation of the principles of NEM) when
required to fulfill a state-negotiated trade obligation.
12. Yet Budapest is not totally resigned to the status
quo. NEM's world market orientation dictates the fullest
possible exploitation of Western technology. Denied massive
import of Western equipment by its limited ability to expand
exports to hard currency countries, Budapest has encouraged
cooperative agreements -- ranging from the mere buying of
licenses to the establishment of joint enterprises --
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between Hungarian and Western firms. The Hungarians have
established two companies for the sole purpose of facilitating
such cooperation, and another eight: firms have been formed
to provide local representation for Western enterprises.
One government official has noted with pride that 26
cooperative agreements were concluded between Hungarian and
tern firms in 1968 -- nearly as many as the total for the
preceding four years -- and that a further 20 such agreements
had been signed in the firr..t half of 1969. Of course, most
of these agreements have been of fairly minor significance,
but if Budapest continues in pursuit of Western capital and
cooperation, pressures will mount -- as they have in
Yugoslavia -- for accommodations to make such propositions
more attractive to prospective partners.
Political Change
13. A daring overhaul of an orthodox socialist economic
system cannot be carried out in an unfavorable political
climate. In Hungary, the circumstances which permitted the
birth of NEM are rooted in the domestic "alliance policy"
proclaimed by Kadar nearly eight years ago. Popularized in
the slogan -- unique in the Bloc -- of "who is not against
us is for us," this policy is characterized by Budapest as a
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continuation of the class struggle by means of persuasion
and incentive rather than "administrative" measures. All
who are loyal to their homeland and who are willing to help
in the fulfillment of the concrete aims established by the
Party and government are to be welcomed into the system
without regard to family background, past activity, or
personal philosophy. Under these guidelines, firmly and
pointedly endorsed anew by Kadar in recent days, non-Party
people are theoretically eligible for any responsible position
(outside the Party, of course). And while, in practice,
advancement beyond the middle echelons of government or
management is still rare for non-members of the Party, a few
have breached this barrier. Perhaps equally important, the
"alliance policy" has done away with most of the discriminatory
practices which had previously marked Hungary's education
system.
14. The circumstances in 1964 rind 1965 which prompted
the drafting of HEM also sparked serious study of the question
of the need to "broaden socialist democracy." In view of the
delicacy of the issue, it is not surprising that tangible
progress has been slow in coming. But the Kac?ar regime is
publicly committed to meaningful political reform. In
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general terms, Budapest has made it clear that the major
thrust of the Party and state changes is to be the improve-
ment of the qualitative and representative characteristics
of elected bodies and the enhancement of their powers at
the expense of the executive apparat. Within the Party,
this process began some three years ago with the adoption of
potentially significant statutory changes. Further
interesting developments seem imminent, since the 1970 Party
Congress is scheduled to adopt new measure;, co "democratize"
the organization and to redefine its role in society. The
Party will not, of course, renounce. its leading position,
but its right to intervene directly in the operation of the
government and the economy is likely to be formally curtailed.
15? Outside the Party, the most dramatic step to date
has been the enactment of the November 1966 Electoral Law.
This measure gave voters the possibility of choosing between
two or more candidates in electoral districts instead of
approving a single liFt, a possibility which was at least
partially realized in the 1967 elections:, It also provided
a mechanism for recall of elected representatives by their
constituents (though there is no evidence that recall has
yet been exercised). Future plans call for upgrading the
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role of Parliament and increasing the autonomy of district
councils with the aim of making them "irjdependenj organs of
self-management." In parallel action, the responsibilities
and autonomy of mass organizations -- particularly the trade
unions and the People's Patriotic Font -- will also be
increased. According to one important Parliamentary official,
a few of these organizations may even be given the right to
initiate legislation. T;:e exercise of power by various bodies
will be more clearly defined and limited in constitutional
law. And at least limited use will be made of popular
referendums.
16. The similarity of this approach to what the
Yugoslavs have been trying to do is striking, and probably,
not coincidental. Though the internal and external problems
facing Tito and Kadar differ in many respects, the trouble
Belgrade has had in translating theory into practice is
instructive with respect to the changes envisaged by
Budapest. Kadar has been cautious. He has avoided spelling
Jut his plans in any detail. He has set 'timself no time-
table. He has protected himself against conservative
critics by stressing that there are to be no changes in
Hungary's "iolitical structure" -- only in "political work."
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Even rio, implementation of his political reforms will, at
best, be a slow and uneven process.
Nationalism
17. When. history or tradition can be safely invoked,
Budapest does not hesitate to do so. For example, plans
have been laid for the celebration of the 1000th anniversary
of the birth of Hungary's first king, Saint Stephen, in
1970. Unlike some of his peers elsewhere in Eastern Europe,
however, Kadar is denied the luxury of openly exploiting
nationalistic sentiment to rally the population behind his
regime. The risk of unleashing anti-Soviet and irredentist
emotions is too great. On the other hand, there is a
strong element of nationalism underlying Kadar's insistence
on Hungary's right to pursue its own road to socialism --
and events seem to be pushing Budapest toward a clearer
reckoning with this fact. Whether motivated by alarm over
the implications of the current trend of developments in
Czechoslovakia or by its conviction that it is better to air
than to suppress controversy; the Kadar regime has recently
permitted an unprecedented debate on the questions of
patriotism and nationalism to be waged in the Hungarian
press. Of course the polemics have so far been couched in
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rather obscure language. And both sides -- "patriots" and
"internationalists" -- have interlaced their arguments with
professions of boundless love for the Soviet Union. Yet it
is significant that a debate on such sensitive questions has
been allowed to appear -- and to continue ?-- in public media.
18. Kadar will, of course, squelch this particular
dispute if it seems to be getting out of hand. He has,
nevertheless, teken a bold step toward reconciling the
nationalistic aspirations of his people with the realities
imposed upon his regime by external factors. This provides
a new dimension to the accommodation he is seeking with the
general population. It also adds a new dimension to the
already complex picture of Hungarian-Soviet relations, a
dimension which may assume greater importance as the
Hungarian reforms progress.
The Outlook
19. As Kadar moves further along his presently
established course, the obstacles he will face at home
and abroad are likely to be formidable. His methods are
careful, but perhaps his greatest asset is the fact that
his objectives are limited and -- from the standpoint of
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purely Hungarian requirements and circuzistances not
unrealistic. Yet, even if there is no interference y'rom
Moscow, Kadar will need considerable time to overcome the
most serious of hic internal problems and to lay the ground-
work for an orderly succession by like-minded leaders, The
men around Kadar are: generally loyal to him personally but,
below the Politburo, enthusiasm for the reforms within the
Party tends to be lukewarm. And even the attitudes of
Politburo members are reportedly less than uniformly
positive. Of course, Kadar conwciously attempts to maintain
a balance of views within the Party leadership, both to
facilitate his control over the shaping of policy and to
foster a greater sense of 1.7ity. But, as Yugoslav experience
attests, this is a tricky business. Conservative elements
are still clearly in a position to impede the smooth
implementation of the reforms. Indeed, there are indications
treat Kadar may presently be having some sort of factional
difficulty in the Ministry of the Interior. Finally,
popular support for HEM still has but shallow roots and
could easily be shaken by economic reverses.
20. Yet the internal problems confronting Kadar are not
necessarily more serious than the ones he has already overcome.
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He has clearly established his skill at political manipula-
tion. The results achieved to date under HEM give reason
for some optimism about the long range effectiveness and
viability of the economic reform. And whatever doubts may
be entertained -- among bureaucrats or the general populace
-- about Kadar's programs, the events in Czechoslovakia seem
to have generated a widespread conviction that Hungary is
extremely fortunate to have Kadar at the helm. Clearly,
the next two or three years will be critical. But unless
Moscow moves to thwart him, Kadar's chances for successfully
recasting Hungarian socialism along the lines he has laid
down appear better than even.
21. The problem posed for the Soviets by the Hungarian
reforms is an exceedingly difficult one. Within limits,
Moscow is publicly committed to the principle of separate
roads to socialism. Kadar has demonstrated his determination
not to repeat Dubcek's errors, i.e., not to let events tape
control. For 13 years he has proven to be an effective and
-- from the Kremlin's point of view -- reliable leader.
But while Kadar remains firmly committed to the principle of
Party primacy, his pragmatism and humanism have directed
him onto a path which stands in sharp contrast to current
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trends and practices elsewhere in the Soviet Bloc. Not
only could the momentum of his reforms carry him beyond the
limits he has staked out, but even the changes already
implemented or planned could, if they prove successful,
have far reaching long term implications for the rest of
Eastern Europe, and perhaps for the Soviet Union as well.
22. Hungary is determined to remain an acknowledged
member of the socialist community. Until its reforms are
officially discredited, they are legitimate ammunition --
part of the common pool of "positive socialist experience"
-- useful to critics of more conservative policies elsewhere.
Husak apparently finds this prospect encouraging, but
Ulbricht, for one, has already registered his uneasiness.
And even the USSR is not immune to the Budapest virus.
Recent articles in the controversial Moscow journal,
Novy Mir, have suggested that some of Hungary's political
and economic reforms should be emulated in the Soviet Union.
While the influence of an established and viable Hungarian
model of socialism would probably affect Budapest's allies
unevenly, both in time and intensity, Kadar could well push
the Soviet Bloc a long step in the direction of Togliatti's
vision of "unity in diversity," with an attendant erosion of
Moscow's control.
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23. The Kremlin's concern over developments in Hungary
is reflected in the stream of high-level visitors and
delegations which have been shuttling back ELnd forth between
Budapest and Moscow. The Soviets have warned Kadar personally
on several occasions to go slow. And almost every day soviet
papers publish articles condemning the sort of "deformations"
of Marxist-Leninist thcory which may be said to underlie the
Hungarian reforms. But Kadar has so far managed to avoid
giving his would-be Soviet critics a firm handle for
attacking his reforms directly. And.he probably is not
without friends in the Kremlin who view the Hungarian
reforms as a potentially useful experiment. In any event,
Moscow's public posture toward the Hungarian experiment has
been ambiguous. Guardedly favorable commentary on NPM has
been published in the Soviet press, and the Kremlin publicly
congratulated the Hungarian Party last March for "firmly
adhering to the attitudes of Marxism-Leninism and proletarian
internationalism." On the other hand- frequent allusions have
been made to the numerous pitfalls which beset Budapest's
reformist path. Soviet officials have complained about the
alleged diversion of Hungarian machinery to Western markets.
And TASS significantly omitted Kadar's lengthy defense of his
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internal reforms in its summary of his recent interview
with a L'Unita correspondent.
21+. There are surely those in the Kremlin who read all
sorts of dire threats into the Hungarian reforms, but so
long as Kadar clearly maintains control oNer the direction
and pace of change, they will be hard pressed to demonstrate
that the Party in Hungary is losing its grip on any
significant aspect of society. Barring the type of dramatic
development which Kadar hopes to avoid, agreement in Moscow
on the need to apply strong pressures -- political, economic,
or military -- would probably be difficult to achieve. Under
these circumstances, and with Soviet attention also directed
toward such other matters as the threat from China and the
pursuit of detente in Europe, Moscow has apparently opted
for a compromise policy toward Hungary: neither hands-off
nor heavy-handed intervention.
25. The point at which the Soviet Union's patience
might wear dangerously thin simply cannot be predicted.
There are probably at least some Soviet leaders who
rationalize their present stance toward Hungary on the hope
that without some extraordinary support and cooperation
from Moscow, NEM will founder -- with predictable and
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gratifying political consequences. Other Soviet leaders
probably feel that Hungary's dependence on the Soviet Urion
will gradually cause Kadar to shelve the more objectionable.
aspects of his reform and to adopt a more orthodox posture.
Either of these eventualities could come to pass, but the
chances are that they will not. And if they don't, the
danger point for Kadar will come if and when the Soviet
leadership comes to agree that the leading role of the
Hungarian Party is being jeopardized and that the passage
of time has been working to the Soviet Union's disadvantage.
But by then the best opportunities for subtle Soviet
intervention may have slipped away, and the price tag
carried by cruder methods -- especially by military action
-- is likely to have increased. Whether, at that stage,
Moscow would be willing to bear this cost will depend upon a
host of factors -- internal and external -- which even Kadar
cannot now foresee.
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