State regulation, enterprise behaviour and the labour market in Hungary, 1968–83

In Hungary the centralisation of economic management began in the late 1940s. Most enterprises were nationalised, small-scale industry and retail trade were practically abolished, peasant farms were collectivised. The enterprises were directed by an hier archical state apparatus. The main instrument of economic management was the system of obligatory plan targets. These were disaggregated to the enterprise level, and pre scribed the input and output levels as well as product mixes. The centralisation of econ omic management and the plan targets were aimed at the forced industrialisation of a predominantly agricultural country with significant labour reserves, at the expense of the population's living standard. The rush for growth and the system of plan targets led to low efficiency and to poor quality goods and services. As a result of economic troubles and tensions in the early 1960s, politicians and planners generally agreed that it was necessary to carry out radical changes in the system of economic management, and in 1968, economic reform was introduced. Plan targets were abandoned and a normative system based on financial regulators was introduced to control the economy. It was a commonly held view that this normative regulation, which meant identical treatment for all enterprises and indirect means of controlling market processes, would improve the efficiency of the enterprises and increase their respon siveness to the market. The autonomy of enterprises increased, they were allowed to determine their input and output levels and their product mix, and to retain part of their profits for investments and wages. The price system became more flexible and, although some prices continued to be set centrally, the scope of free prices was extended. How ever, along with the decentralisation, the revitalisation of the market and the normative central regulation, devices were also built into the system aimed at maintaining the role of the state as the main resource allocator. The post-reform history of the economy can be divided into three periods (Table 1 and Fig. 1). The first period (1968-71) was characterised by a rapid increase in national income and in living standards, and a slight increase in the price level. Employment con tinued to rise but with the gradual exhaustion of labour reserves labour shortages began to appear in large cities and industrial centres. The performance of the economy and the quality of the products undoubtedly improved. Nevertheless, the original ideas for reform only partially materialised. As a result of the uncertainties of central financial