By: Mallory Young
The Central and Eastern European Countries’ (CEEC) transition from socialist states to open-market democracies has been a long and arduous affair; however, many argue that CEECs are finally developing a solid economic standing. A global powerhouse since the early 2000s, Eastern Europe has seen continued economic growth and a steady influx of foreign direct investment (FDI), with a number of countries assenting to the European Union’s plan.1 Hungary, in particular, has been a quickly emerging market and a frontrunner among the CEECs’ transitions toward successful capitalist economies.2 Yet, Hungary continues to be plagued by regional inequality and ongoing limitations to innovation. This is even the case within the automotive industry, which is a significant sector of the national economy and one of the primary beneficiaries of FDI.
About The Author:
Mallory Young is a Masters of Public Administration candidate at Cornell University, where she’s concentrating in Economic and Financial Policy with a focus on the health care field. Prior to returning to school, she worked for the Pew Environment Group, a part of the Pew Charitable Trusts. Mallory worked with the communications team to track and influence environmental policy and increase public understanding of current environmental concerns. She has also had experience interning with the U.S. Department of Health and Human Services, Office of Budget, the Colorado Democratic Party, and Sprocket Communications, a boutique public relations and communications firm located in Denver, Colorado. Mallory has a bachelor degree in Anthropology from Mount Holyoke College.
An Overview of Hungary’s Socialist System and Transition to An Open Market
Hungary was a centrally planned state while under Soviet rule with the federal government dictating economic activity. The Soviet Union assessed its industry needs and allocated production centers according to state capacity, availability of natural resources, and relationships within the Eastern Bloc.3 Industries were then “built up and run in complex cluster-like web[s] of planning and competition.”4 Each region within the Soviet Union and its satellite countries became highly specialized in its delegated production focus. Hungary’s major production regions, Budapest and the Northeast, played a significant role in production and component manufacturing for the automobile industry. They supplied parts domestically, as well as to other socialist countries.5
Budapest became the center of Hungary’s industrial production during socialist rule as Europe’s postwar centralization of infrastructure development led populations to relocate to urban areas.6 Regional disparities had existed throughout Hungary’s history due to continuous governance by foreign powers, such as the Habsburgs or the Soviet state. These existing disparities were intensified by the relocation of industries to the nation’s capital as a part of postwar development policies. As a result, an increased amount of job opportunities and regional investment also moved to Budapest and the Northeast region.7
Government policies did relocate some industry to areas outside of Budapest in an attempt to relieve the overabundance of agricultural laborers in that area, as well as to limit the growing disparities between regions.8 While this move helped ease inequalities to a degree, regional differences ultimately grew within the socialist system due to the preferential treatment of high-producing regions. Additionally, beginning in the 1980s, growing financial uncertainty throughout the Eastern Bloc rendered Hungary’s regional concerns secondary to the fate of the national economy.9
In 1990, following the collapse of the Soviet Union, CEECs decided to adopt an open-market approach to economic development called “shock therapy.”10 Hungary employed this strategy, immediately implementing a democratic government accompanied by open-market regulations in an effort to develop an economically modern and viable nation.11 The CEECs’ implementation of shock therapy policies reflected their common desire to replicate the economic success of liberal Western nations.
An open economy guided by neo-liberal financial policies requires a “hands-off” approach to the market, and assumes that any deficiencies will be accounted for and remedied without a need for government intervention.12 Hungary’s new open-market approach made attracting FDI a top priority in order to encourage growth and improve economic stability. FDI was seen as an “engine of transition,bringing badly needed capital, new technology, efficient management, up-skilling, value-added production, jobs and economic growth to Eastern Europe.”13 The national leadership believed that foreign investment would not only address the innovation needs of the economy, but also reduce regional inequality throughout the country by bringing industry to less developed regions, and driving populations to new areas of production.
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