The New Economic Mechanism (NEM) ( hu, Új gazdasági mechanizmus) was a major

economic reform Microeconomic reform (or often just economic reform) comprises policies directed to achieve improvements in economic efficiency, either by eliminating or reducing distortions in individual sectors of the economy or by reforming economy-wide polici ...

launched in the

People's Republic of Hungary The Hungarian People's Republic ( hu, Magyar Népköztársaság) was a one-party socialist state from 20 August 1949 to 23 October 1989. It was governed by the Hungarian Socialist Workers' Party, which was under the influence of the Soviet Uni ...

in 1968. Between 1972 and 1978, it was curtailed by the prevailing winds of Eastern Bloc politics. During the subsequent decade, until the

revolutions of 1989 The Revolutions of 1989, also known as the Fall of Communism, was a revolutionary wave that resulted in the end of most communist states in the world. Sometimes this revolutionary wave is also called the Fall of Nations or the Autumn of Natio ...

ended the era, the NEM's principles continued to affect the

Hungarian economy The economy of Hungary is a high-income mixed economy, ranked as the 9th most complex economy according to the Economic Complexity Index. Hungary is a member of the Organisation for Economic Co-operation and Development (OECD) with a very hi ...

, even in cases where the "NEM" name was not emphasized. Because of the NEM, Hungary in the 1980s had a higher ratio of

market mechanism In economics, the market mechanism is a mechanism by which the use of money exchanged by buyers and sellers with an open and understood system of value and time trade-offs in a market tends to optimize distribution of goods and services in at l ...

s to

central planning A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, part ...

than any other Eastern Bloc economy. The ratio was different to an extent that was

politically Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...

challenging to bring about in the Soviet sphere because of the

ideological An ideology is a set of beliefs or philosophies attributed to a person or group of persons, especially those held for reasons that are not purely epistemic, in which "practical elements are as prominent as theoretical ones." Formerly applied prim ...

mixture it required. The name

Goulash Communism Goulash Communism ( hu, gulyáskommunizmus), also commonly called Kádárism or the Hungarian Thaw, is the variety of socialism in Hungary following the Hungarian Revolution of 1956. János Kádár and the Hungarian People's Republic imposed polic ...

was jokingly (but tellingly) applied to this mixture. The Hungarian economy under the influence of NEM principles was widely viewed as outperforming other Eastern Bloc economies, making Hungary "the happiest barrack" in

barracks communism Barracks communism
''

Chinese economic reform The Chinese economic reform or reform and opening-up (), known in the West as the opening of China, is the program of economic reforms termed " Socialism with Chinese characteristics" and "socialist market economy" in the People's Republic of C ...

, in the sense that both were qualitative challenges to a

Stalinist Stalinism is the means of governing and Marxist-Leninist policies implemented in the Soviet Union from 1927 to 1953 by Joseph Stalin. It included the creation of a one-party totalitarian police state, rapid industrialization, the theory o ...

type of system—and thus that such reforms were not politically feasible in most of the Eastern Bloc.

Reform

The period from 1956–1968 was one of reform in Eastern Europe. The beginning of these transformations was marked by the

Hungarian Revolution of 1956 The Hungarian Revolution of 1956 (23 October – 10 November 1956; hu, 1956-os forradalom), also known as the Hungarian Uprising, was a countrywide revolution against the government of the Hungarian People's Republic (1949–1989) and the Hunga ...

, which resulted in

János Kádár János József Kádár (; ; 26 May 1912 – 6 July 1989), born János József Czermanik, was a Hungarian communist leader and the General Secretary of the Hungarian Socialist Workers' Party, a position he held for 32 years. Declining health le ...

’s placement as the communist leader of the

and the creation of the

Hungarian Socialist Workers' Party The Hungarian Socialist Workers' Party ( hu, Magyar Szocialista Munkáspárt, MSZMP) was the ruling Marxist–Leninist party of the Hungarian People's Republic between 1956 and 1989. It was organised from elements of the Hungarian Working Peop ...

(HSWP). For the first ten years of his rule, Kádár’s objective was to create a united Hungary, announcing in December 1961 that "those who are not against us are with us." Having reached social peace, Kádár turned his attention to economic improvement. On 7 May 1966, the Central Committee of the HSWP announced Kádár's plans for the reform of the economy, known as the New Economic Mechanism (NEM).Balassa, Bela. ''The Economic Reform in Hungary''. Economica, New Series, Vol. 37, No. 145. (Feb., 1970), pp 1-22. The reform is considered as "the most radical postwar change" of any

Comecon The Council for Mutual Economic Assistance (, ; English abbreviation COMECON, CMEA, CEMA, or CAME) was an economic organization from 1949 to 1991 under the leadership of the Soviet Union that comprised the countries of the Eastern Bloc along wi ...

country.Granick, David. ''The Hungarian Economic Reform''. World Politics, Vol. 25, No. 3. (Apr., 1973), pp. 414-429. The plan, which became official 1 January 1968, was a major shift to decentralization in an attempt to overcome the inefficiencies of

. The NEM represented a move away from the Soviet economic system of compulsory plan indicators in favor of a policy that states profits as the enterprise's main goal. The new economic policy was a "comprehensive reform of the economic system", creating market relationships among firms, using prices as allocative functions and firms responding to prices to maximize profits, and using profits to budget new investments.

Enterprises

The Central Committee's document on 7 May 1966 details changes in the firm's role under the new economic policy. The reform gave producers the freedom to decide what and how much they produce and offer for sale and to establish commercial or co-operative relationships. Buyers were also given the freedom to choose between domestic goods and imports. Additionally, firms were given greater autonomy in carrying out investments and hiring labor. As dictated by the Central Committee, success is to be measured by a firm's profitability. The decentralized structure of the New Economic Mechanism marked an improvement in the decision making process, allowing for basic decisions to be made at the local level without information having to be transmitted upward for a more centralized decision. The Hungarian government made 50.5% (enterprises 49.5%) of the investment decisions for the 68 billion

forint The forint (sign Ft; code HUF) is the currency of Hungary. It was formerly divided into 100 fillér, but fillér coins are no longer in circulation. The introduction of the forint on 1 August 1946 was a crucial step in the post-World War II stabi ...

invested in 1968, while in 1974 enterprises accounted for 53.1% of the decisions for the 128 billion forint invested.Das Gupta, K.K.. ''The Nature of Post-Reform Economic Management in Eastern Europe: The Hungarian Case''. Social Scientist, Vol. 9, No. 1. (Aug., 1980), pp. 3-17.

Prices

The New Economic Mechanism also aimed to create a more active role for prices.Hare, P.G. ''Industrial Prices in Hungary Part I: The New Economic Mechanism''.

Soviet Studies ''Europe-Asia Studies'' is an academic peer-reviewed journal published 10 times a year by Routledge on behalf of the Institute of Central and East European Studies, University of Glasgow, and continuing (since vol. 45, 1993) the journal ''Soviet St ...

, Vol. 28, No. 2. (Apr., 1976), pp. 189-206. A system of free prices reflecting market conditions was implemented. The government wanted flexibility, but also to combat inflation. To do so, they introduced a new practice of price controls declaring an item's price as fixed, limited, or free. ''Fixed prices'' were classified as material and basic intermediate goods. The price was fixed because of the good's impact on the economy and the overall need to ensure stability. The price was determined by ministries. ''Limited prices'' referred to particular products or products in some product group for which there were no substitutes, such as bread. It was applied on the average price over a period or a window within which prices were free to fluctuate. ''Free prices'' were assigned to goods that formed small parts of individual expenditures or were regarded as luxuries. The price reform allowed for prices better to reflect the cost of production and the valuation by the market, and to correspond more closely to "some measure of socially necessary inputs", helping reach market equilibrium.

Foreign trade

The goal of the New Economic Mechanism consisted of improving Hungary's economy to make Hungary a serious contributor to the international economy. In 1966 the Soviet Union accounted for 32% of Hungary's exports and 29% of its imports. Of Hungary's exports to Western Developed Countries, 42.7% was Food and Live Animals, 43.5% Manufactured Goods. Meanwhile, trade with Socialist Countries consisted largely of Manufactured Goods (81.3%). Conversely, Hungary's imports from the West were primarily Manufactured Goods (70.6%). Because of the pre-existing quota system which placed an emphasis on quantity, not quality, Hungarian goods were inferior and did not meet Western technological standards. Decentralization provided enterprises with the opportunity to better align with the world market by giving them more freedom in deciding which products and technologies to invest in and manufacture. Additionally, firms were paid for exports in the Hungarian currency equivalent of the foreign currency they earned, as the government aimed to involve enterprises in foreign markets and in improving the quality of goods produced. The new plan established direct connections between the foreign and domestic markets on the basis of an appropriate exchange rate. The primary concern of the New Economic Mechanism was in improving foreign trade and establishing a relationship between success in exportation and a firm's profitability.

References

{{Eastern Bloc economies Economic history of Hungary Hungarian People's Republic Decentralization 1968 in economics

Reform

Enterprises

Prices

Foreign trade

See also

References