HUNGARY: THE WANING OF THE KADAR ERA

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• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 23, 2016
• Document Release Date: April 6, 2011
• Sequence Number: 2
• Publication Date: May 1, 1986
• Content Type: NIE

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~.E Director of CTet
Central
Intelligence
191E COPY
1riatti
ON
Hungary: The Waning
of the Kadar Era
NIE 12.5-86
May 1986
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS,
EXCEPT AS NOTED IN THE TEXT.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organization of the Department of State.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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RET
NIE 12.5-86
HUNGARY: THE WANING
OF THE KADAR ERA
Information available as of 14 May 1986 was used in the
preparation of this Estimate, which was approved by the
National Foreign Intelligence Board on 15 May 1986.
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CONTENTS
Page
SCOPE NOTE ...................................................................................... 1
KEY JUDGMENTS .............................................................................. 3
DISCUSSION ........................................................................................ 7
Introduction: Hungary's Unique Status in Eastern Europe and
Emerging Problems .......................................................................... 7
The Political Dynamics ........................................................................ 7
Kadar's Alliance Strategy ................................................................. 7
Offering Incentives ....................................................................... 7
Co-opting the Intelligentsia .......................................................... 8
Seeking Feedback ......................................................................... 8
Kadar's Ruling Style ..................................................................... 8
Responding to Political Frustrations ............................................ 8
The Internal Strains of the 1980s ........................................................ 9
The Economy .................................................................................... 9
The Mistakes ................................................................................. 9
Austerity and the Reform Debate ............................................... 9
Ka ar s Current Economic Agenda ............................................. 9
Agriculture .................................................................................... 11
Moscow's Economic Leverage and Increasing Demands .......... 12
Social Problems, Dissidence, and Nationalism ............................... 13
Dissatisfaction Among Youth ....................................................... 13
Main Opposition Groups .............................................................. 13
The Regime's Response ................................................................ 14
Hungarian Foreign Policy .................................................................... 15
Meeting Soviet Concerns .............................................................. 15
The "Small-State" Gambit ........................................................... 16
The Outlook: Kadarism Maintained But Tested ................................ 16
Alternative Outcome: A More Precipitous slide ................................
Implications .......................................................................................... .
For the USSR ....................................................................................
For the United States ........................................................................
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SCOPE NOTE
This Estimate is the first to deal specifically with Hungary since
1955. Its goal is to assess the prospects for that country's political and so-
cial stability, economy, and foreign policy through the end of the
decade. The next five years or so will be a crucial period for Hungary-
a time for choosing directions-as the leadership prepares for and
possibly experiences its first major political succession since 1956.
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KEY JUDGMENTS
Hungary has entered an important transitional period. The era in
Hungarian politics associated with Janos Kadar is inexorably drawing to
a close. The regime is facing some rigorous tests. Accumulating social
and economic strains are serious enough that by the end of the decade
Hungary will have a harder time maintaining its present image as a
unique showcase in Eastern Europe for economic reform, political
stability, and a relatively relaxed ideological climate.
The problems are many:
- The economy, suffering from one of the lowest growth rates in
Eastern Europe since 1980, is still in the doldrums. Performance
lags in the key export sector and debt service burdens loom into
the end of the decade.
- Moscow's trade demands have toughened in recent years. The
Soviets are requiring more exports, higher quality goods, and a
reduction in Hungary's hard currency surplus with the Soviet
Union. Moscow is unlikely to moderate these demands over the
next several years, thus cutting into Hungarian prospects to
increase their exports to the West and revive their economy.
- The economy's poor growth prospects will impede the regime's
ability to improve living standards, which have stagnated for
several years.
- Social tensions have grown to uncomfortable levels because of
stagnating living standards, inflation, and growing income
disparities.
- Political dissidence has been stimulated by the public's broader
contacts with the West and the younger generation's increasing
impatience with the regime over issues such as the treatment of
Hungarian minorities in neighboring countries (particularly
Romania), political reform, and economic problems.
One of the key uncertainties is how long and to what degree Kadar,
who is now 74, will remain in charge. Should Kadar die, become
incapacitated, or much less likely retire, the succession probably would
proceed fairly smoothly at least in its early stages. Deputy General
Secretary Nemeth, 63, is a strong contender and at the moment appears
to be the most likely immediate successor. However, there are other
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strong candidates-Central Committee Secretary Janos Berecz, Politbu-
ro member and First Secretary of the Budapest party committee Karoly
Grosz, Central Committee Secretary, Politburo member and economic
czar Ferenc Havasi, Central Committee Secretary Istvan Horvath and
Deputy Prime Minister and Politburo member Laszlo Marothy, among
others:
- Should the succession be triggered soon, ,whoever follows Kadar
probably will continue Kadar's general political approach and
the current economic reform program at least initially. "Kadar-
ism" has worked well for too long to be reversed without major
negative repercussions. Moreover, the majority of the top
leadership has been carefully groomed and selected over the
years because they subscribe to Kadar's general beliefs.
- The continuation of Kadar's general approach probably will
mean that the social malaise will still be evident but Hungary
will remain basically stable. Dissent, however, may be some-
what more visible as economic problems drag on and as
Hungary approaches the 30th anniversary of the 1956 October
Revolution this fall. The government's use of police measures
may be more common than during the 1970s, although not as
repressive as in the late 1950s.
We question, however, whether even Kadar's masterful tinkering
with the system will be viable over the longer term if the economy
shows no signs of reviving and the resultant social strains continue to
grow. Piecemeal implementation of reforms will limit the gains in
efficiency and competitiveness needed for improved industrial perfor-
mance. Debt burdens and Moscow's hardening trade demands will limit
resources available for industrial modernization. Without an economic
turnaround, troubles could deepen in Hungary toward the end of the
decade:
- Economic stresses could sharpen rivalries within the leadership
concerning the scope and pace of reforms. If the succession to
Kadar occurs about this time, the initial smooth transition
period might be but a respite before factionalism becomes more
serious.
- While struggling with heightened factionalism, the regime
could begin to drift, resorting to a "stop and go" approach to
economic reform and ultimately deepening morale problems
and accentuating social strains.
- An increase in public discontent would renew and possibly
intensify the regime's emphasis on discipline and social control.
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Hungary's economic and social problems will deepen during a
difficult period for Moscow-a time when Gorbachev will wish to
concentrate on Soviet economic problems and not assume any more
burdens of his allies. Tensions between Budapest and Moscow could
increase over a number of issues such as: the scope and pace of
economic and political reform, commercial ties to the West, the
dimensions of CEMA integration, ruble versus hard currency payments,
prices for raw materials from the Soviet Union, the quality of Hungar-
ian exports to the Soviet Union, and defense spending.
Despite the somewhat greater possibilities for increased strains,
particularly over economic issues, in all major respects Hungary will
continue to fulfill its current commitments to the Warsaw Pact. A
serious crisis-one that would require the direct use or the very real
threat of force by the Soviets-is unlikely. If such a crisis did develop,
however, it would most likely spring from a Hungarian succession
process that goes awry and/or Soviet mishandling of the leadership
transition.
The United States has an important stake in the evolution of the sit-
uation in Hungary because it is at the leading edge of reforms in
Eastern Europe. Hungary's growing indebtedness to and economic need
of the West, moreover, should continue to give the United States and
other Western industrialized countries some limited leverage. Over the
longer term-and particularly if Gorbachev's program to revive the
Soviet economy fails-the economic attraction of the United States and
the developed West may increase even more and, thus, provide a better
opportunity for Western leverage in Hungary.
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DISCUSSION
Introduction: Hungary's Unique Status in Eastern
Europe and Emerging Problems
1. Hungary-which has long enjoyed a unique rep-
utation as the most stable, affluent, and ideologically
relaxed country in the Warsaw Pact-will have a
harder time maintaining this image in the next several
years because of several interlocking strains: a faltering
economy, stagnating living standards, growing social
inequities, continuing demands by opposition groups
for greater political liberties, and a looming succession.
Tensions between the government and the people and
among various socioeconomic groups stem largely
from the question of who is to bear the brunt of the
economic slowdown and resulting economic auster-
ity-management or workers, rural or urban interests,
or the haves and have-nots. Moreover, a generation
gap is rapidly emerging. The youth are rejecting the
compromises of their elders and are rediscovering the
dissidence and nationalism of more heroic as well as
more troubled times.
2. The overarching issues facing the regime are:
how far and fast to proceed with economic and
political reforms while assuring Moscow's continuing
confidence; how best to maintain social stability in the
face of socioeconomic strains; and how to prepare and
shepherd Hungary through the political succession to
General Secretary Janos Kadar, who has ruled for
some 31 years.
The Political Dynamics
Kadar's Alliance Strategy
3. From the mid-1960s Kadar has given the Hun-
garian people the best of an unenviable lot among the
East Europeans under Soviet domination. Kadar has
proved himself to be an extraordinary politician (see
inset). Recognizing the futility of past attempts to rule
Hungarians by raw compulsion, Kadar has relied on
preempting and co-opting potential opposition. He
always deals from strength, however, maintaining a
publicly understood option of applying "extraordi-
nary" measures to buttress his regime's authority.
4. Offering Incentives. Kadar's domestic strategy
ultimately depends on credible positive incentives. His
first political concession over a quarter century ago
The Legacy of 1956 and
Kadar's Rise to Power
Kadar's reputation as Eastern Europe's leading re-
former developed from inauspicious beginnings. Both a
participant and victim of the Stalinist purge trials, he
came to power in 1956 at the head of a Soviet-installed
regime whose first tasks were to topple the legal
government of Imre Nagy and brutally crush the
popular resistance. Later, Khrushchev tasked him with
setting right the Stalinist excesses that brought on the
revolt. In his early rule, Kadar coerced or silenced all
manner of opposition. He suppressed the revolutionary
workers councils, either acquiesced in or ordered the
execution of Nagy, and forcibly recollectivized agricul-
ture. Only after the latter was completed in 1959 did
Kadar win from Khrushchev his first substantial leeway
in Hungary. In the early 1960s, Kadar launched the
policy of "national reconciliation" based on the slogan
"he who is not against us is with us." He quietly
rehabilitated victims of Stalinism and many, but not all,
of those who participated in the uprising. In the early
1960s, he also initiated planning for an economic
reform-the New Economic Mechanism (NEM)-a
scheme based on modified market mechanisms and
private incentives largely borrowed from Imre Nagy's
New Course. (Khrushchev captured the essence of the
changes by dubbing it "goulash Communism.")
was to ease demands that Hungarians publicly affirm
commitments to Communism, the party, and the
USSR that they do not hold. In essence, he encouraged
the silent and the politically uncommitted to pursue
constructive nonpolitical careers and even to be active
in public life through the party-controlled mass orga-
nization, the Patriotic Peoples Front (PPF).
5. His strategy, which continues into the present,
also encourages more political involvement through
devices that gradually erode the commitment of the
opposition. The party, as in other Communist coun-
tries, allocates the highest paid and most sensitive
public jobs to loyal supporters who are registered in a
secret "nomenklatura" list; and, more actively than
other Communist regimes, it uses the lure of career
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advancement to draw Hungarians, in stages, from
political passivity to incremental activism in the re-
gime's activities. Kadar has also instituted some limit-
ed political reform while holding out the prospects for
further liberalization. All social strata-including
workers, farmers, and the intelligentsia-are urged to
take their place in this alliance policy. Such "even-
handedness" contributes to an unusually high toler-
ance for the regime in previously irreconcilable strong-
holds of anti-Communist sentiment such as the
Catholic Church; rural, agricultural communities; and
even emigre groups.
6. Co-opting the Intelligentsia. Under Kadar the
intelligentsia have enjoyed more artistic freedom than
most of their Warsaw Pact counterparts. Recognizing
the crucial role that intellectuals-especially men of
letters-played as harbingers of the 1848 national
uprising against Austria and in 1956 against the USSR,
Kadar has assigned them a special place in his alliance
strategy. Those who play by his relatively liberal
ground rules reap substantial rewards. Obdurate, vocal
anti-Communists or antiregime activists lose favor,
perks, jobs, and sometimes their physical freedom. The
resulting pressure to conform has created a system of
"self-censorship" in which the limits to criticism are ill
defined but very effective.
7. Seeking Feedback. Aware of the self-deceit and
isolation of the previous Stalinist regime, Kadar also
has made collection of reliable information on grass-
roots opinion in the country a top priority:
- He relies on an informal network of contacts in
which top party officials maintain a rapport with
nonparty opinion makers in the arts, academia,
trade unions, villages, and even among the cler-
To an extent, these leaders not
only sell the party's alliance tactics to their
constituents but also explain their constituents'
interests in Politburo debates on policy issues.
- Kadar also relies on secret, frank polling to cross-
check whether or not his aides have an accurate
reading of the popular mood. The top leadership,
however, is uncomfortable about polls as a policy
input, in part, because the techniques applied
have long been the domain of dissident sociolo-
gists and because orthodox elements remain sus-
picious of polls that they regard as bourgeois
devices for diverting them from ideologically
"proven" measures.
8. Kadar's Ruling Style. Kadar's assessment of
public sentiment and Soviet wishes is reflected in his
promotion of individuals to top leadership posts. For
example, he may have promoted Karoly Grosz to the
Politburo at the last party congress so that those who
have suffered from the reforms, such as pensioners,
would have a spokesman. In this way, Kadar has
permitted the key institutions in Hungary to be led by
men who have considerable range to advance new
views on important issues.
9. Kadar's approach has been one of consensus
building among officials who represent important
interests or constituencies. He has sought to avoid
conflict in this process and those officials who remain
in opposition once a consensus has been reached-as
happened with Bela Biszku on economic policy in
1979-are quickly demoted, though without character
assassination or fanfare. Thus, Kadar has achieved a
level of unquestioned authority without arbitrary mus-
cle flexing or the trappings of a personality cult. More
in the style of a remote chairman of the board, he has
delegated power and encouraged collegiality among
his Politburo lieutenants and the leaders of other key
institutions while insisting that they respect his ulti-
mate authority and avoid debilitating factionalism.
Another source of his success has been the unfailing
support of a succession of Soviet leaders
10. Responding to Political Frustrations. In the
past few years, as the gloss has worn off Hungary's
economic achievements, a pattern of political malaise
and social stress has emerged. The regime has tried to
counter these problems through some limited political
reform. An electoral reform, first broached in 1969
and finally used in June 1985, introduced mandatory
multicandidate races in most parliamentary and all
municipal council elections. The optional use of multi-
ple candidates and secret balloting, moreover, has
spread to trade union elections. There is also a measure
of more free speech in debates in the legislature, and
in March the parliament passed an ammendment to
the tax law despite high-level party opposition=
11. The regime probably intended these new prac-
tices to be a palliative for internal pressure for greater
political liberalization and as propaganda to boost
Hungary's image in the West. Most top leaders, some 3
dozen including Kadar, were exempt from challenge
in their parliamentary seats. Most regime-favored
candidates in contested seats, while sometimes put in
the position of having publicly to defend government
policies, were kept safe with a nominating process that
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squeezed out dissidents. But three Central Committee
members running for reelection to the parliament
failed to win. The reform, in general, failed to catch
the popular imagination even though it went beyond
any other such attempts in the Warsaw Pact.l
The Internal Strains of the 1980s
The Economy
12. The Hungarian economy, suffering one of the
lowest growth rates in Eastern Europe since 1980, is
still in the doldrums. Performance lags in the key
export sector. Debt problems loom into the end of the
decade. The leadership knows that more fundamental
reforms involve some very hard, politically sensitive
decisions. Without continued sizable Western credits
and the once growing supplies of comparatively cheap
Soviet energy and raw materials, the economy faces
poor growth prospects that will impede the regime's
ability to improve living standards and to halt the
declining domestic and foreign confidence in the
system.
13. The Mistakes. Through the early and mid-
1970s, Hungary enjoyed record postwar economic
growth, but flaws in regime policy sowed the seeds of
problems in the 1980s:
- Kadar retreated too far from the intent of the
1968 economic reforms in the retrenchment of
1972-73, which was sparked by resistance to
change among party bureaucrats and industrial
workers and by Moscow's concerns over excessive
decentralization.
- The regime further tightened central control in a
shortsighted effort to shelter the economy from
the oil price shocks, global inflation, and reces-
sion of the mid-1970s. Rather than adjust, Hun-
garian planners opted to sustain rapid economic
growth and expansion of consumption, borrow-
ing from liquid Western credit markets to cover
widening payments deficits. Regime policies re-
inforced inefficiencies in production and in-
creased subsidization of consumption while the
country sank deeply into debt. Gross hard cur-
rency debt rose from $1.4 billion in 1973 to $9.1
billion in 1980, amounting to a per capita debt
burden higher than Poland's.
14. By 1978 Hungarian policymakers recognized
that changes in policy were needed to avoid financial
disaster. The regime lowered economic growth targets
and shifted priority to improvement of the balance of
payments by cutting back on hard currency imports.
Planners placed the burden of the slowdown on
investment, permitting living standards to level off
rather than erode. At the same time, Budapest began
to revive the reform program in an effort to enhance
efficiency and export competitiveness.
15. Budapest's measured program of adjustment
and reform, however, proved inadequate to deal with
the rapid deterioration in Hungary's external circum-
stances at the outset of the 1980s. Payments deficits
were reduced, but not eliminated, and the debt con-
tinued to rise. Hungary's terms of trade with both the
West and CEMA deteriorated sharply as the oil price
escalation of 1979 stoked inflation and shortly after-
ward accelerated the rise in Soviet oil prices. In quick
succession, the Polish financial crisis and ensuing flight
of creditors from Eastern Europe, skyrocketing world
interest rates, recession in Hungary's Western markets,
and a cutback in Soviet oil supplies forced Hungary to
impose tougher austerity measures.
16. Austerity and the Reform Debate. Under
pressure from Western creditors and the IMF, Buda-
pest made still deeper cuts in investment, imposed
controls on imports, hiked consumer prices, and
slowed the growth of wages in the socialist sector after
1981. These measures improved financial perfor-
mance enough to convince Western banks, govern-
ments, and the IMF, which Hungary joined in 1982, to
provide the credits needed to stave off insolvency. At
the same time, despite all these efforts, debt continued
to grow, reaching $11.8 billion with the West in 1985.
At the same time, the economic stringencies associated
with adjustment provoked a wide-ranging debate
within the leadership about whether Budapest should
take a bolder or more cautious approach to reform.
The proreform group contended that more rapid and
thoroughgoing change was the only way to get Hunga-
ry on a course of long-term growth and balance-of-
payments equilibrium. Kadar agreed to the necessity
of further reform, but proceeded cautiously because of
anxiety about potential Soviet and domestic criticism
and about the impact of greater decentralization on
management of Hungary's financial position. This
tenuous financial position will continue because debt
service payments will remain high through the end of
the decade
17. Kadar's Current Economic Agenda. By early
1984 Kadar was ready to move forward on economic
reforms. The regime recognized that austerity mea-
sures were eroding morale while providing no prospect
of an economic turnaround. Encouraged by some
improvement in its financial situation and indications
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Table 1
Hungary: Schedule of Debt
Service Payments, 1983-90 a
a Including payments on projected new borrowings.
bIncluding interest on short-term debt. Assumed interest is 9.7 percent in 1985 and 8.7 percent afterward, based on average rates actually
paid.
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that Moscow would tolerate further reform, Budapest
felt less constrained by external factors. At a Central
Committee plenum in April 1984, Kadar called for:
- Further liberalization of prices by reducing sub-
sidies and turnover taxes and by adjusting ex-
change rates more frequently.
- Further decentralization of economic decision
making in many enterprises and introduction of
new management forms, including the participa-
tion of worker-elected representatives in the
management of state enterprises.
- Encouragement of small-scale ventures under
both socialist and private ownership.
- Greater differentiation in wages to reflect differ-
ences in productivity.
- Introduction of a bankruptcy law providing for
the liquidation of chronically insolvent firms.
- Decentralization of the banking system and the
creation of securities markets to facilitate the
movement of capital among enterprises
18. These measures were intended to increase en-
terprise independence, promote greater competition,
and strengthen market forces. Their implementation,
however, has been erratic, and at times undermined
by backsliding on reforms. This has had destabilizing
social and political repercussions because many inter-
est groups feel threatened by change:
- Price reform, in particular, has become one of
the most sensitive issues because it has led to
higher consumer prices. Inflation ran at 8 to 10
percent annually over the 1979-85 period by
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official Hungarian estimates, but the actual rate
was probably higher. Consumers have felt the
price hikes because wages have not kept up with
even the official inflation rate. Thus, the major-
ity of Hungarians have taken second jobs just to
maintain their standard of living. Pensioners and
those workers who are unwilling or lack opportu-
nities to moonlight in the private sector have
suffered the most.
- Factory-level reforms are another source of anxi-
ety for industrial workers, union officials, and
managers. Unions stand to lose if workers are
allowed to represent their own interests in enter-
prise management. Many enterprise directors are
uneasy about being personally responsible for
performance and profit levels. Workers, mean-
while, are concerned that wage differentiation
will reduce incomes for the old, the less capable,
and those with insufficient training. Wage differ-
entiation also strikes at the socialist doctrine of
equal distribution of wealth and threatens certain
social programs that the population has come to
expect. There is also concern that the regime will
not be able to meet its promise of full employ-
ment should inefficient firms be closed.
- Expansion of private-sector activity has had a
mixed impact on Hungarian life. While private
enterprises have improved the quality and quan-
tity of consumer goods and services, this prosper-
ity is not shared evenly among the population.
This poses new problems for the regime in terms
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of ideological contradictions, widening income
differentials and corruption. Ideological conser-
vatives and those envious because they lack the
opportunity to participate in lucrative pursuits
claim that the emergence of a wealthy class and
its conspicious consumption demonstrate that the
reforms are bringing capitalist evils to Hungary.
- One of Kadar's reforms called enterprise work
associations is becoming particularly controver-
sial. Designed to make up for factory shortcom-
ings and help workers augment incomes, the
system allows workers to rent factories after
hours to produce extra goods for sale to their
enterprises. At first, the reform was praised for
boosting productivity. Critics now claim, how-
ever, that these workers rest on their regular jobs,
do not pay their fair share of enterprise mainte-
nance and modernization costs, and are not fairly
taxed on their extra earnings.
- Financial reforms are resisted by many senior
National Bank officials who fear losing control
over credit allocation and their arbitrary power
over the financial system. Their primary worry
probably is that a decentralized banking system
will encourage excessive lending and an uncon-
trollable investment boom. In addition, should
loans be granted on a more competitive basis by
new banking institutions, inefficient enterprises
that depend on cheap credit may be squeezed
out of the borrowing market and go bankrupt.
19. The need to build support among interest
groups for the new reform initiatives has caused the
regime to implement them at a very measured pace
and even to backtrack in some areas. Kadar and other
leaders are aware that social tensions have grown to
uncomfortable levels because of inflation and widen-
ing income disparities. They have attempted to ad-
dress these problems by restricting price increases in
1985 and by increasing taxes on higher incomes earned
in legalized private activities. They may also be forced
to crack down harder on illegal private activities and
to defer some controversial reforms, such as the closing
of insolvent firms.
20. Even if the regime continues to go slow on
reform, social tensions will keep rising because poor
growth prospects argue against any tangible improve-
ment in living standards. The plan for 1986-90 indi-
cates that Budapest will continue to give priority to
correcting foreign payments problems over growth.
Consumption and investment are to grow by only 1.5
to 1.8 percent annually because of ambitious targets
for expansion of both hard currency and ruble exports.
Increases in output and exports are to come largely
from the industrial sector.
21. Even modest growth in national income will be
difficult to achieve because it depends on a sharp
increase in industrial efficiency. The problems the
Hungarians will face in trying to revitalize industry,
however, are daunting:
Six consecutive years of cuts in investment have
delayed industrial modernization, and the invest-
ment that has been made has flowed mainly to
traditional heavy industries.
- As a result, Hungary's industrial structure re-
mains geared toward products with poor growth
prospects and Hungarian industry has been los-
ing ground in international markets
22. The 1986-90 plan aims to increase the propor-
tion of investment allocated to infrastructural develop-
ment. Yet if Budapest is serious about restructuring, it
will also have to liquidate insolvent firms and continue
to limit growth in consumption in order to free
resources for a modernizing investment drive.
23. Agriculture. While agricultural production has
suffered through ups and downs (see table 2) largely
because of weather variations, the general availability
of food in Hungary has been one of the successes of
the Kadar regime, contributing to domestic stability.
The regime's liberal approach to agricultural develop-
ment has increased farmers' incentives and thereby
minimized domestic shortages. The successful intro-
duction of private incentives into the collectivized
farm system in 1963-64 also paved the way for the
1968 economic reform mechanism in the rest of the
economy. In the mid-1960s, the farms were able to
increasingly meet rising domestic demand, and in the
1970s they became major hard currency earners as
well.
24. The dearth of investment in agriculture during
the past six years, particularly in animal husbandry, by
1985 began to sap the sector's ability to continue
fulfilling its dual role in meeting domestic needs and
supplying exports. A drought in 1983 caused some
shortfalls, while export performance dropped due to
other adverse trends. Agriculture's export perfor-
mance, has been buffeted in recent years by some
adverse trends. The decreases in world food prices
have cut sharply into agriculture's hard currency
earnings. While the volume of food exports overall has
increased since 1980, the value of these sales has
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Table 2
Hungary: Domestic Economic Indicators,
Average Annual Percentage Growth
fallen. In the plan for 1986-90, agricultural growth
targets have been scaled down from the previous
planning period in part because of weak markets for
Hungary's food exports. Moreover, the majority of
Hungarian hard currency exports to the Soviet Union
are agricultural products, but the Soviets have been
less inclined in recent years to buy these products on
terms previously favorable for the Hungarians.
25. Through the end of the decade, the regime may
have to face difficult choices between increasing
agricultural exports to meet growing Soviet demands
to pay hard currency debt obligations or to satisfy
domestic expectations. That choice will be all the
harder in the event of more crop damage due to
drought or other causes
26. Moscow's Economic Leverage and Increas-
ing Demands. Moscow's economic leverage com-
pounds the many uncertainties clouding Hungary's
economic future. The USSR is the leading trade
partner and the source of most of Hungary's raw
material and energy needs. From the mid-1970s
through the early 1980s, the Soviets subsidized the
Hungarian economy by selling their key exports at
prices below world market levels, accepting low-
quality goods in payment, and allowing Hungary to
run deficits. Moscow shored up Budapest's financial
position by buying Hungarian meat and other agricul-
tural products for hard currency, permitting Hungary
to run a surplus in this unique trade relationship
among CEMA countries. But the Kremlin's economic
demands have toughened in recent years and are not
likely to moderate since Moscow faces its own trade
problems, including weakness in both oil production
and exports. Examples of Soviet pressure to balance
trade include:
- From 1980 to 1984, Hungary boosted its real
exports to the USSR by 30 percent, but obtained
no increase in the volume of Soviet imports. The
Hungarians had to accelerate deliveries to cover
rising Soviet prices and, more recently, to comply
with Moscow's demand for reduced ruble trade
deficits. Hungary's terms of trade declined by 15
percent over this period as prices on Soviet goods
rose by nearly 50 percent compared with a 25-
percent increase in Hungarian export prices.
Besides requiring more exports, the Soviets insist-
ed on higher quality goods. Moscow has even
threatened a reduction in its exports if the
quality from Budapest is not improved. The
delivery of more and better goods to the USSR
probably was a factor behind the Hungarian
economy's disappointing results for growth and
exports to the West in 1985.
The Soviets have also insisted on a reduction-if
not elimination-of Hungary's hard currency
surplus with the USSR. A reduction in Soviet
hard currency purchases-possibly by shifting
these goods into ruble trade-reduced Hungary's
hard currency surplus with socialist countries
from $800 million in 1982 to $340 million in
1985.
Moscow has called upon the Hungarians and
other East Europeans to invest in Soviet energy
and raw material projects to ensure continued
deliveries of these vital exports.'
' The recent nuclear accident at Chernobyl in the Soviet Union
could affect a number of Hungary's economic interactions. The
dimensions of the disaster were unclear at the time of this Estimate's
publication and precluded an assessment of the full economic
implications
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Social Problems, Dissidence, and Nationalism
27. The country's social fabric has shown signs of
steady decay. Over the past five years, this has
manifested itself in a range of negative trends, such as
the absolute decline in the country's population (which
is projected to last well into the next century), the
rising number of suicides (previously high but now
afflicting more youth), divorces, alcoholism, and juve-
nile and adult crimes, including drug addiction. Pover-
ty also is on the rise, with estimates claiming that the
living standards of nearly 30 percent of the population
is hovering at or below subsistence level. These nega-
tive trends, which are compounded by the chronic
housing shortage, have had their greatest impact on
the increasingly alienated youth and have contributed
nationalist issues h
most notable ever
phen the King,"
themes, which Pi
Hungarians in sev
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31. Main Oppc
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about 200
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- The "neopc
sociologists,
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Communise
s grown in recent years. One of the
to the proliferation of dissent in Hungary
28. Dissatisfaction Among Youth. Since the latter
half of the 1970s, a new group in Hungary-the
generation of young people who are beginning to enter
their thirties-has become increasingly disenchanted
with the regime. Younger Hungarians, increasingly
skeptical of Communism, in part because their own
material prospects have dimmed, have begun ques-
tioning the compromises of their elders. The youth
differ from their elders in several key ways: most
matured in periods of relative plenty and without
keenly felt hardships and repression. This has resulted
in higher expectations for continued improvement of
living standards, expectations the regime is increasing-
ly hard pressed to fully meet. This conflict serves to
steadily widen the gap between the party and growing
segments of the younger generation.
29. In their search for an alternative to what they
now regard as a bankrupted social contract, some
younger Hungarians have "rediscovered" the political-
ly sensitive issue of Magyar nationalism. There has
been a strong reaction against official efforts to alter
the historical record and, thereby, diminish Hungar-
ians' traditional antipathy toward the Soviets. While
the authorities still routinely praise Hungary's "libera-
tion" by the Red Army, dissident and some official
historians are reevaluating the record and publishing
information about the sacrifices of the Hungarian
Army, which fought with Nazi Germany on the
Eastern front. Dissident historians have also gone as far
as describing some of the atrocities committed in 1945
by Soviet "liberators."
30. Youth meanwhile learn at home a more accu-
rate and emotionally compelling history about the
national martyrs of 1848 and 1956 who were brutally
suppressed by intervening Russian troops. The number
of historical articles and books addressing Magyar
- "Economic
gary's ecom
urged accele
er leeway t
West, and,
party influei
as faster and
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mentalists N
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divided and weak
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but the texts of
broadly circulated
1986 is to continue
13
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ith strong nationalist and religious
yed to hundreds of thousands of
in park. This was followed by a
y of T-shirts, records, and posters
sition Groups. Opposition in Hun-
illy been a loosely organized move-
f dissident subgroups from various
ich with their own specific interests
.nocratic opposition" made up of
'oung sociologist, philsophers, and
s organized to promote the human
-des of the Helsinki Final Act.
?oup of young Catholic priests criti-
;onciliatory stance of its hierarchy
inal-primate Lekai has organized
_ asic communities"-groups of be-
clerics who contest both regime
eligion and what they believe to be
commodationist Catholic hierarchy
pulists," primarily writers, actors,
and historians, have criticized the
ial, cultural, and moral impact of
eformists" have argued that Hun-
mic reforms are inadequate and
market forces, closer ties to the
ost daringly, removal of state and
more far-reaching reforms.
ho oppose the construction of a
power plant on the Danube and
o-Nagymaros Dam, as well as social
nterests of the poor.
last year these disparate and often
ational issues. Their representatives
ws and programs. No deals were
11 speeches were reproduced and
A follow-on meeting sometime in
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33. "Samizdat" (dissident literature) has increased
in recent years, and, perhaps even more important,
these publications increasingly have addressed politi-
cally sensitive themes:
- The regime's failure to alleviate the plight of the
most impoverished Hungarians.
- Support for a fledgling independent peace move-
ment, an environmentalist coalition, and re-
ligious pacificists.
- Demands for public investigation of sensitive
historical issues, such as the execution in 1958 of
Imre Nagy, and revelation of his secret burial
place
34. The Regime's Response. In the last three
years, the Kadar regime has tried to manage the
opposition by increasing random crackdown measures,
such as fines, confiscation of Samizdat, and denial of
passports; these measures have served as reminders to
the various opposition groups of the established re-
gime-approved limits for their activities. Since the
beginning of the year, the police have broken up two
major demonstrations, and we have other reports that
searches of dissidents' homes, retentions, and various
other police harassments have increased.
35. Concerned about his image at home and
abroad, Kadar also sought to temper the general
dissatisfaction in Hungarian society by tolerating pop-
ular complaints about the status of Hungarians in
Romania and Czechoslovakia (see inset). The Kadar
regime is very cautiously trying to co-opt and exploit
the revised sense of nationalism-in part to enhance its
legitimacy and to divert the population's attention to
economic problems. The regime may also see national-
ism as an antidote to the growing malaise among
young people who are increasingly alienated from the
government, skeptical of its promises, and frustrated
by the lack of opportunities for job mobility, housing,
and the emptiness of official ideology.
36. Kadar is, however, engaged in a very risky
game: Hungarian nationalism is a potentially explosive
mix of ethnocentrism and anti-Russian feelings and if
not carefully controlled could anger Moscow as well as
have adverse domestic consequences for the regime.
The issue already has become an especially sore point
in relations with Romania. Hungary and Romania's
criticism of each other over minority policies escalated
to the level of party-to-party communications within
The Status of Hungarians in Other
East European Countries
Hungarians are Europe's largest minority. More than
3 million live in the states that border Hungary: over 2
million in Romania; some 630,000 in Czechoslovakia;
about 435,000 in northeastern Yugoslavia; and some
171,000 remain in western Ukrainian territory, previ-
ously part of Hungary but annexed by the Soviets after
World War II (see map). How these minorities are
treated varies from country to country. Hungarians are
treated fairly well in Yugoslavia, where they enjoyed
significant cultural autonomy; they are treated less well
in the Soviet Union. The situation is worse, however, in
Romania and Czechoslovakia, where a combination of
official policy, mutual ethnic rivalries, and prejudice
have set the Hungarians against the majority popula-
tion. The regimes in these two countries seem wary of
any form of cultural or intellectual diversity particular-
ly any that question the postwar borders formed at
Hungary's expense.
Kadar thus far has managed to contain regime critics
through a combination of repression and conciliation.
Working in the regime's favor is the fact that Hun-
gary's dissidents are presently not a large, powerful,
cohesive force. He has not, however, resolved many of
the basic issues that concern the opposition and contin-
ue to fester beneath the surface.
38. There is another view that holds that the
Estimate exaggerates the role of nationalism among
Hungarian youth and ascribes to Kadar a "risky"
activist "game" with nationalism, which, in fact, he
does not play.' The holder of this view also believes
that the Estimate understates the impact of the two
largest opposition movements:
- The "neopopulists" represent the greatest chal-
lenge to the regime as they criticize the decay-
ing social fabric and the mistreatment of ethnic
Hungarians in Romania and Czechoslovakia-
issues on which Kadar is highly vulnerable. The
"basic" or grassroots communities have a poten-
tial for upsetting church-state relations. Their
primarily young adherents pursue a "counter-
society" to offset what they see as a harmful
alliance between church and state, and they
resist state authority. Some 150 of their consci-
entious objectors are already serving stiff jail
the last two years.
37. Kadar's approach, while so far successful in
controlling volatile popular reactions, has not given
him control over this highly charged issue. In general,
terms
Intelligence and Research in the Department of State.'
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Europe's Largest Minority
PRAGUE-
Olomouc
0
VIENNA
,Zia
--'Banska Bystrica,
Ba/atp4%
Maribor Nag,kanizsa
i
Pecs
705130 (A05351) 7-85
Hungarian Foreign Policy
39. Meeting Soviet Concerns. Soviet leaders have
always harbored reservations that Kadar's system
might undermine Communism in Hungary and spread
elsewhere in the Bloc. To keep in the Kremlin's good
(though guarded) graces, the Hungarian regime under
Kadar is consistently loyal to the USSR's larger inter-
ests and usually meets Soviet minimum expectations
regarding their important foreign policy concerns. For
example, Budapest provides financial and political
support for Third World insurgent groups along with
training and weaponry. The secret police are among
the most closely controlled services by the KGB in
\ 1 ara Hunedoara Sibiu
Petro;an
gg BELGRA E {J( J
i i
a
*SOFIA Boundary representation is
not necessarily authoritative
Eastern Europe and have been particularly coopera-
tive in illegally acquiring Western high technology.
Hungary is a key transit point of COCOM controlled
technology to the Soviet Union probably because of
Budapest's extensive commercial contacts with the
West. Hungary follows the Soviet policy and propa-
ganda lead in the United Nations and other interna-
tional organizations. The main service Kadar provides
the Kremlin, however, is assuring the continuity of the
Communist system forced on Hungary 40 years ago. A
succession of leaders in Moscow since Khruschev have
prized Kadar's leadership for its stabilizing effects,
which are all the more dramatic in light of recurring
crises elsewhere in the region.
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40. Soviet troops, along with economic ties, provide
leverage and influence for Moscow. There are nearly
70,000 troops stationed in Hungary in four divisions
with support elements and major portions of an air
army. Soviet advisers are believed to be stationed
down to at least the division level in the Hungarian
People's Army. Most top Hungarian officers have had
some form of training in the Soviet Union. Relations
between the local populace and Soviet troops are calm,
with little overt signs of resentment. Articles in the
official press, however, carefully refer to the Soviet
forces as "temporarily" stationed in Hungary.
41. The "Small-State" Gambit. While economic
and military restraints keep Hungary closely in the
Soviet camp, Budapest, in the last few years, has tried
to create an image of Hungary as a moderate loyalist
that can serve as a go-between for the Warsaw Pact
with the West. Because of its dependence on foreign
trade, Budapest is also interested in maintaining good
relations with the West. Since about the mid-1970s, it
has gradually developed high-level contacts with
Western Europe, which seem not as dependent on the
Soviet lead as they once were. While in 1985 both
Zhivkov and Honecker had to cancel their visits to the
West because of Soviet pressure, Kadar still managed
to visit both Paris and London.
42. During contacts with Western officials, the
Hungarians stress the special role, even responsibility,
of "small nations" in promoting East-West detente as
well as Budapest's wish to be a "correct partner" to all
nations on the basis of "mutual interest." Hungary's
trade relations and more active level of international
contacts, which began in the mid-1970s, laid the
foundation for this approach.
43. In the early 1980s, moreover, other develop-
ments appear to have prompted Budapest to take a
more active foreign policy role. Soviet policy toward
East-West ties and the general chilling in Soviet-US
relations raised anxiety in Budapest and other East
European capitals that their national security and
economic interests would be harmed. Soviet actions
that raised such concerns included: the call for boy-
cotting the 1984 Olympics, Moscow's hard stance
against INF deployment, and the Soviet deployment
of new missiles to East Germany and Czechoslovakia.
In addition, during this period, the Soviets were going
through a drawn-out succession process. General Sec-
retaries were often sick and absent
44. As a result, Budapest may have perceived an
opportunity to pursue national interests a little more
assertively. Matyas Szuros, party Secretary responsible
for international relations, authored several articles
during this period, which justified more Hungarian
"wiggle" room through this theory of Budapest as a
"bridge" between East and West. Such a notion, at
times, has brought warnings for greater conformity
from Moscow. There even erupted a short-lived out-
break of polemics concerning national interests versus
Bloc unity in various East European official presses in
the spring of 1984.
45. The Hungarian "small-state" idea, however,
appears to have survived even in the face of occasion-
ally explicit Soviet disapproval. Most Hungarian lead-
ers are well aware of the Soviet limits on their
sovereignty and would exercise great caution not to
arouse serious Soviet ire. The Hungarians have sur-
vived throughout history in a conflict-prone Central
Europe by being realists and keen readers of great
power relations. Yet, top leaders also sense that it is
necessary to appear as a Hungarian "patriot" and
supporter of Hungarian national interests in order to
maintain some popular confidence or acceptance.
Thus, the regime is trying to walk a very fine, careful
line in its foreign policy, using the appeal of the
"bridge" role.
46. What assists the Hungarians in staying on this
carefully drawn line is the fact that certain aspects of
the approach, while serving Hungarian interests, may
even be useful to the Soviets. For instance, because of
their "moderate" image, statements by Hungarian
officials are believed more readily in some Western
circles than if the same statements came directly from
Moscow. Hungary, therefore, can serve, at times, as a
conduit for Moscow's policy and propaganda views.
The Outlook: Kadarism Maintained But Tested
47. Hungary has entered an important transitional
period. While Janos Kadar may remain politically
active throughout this period, his era in Hungarian
politics is inexorably drawing to a close. Kadar's
success has rested on an approach that combines some
partial political concessions, co-opting elements of the
opposition, isolating intractable regime enemies, and
at least until about the mid-1970s providing rising
standards of living for the majority of the population.
Now, however, the regime faces some rigorous tests.
Beyond the looming leadership change is a variety of
problems, such as stagnating living standards, a height-
ened sense of nationalism, demands for faster political
liberalization, and debt burdens, among others. How
well the Hungarian regime copes with these issues will
greatly determine the shape of Hungarian society into
the 1990s and the fate of Kadar's political legacy.
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48. One of the key uncertainties is how long and to
what degree Kadar, who is now 74, will remain in
charge. The regime has undertaken some steps to
begin the transition to the post-Kadar era. At the
March 1985 party congress changes in political ap-
pointments seemed designed to put more vigor, tech-
nical expertise, and youthfulness into the top leader-
ship. Karoly Nemeth was named to the new position of
Deputy General Secretary and is taking over some of
Kadar's day-to-day workload. Although his workload
has been lightened, Kadar still appears in control of
policy formulation.
49. There are recurring rumors-as recently as this
spring-that Kadar will retire or is being eased out. In
the past, such rumors may have been disseminated by
Kadar or his opponents for domestic political reasons.
We believe it is unlikely Kadar would accept relega-
tion to figurehead status. However, certain special
circumstances might develop that would lead him to
assume a largely ceremonial post turning over most
political control to Nemeth and others. Such circum-
stances might be a serious decline in his health,
Kadar's own disillusionment and frustration over eco-
nomic and/or social problems, and Soviet pressure.
50. Should Kadar die or become incapacitated, we
believe the succession probably would proceed fairly
smoothly at least in its early stages. Nemeth in his
current position is a strong contender to replace Kadar.
While he lacks charisma, in some ways the neutral
image he prlesents co_ Id make him a "safe," compro-
mise choice.
51. While Nemeth, at present, may be the most
likely successor, there are other challengers. Other
potential successors can roughly be divided into sever-
al very general and sometimes overlapping groups-
those who support even further reforms, those of a
somewhat more orthodox bent in their ideological and
economic views, and the opportunists. Economic czar
Ferenc Havasi, 57, at the proreform end of the
spectrum, was one of the chief architects of the latest
reform package adopted at the April 1984 Central
Committee plenum. Hungary's poor economic per-
formance in recent years could damage his chances,
although he would argue that he has been blocked
from implementing the necessary corrective measures.
Trade union chief Sandor Gaspar probably represents
the more orthodox end of the spectrum but is too old,
69, to be near the top of the succession list. Falling
more ambigously between these two are contenders
such as Central Committee Secretary Janos Berecz, 55,
Politburo member and First Secretary of the Budapest
Party Committee Karoly Grosz, 56, Central Commit-
tee Secretary Istvan Horvath, 49, and Deputy Prime
Minister and Politburo member Laszlo Marothy, 43,
among others Given the spread of
ideological differences, a centrist-opportunist like
Berecz could have the advantage if Nemeth falls aside
and the others neutralize each other. Soviet wishes
might be the determining factor, but we have no
evidence that Moscow has made known its prefer-
ences.
52. Reporting on Gorbachev's views on Hungarian
reforms is mixed. There are some indications that
Gorbachev has remarked favorably about Hungarian
economic reforms, particularly agricultural reforms,
and that he has "blessed" the current scope of the
reforms although no public endorsement has yet been
given. Gorbachev, however, has been critical of reli-
ance on the West and extensive emphasis on market
mechanism and private enterprise. The mixed report-
ing may well reflect a genuine Soviet ambivalence,
and the Hungarian leadership probably is uncertain
about what measure of additional reform Gorbachev
would tolerate.
53. Thus, the post-Kadar Hungarian leadership
most likely will continue to "tinker" within the system
as Kadar leaves it, avoiding risky new reforms until
confident of Soviet approval. We believe, moreover,
that whoever follows Kadar will also try to continue
within the broad outlines of Kadar's political strategy
because "Kadarism" has worked well for too long to be
reversed without major negative repercussions and
because the majority of the top leadership has been
carefully groomed and selected over the years since
they subscribed to Kadar's general beliefs and ap-
proach.
54. Continuing with Kadar's general political ap-
proach and the current reform agenda could contain
economic, social, and political challenges at least for
the next year or so. This would mean the general social
malaise will still be evident but Hungary will remain
basically stable. Both strikes and demonstrations-
presently fairly rare occurrences-could increase, al-
though within controllable limits, as the economy
continued to experience problems and the impact of
industrial reforms was felt. Dissent, in general, could
become more visible because of the 30th anniversary
of the October Revolution this fall, but the regime will
control the opposition using rhetoric, intimidation, and
force, if needed. The government's use of police
measures could become more common than during
the 1970s although not felt as severely as in the late
1950s
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55. We question, however, whether even Kadar's
masterful tinkering with the system will be viable over
the longer term if the economy shows no signs of
reviving and the resultant social strains continue to
grow. The most recent series of reforms probably will
not improve the chances for an economic turnaround
in the next five years or so. Notwithstanding the
accomplishments of some 17 years of economic experi-
mentation, piecemeal implementation of reforms will
limit the gains in efficiency and competitiveness need-
ed for improved performance, particularly in indus-
try. Moreover, debt burdens and Moscow's trade
demands will limit the resources available for modern-
izing the industrial base
56. At some point, perhaps toward the end of the
decade, economic stresses could sharpen rivalries with-
in the Hungarian leadership concerning the scope and
pace of reforms. If the succession to Kadar occurs at
that time, the initial smooth transition period might be
but a respite before factionalism becomes more seri-
ous. Kadar has been exceptionally successful in recon-
ciling policy conflicts as well as being adept at main-
taining Kremlin support. His successor might not have
similar gifts nor command the same respect that Kadar
Indicators of the Most Likely Scenario
"Kadarism Maintained But Tested"
- Economic performance is mixed; some targets of
the Seventh Five-Year Plan (1986-90) are met
while others fall short; overall, the industrial sector
continues to stagnate.
- Strikes or demonstrations, while possibly more
frequent than presently low levels, are managed
and contained by the regime.
- Police measures are somewhat more evident but
not nearly as repressive as during the late 1950s.
- Should the succession be triggered, the process is
fairly smooth, at least in the early stages.
- Kadar's successor adheres to main outlines of
Kadar's alliance strategy and the current economic
reform program at least through the next two
years.
- Debate over course and scope of economic re-
forms more evident and intense by the end of the
decade if economic and social stresses not eased;
some reforms halted
has earned after three decades of rule.
57. While trying to maintain some consensus within
the top leadership, the regime could begin to drift,
altering some reforms, dropping others most under
attack, even while moving ahead on another front.
Such "stop and go" implemention, however, would
run the risk of ultimately deepening morale problems
and accentuating social strains. An increase in public
discontent would, in turn, renew and possibly intensify
the emphasis on discipline and social control by a
leadership that would feel more defensive and was
fearful of Moscow's reaction if it failed to control or
preempt public dissatisfaction.
59. It is possible that economic problems might
worsen more quickly than forecast, that public morale
could slide more precipitously, and, if so, that the
more intense strains we foresee as a possibility at the
turn of the decade would unfold earlier and to a
greater degree. Leadership debate on reforms could
turn into more personalized attacks with blame for
economic and social problems attributed to different
individuals. The likelihood of this intensified leader-
ship struggle emerging would increase should Kadar
leave the scene or be incapacitated for a long period.
Alternative Outcome: A More Precipitous Slide
58. The fact that Hungary is facing its first political
succession in some 30 years at a time when the
economy is troubled and social strains are on the rise
means a good measure of uncertainty is inherent in
our discussion of future trends. Many variables outside
leadership control-the strength and duration of the
Western economic recovery; the continuation or not of
the recent oil price decline; changes, if any, in Soviet
policy toward Eastern Europe; the outcome of other
leadership transitions in Eastern Europe; the state of
Soviet-US relations, for instance-will impact on the
Hungarian political and economic scene.
60. Another variable is the future course of opposi-
tion in the country. The various groups of regime
critics in Hungary have taken only the very first,
tentative steps toward cooperation. However, in a
situation of greater, more visible leadership rifts and
spreading popular discontent, at least some of the
dissident groups might coalesce long enough to offer
more of a challenge to the regime with an appealing
program of faster and truly fundamental political and
economic reform. Certain factions within the party
might even take up these calls. The regime would then
be in a bind of trying to defuse the escalating demands
and resolve its own differences, while maintaining
Soviet confidence.
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61. The most likely result of such increased tensions
would be purges within the leadership. The regime's
response to the opposition would depend on the new
balance of forces in the leadership. Based on our
current reading of the trends, we believe the most
probable initial response would be greater repression,
in short, a protracted crisis during which reforms
would be halted and the economy would continue to
slip. Such a situation would continue for a number of
years before pressures built again to return to and
intensify reforms
the quality of Hungarian exports to the Soviet Union,
and the extent of Budapest's commercial ties to the
West, could gain more significance and increase bilat-
eral strains as both Hungary and the Soviet Union
struggle with domestic economic problems and a
tougher trade environment
63. Defense spending is another issue that could
become a bit more contentious. Hungary is likely to
continue to resist pressure from the Kremlin to in-
crease defense spending. Gorbachev, in turn, may be
less inclined to put up with Budapest's foot-dragging as
he tries to find means to lessen the defense burden on
Indicators of the Alternative Scenario
"A More Precipitous Slide"
Economic performance in most sectors falls seri-
ously short of the yearly targets of the Seventh
Five-Year Plan (1986-90).
- Hungary experiences increasing difficulty in
maintaining trade with the West.
- Some Western banks decline to extend additional
loans to Hungary increasing the possibility of
rescheduling.
- The regime halts or backs away from the current
reform program.
- The number of labor strikes and demonstrations
(presently at low levels) substantially increases.
- Should the succession process be triggered, politi-
cal infighting increases with criticism of individual
leaders made by various factions accompanied by
possible purges.
- A substantial increase in heavyhanded police mea-
sures such as crackdowns on Samizdat, greater
restrictions of travel to the West or contact with
Westerners, and more show trials of dissidents are
undertaken.
use, and juvenile crime rises significantly.
Implications
62. For the USSR. If our most likely scenario
proves true, the Kremlin may be faced with a more
troubled ally by the end of the decade. Tensions
between Hungary and the Soviet Union, particularly
over economic issues, may increase. Different perspec-
tives on trade and economic issues such as the scope of
CEMA integration, ruble versus hard currency pay-
ments, prices for raw materials from the Soviet Union,
the Soviet economy
64. Moscow, however, probably worries most about
the direction of political reform in Hungary. Soviet
tolerance for Hungarian economic reform has been
predicated on the tacit assumption that such reformist
tendencies would not spill over into the political arena.
Moscow would not allow-nor do we believe any
Hungarian leadership is likely to permit-a serious
challenge to the system of one-party rule. However, as
the Hungarian regime struggles with various social and
economic problems, Moscow might overreact to great-
er public debate concerning these issues, which proba-
bly would include calls by opposition groups for more
fundamental political reform. This could also lead to
somewhat greater tension between Budapest and Mos-
cow if the Kremlin did not perceive the Hungarian
leadership as moving quickly or forcefully enough to
suppress such demands.
65. There is also a possibility that frictions between
Hungary and Romania could intensify. As economic
and social strains in Romania increase, the leadership
in Bucharest might clamp down even more on per-
ceived antiregime behavior among minorities and
spark greater outrage in Hungary. A less-experienced
successor to Kadar, in turn, might not be as skillful in
defusing and containing this emotional issue in Hun-
gary. Budapest might miscalculate the reactions of its
own population, those of Romania, or the Kremlin,
leading to a nasty, temporary flareup of ethnic rival-
ries at a time when Gorbachev is trying to demonstrate
to the world that the Soviet house is now in order.
Faced with Soviet pressure, however, we believe
Budapest would tighten policy and eventually check
any popular protests
66. Hungarian economic and social problems will
deepen during a difficult period for Moscow-a time
when Gorbachev will wish to concentrate on Soviet
economic problems and not assume any more burdens
of his allies. While Hungary's deepening problems
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are manageable for Moscow, they will be part of
broader problems for the Soviet Union in Eastern
Europe and as such could take on extra significance.
The Kremlin has had little reason to be concerned for
Soviet interests in Hungary since Kadar consolidated
his regime. But the Soviet leadership may feel some-
what less secure about Hungary's future and its impact
on the Bloc in the same period when other East
European regimes are facing leadership transitions.
67. Despite increased strains over a number of
issues-particularly economic issues-in all major re-
spects Hungary will continue to fulfill its current
commitments to the Warsaw Pact. A serious crisis in
Budapest-Moscow relations-one that would require
the direct use of Soviet military pressure or at least the
very real threat of such use-is not likely. If such a
crisis did develop, however, it would most likely spring
from a Hungarian succession process that goes awry
and/or Soviet mishandling of the leadership transition.
68. For the United States. US-Hungarian relations
have developed rapidly since 1978, when the United
States returned the crown of St. Steven and granted
Hungary most-favored-nation status subject to annual
renewal. There has also been a steady intensification
of scientific, cultural, and high-level official ex-
changes. Hungary's value to the United States-as an
example of the "success" of the policy of differentia-
tion-has been heightened somewhat, in part, because
of the troubles in Poland, Romania, and to a lesser
degree, Yugoslavia.
69. If our most likely scenario proves true, however,
by the end of the decade Hungary may slip into more
social distress. Should economic stresses sharpen rival-
ries within the leadership as well as public discontent,
the great temptation will be to make party control the
top priority, which could mean resisting Western and
domestic pressures for liberalization. This might be at
least a temporary setback to the hope for incremental,
systemic reform in Eastern Europe, in general, and for
the gradual dissolution of the post-World War II
Soviet dominion in Eastern Europe.
70. Hungary's growing indebtedness to and econom-
ic need of the West, however, will continue to give the
United States and other Western industrialized coun-
tries some limited leverage. Too many of the Hungar-
ian elite have traveled or in other ways been exposed to
the United States and other developed Western societ-
ies. Too many Hungarian leaders are aware not only of
the benefits but also of the very necessity of their
country's international economic ties. Over the longer
term-and particularly if Gorbachev's program to
revive the Soviet economy fails-the economic attrac-
tion of the developed West and the United States may
increase even more, thus providing a better opportuni-
ty for Western leverage in Hungary.
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