Hungary Gets The Message From Mexico: Reform Or Else

Since throwing off the Soviet yoke in 1989, central Europe's emerging democracies have been struggling to find a comfortable mix of socialism and capitalism. They've opened up their markets but tried to hang on to the state-paid social benefits that came with the old communist system. Nowhere has nostalgia for the past been stronger than in Hungary, whose Prime Minister, Gyula Horn, served as a top official in the old goulash regime.

Since taking power in 1994, Horn has dithered on reform, driving a succession of free-market aides from office. But the Mexican crisis has blown the whistle on this game. Foreign investors took a look at Hungary's growing $28 billion foreign debt, forced up interest rates, and basically told Horn that if he didn't get public finances under control, Hungary wouldn't get another dime. "We are talking about a credibility crisis," says Lajos Bokros, whom the chastened Horn has just appointed Finance Minister. "Nobody will support us if we don't put our own house in order."

IN THE WORKS. Bokros, a former stock exchange head, and the new National Bank of Hungary chief, Gyorgy Suranyi, are dishing out a dose of reality. The well-regarded twosome, who have been soulmates since bunking together in the Army in the 1970s, have already come up with an emergency package. It aims to cut the $3.7 billion current account deficit by hiking tariffs and to breathe some life into exports by devaluing the forint. They've also jacked up interest rates to put the squeeze on 20% inflation.

Bigger things are in the works. They will soon try to get parliament to sign off on a new budget that slashes the $3 billion deficit almost in half. Among the sacred items to be trimmed are the child-care allowance, maternity leave, and unemployment insurance. Bokros also wants to eliminate 15% of the bloated federal bureaucracy. He eventually aims to put in private pensions and insurance schemes.

So far, their plan is getting good reviews from investors. "It'll give more oxygen to Hungarian industry," says Peter Wohl, vice-president of big lightbulb maker GE-Tungsram Co. in Budapest. But the public doesn't like the benefit trims. A recent poll found two-thirds against the plan.

Bokros' blunt-spoken approach isn't going to help. "My philosophy is quite simple," he says. "You can only have more transfers to the needy after you have a well-balanced economy."

NEW BOYS. Such comments have not endeared him to the old guard. Two leftist Cabinet officials have already resigned over the plan, and the powerful labor unions are quibbling over the details--though they acknowledge the need for cuts.

So far, Horn is backing his new boys, who are technocrats without apparent political ambitions. His support gives the reformers a pretty good shot at success, because his Socialist party has a solid, 54% majority in parliament. "There is no option," says Laszlo Pal, the Socialist Industry & Trade Minister.

But further tests of Horn's commitment will come when Bokros tries to rev up the privatization program that Horn has allowed to languish. With no election scheduled until 1998, Horn can afford to take some risks.

Hungary's new reform efforts will be closely watched by neighboring countries such as Poland and the Czech Republic, which face similar dilemmas. With money tighter than ever, there is a lot more urgency to figure out what to keep from the old system--and what to discard.

Before it's here, it's on the Bloomberg Terminal.