How did Hungary's foreign debt reach such a magnitude that it became one of the heaviest ongoing burdens on the country's fiscal management? The question is, of course, primarily one of economics, but György Földes looks at it through the eyes of the historian, concentrating on its political aspects as he examines the three decades of debt accumulation between 1957 and 1986. [...]
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It was in the early '70 that the economic and political leadership decided to supplement the country's diminishing resources with foreign ones (Chapter Three, Strategic Debt Accumulation). Obviously, these supplementary resources had to come from the West. Investment contributions to CMEA projects, an innovation in the CMEA cooperation of that time period, drew on the country's resources, a loss which also had to be replaced. This is when the great development programs based on Western import and financing were formulated, which, along with the adaptation of advanced technology, were meant (among other things) to increase efficiency.
The next move was made by the world economy. No sooner had the program of planned debt accumulation got off the ground, the world-economic realignment triggered by the oil price explosion brought fundamental changes to the foreign trade environment which, by that time, had become vitally important for the Hungarian economy. The world adapted to the new situation, but Hungarian economic policy did not, and neither, unfortunately, did the Hungarian economy. Földes speaks of the economic policy of the years 1973-1978 as a period of "Escape into the Future" (Chapter Four), a time of following the old strategy under changed circumstances. The strategy of borrowing for capital investment without the necessary adjustments ended up costing more, much more than projected; it was during this relatively short period of time that the country's debt reached the astronomical levels it did, levels which created the kinds of problems that still prevail today. It took the economic policy makers five years to give up their development priorities and their standard of living targets. Their delay was due partially to the fact that the liquidity of the money markets made financing the debt relatively smooth. While a great deal happened during these five years - the introduction of the sliding scale within the CMEA, the experimentation with active price policies, the unsuccessful attempt to join the IMF - the population was largely unaware of there being any problems. There was job security, and the standard of living kept rising. At the same time, by 1978, the country's net foreign debt had reached a level equal to twice the value of the country's yearly convertible export.
Földes does not ask (though it's an interesting question): Why November of 1978? What prompted the leadership to change the course from continuing to raise the standard of living to maintaining the status quo, i.e., what prompted them to give absolute priority to equilibrium, for the first time in socialist Hungary's economic history? (See Chapter Five: Balancing). The fact that by that time all economic indicators pointed to a severe state of disequilibrium is not a sufficient explanation, for the situation had been much the same already in 1977. It is more likely that it was the difficulty of servicing the largely short-term debt on money markets of diminishing liquidity that was the straw that broke the camel's back. In reading the party documents quoted by the author, one gets the impression that the Comrades themselves were not fully aware that debt accumulation (the level and cost of indebtedness) and its financing were two distinct economic problems.
The financing problem became permanent; then, after Afghanistan, the collapse of the Polish economy, and the onset of the developing countries' debt crisis, the liquidity situation became critical, putting extra pressure on the Hungarian economy as well. There could be no relaxing of the strict regulations aimed at creating equilibrium; as a result, the level of indebtedness stabilized, and even decreased somewhat. Luck also had something to do with Hungary avoiding insolvency, for at the time that the country resubmitted its application for membership in the IMF, there was no clear indication of the drastic worsening of the financing problem as yet. Membership, on the other hand, opened up borrowing opportunities which tided the country over the most critical times.
Chapters Four and Five are nearly twice as long each as the first three chapters taken together, indicating, as it were, how much more severe the debt problem had got, and indicating also that there is a great deal of source material available on the subject.
The temporary halting of the debt-monster carried an enormous price tag. In a society not accustomed to recession, social tensions grew to an unprecedented high, and the lobbies for continued development became louder than ever. Chapter Six (Escape into the Future, for the Second Time) tells of the final efforts to speed up the economy before the regime collapsed. I find it somehow surprising that Földes seems to put all the blame for initiating this last turn of events on Kádár personally. The outcome, at any rate, is well known: in two years, Hungary's foreign debt rose to twice its earlier level, without there being any appreciable economic growth. This is where the story ends. Földes does not talk about the few years immediately preceding the changeover.
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