Taste for Capitalism Slips in Nation Once Fed on ‘Goulash Communism’ : Hungary: Formerly at the forefront of Eastern Europe’s transition to free market, it has failed to exploit advantages.

BUDAPEST, Hungary —  Economist Karoly Soos strikes a pensive pose when asked if this nation has lost its leading edge to the Czech Republic or Poland in the regional quest to overcome communism. He removes his musty spectacles, polishes them with the wider end of his tie, inspects a shirt button and ponders the ceiling before offering an answer.

“Don’t forget Slovenia,” the Parliament’s chief budget analyst finally replies. “Their economy is performing quite well too.”

While Soos is only half-serious in lengthening the list of Hungary’s post-Communist betters, this nation--the unquestioned front-runner only three years ago--has witnessed such a miserable downturn in recent months that even optimists are frowning.

Almost five years after Hungary triggered the wave of East European anti-Communist revolutions, the economic expansion that was supposed to follow political restructuring still looms out of reach. Privatization is stagnant, Western investors are looking elsewhere, and 20% inflation and 15% unemployment are both on the rise.

True, this former Hapsburg capital rarely passes a day without some new hamburger franchise or shoe store compounding the crowds and neon glitz of the traffic-clogged center. And Hungary tallied another record year for foreign investment by attracting $2.2 billion in 1993, thanks to an $875-million telecommunications deal ramrodded through just under the New Year’s wire.

But beneath Budapest’s veneer of prosperity, and despite Hungary’s head start with the 1970s-era reforms known as “goulash communism,” this nation of 10 million has failed to exploit its advantages, and officials both in and out of the government admit it.

Due in part to a controversial bank “consolidation” last month, Hungary’s combined domestic and foreign debt has increased to a disastrous 80% of gross national product, Soos says. Recession in Western Europe also contributed to a 25% drop in Hungarian exports last year, resulting in the first negative trade balance in the country’s short capitalist history, a staggering $3-billion deficit.

“Somehow there hasn’t been enough willingness of the government to achieve important results. Everyone was happy believing the role this government had when it came into power,” says Soos, a leading figure in the opposition Alliance of Free Democrats. It is one of several parties expected to benefit in May elections from the current government’s lackluster performance.

The center-right ruling coalition, led until last month by the late prime minister, Jozsef Antall, has prided itself on being the only freely elected government in Eastern Europe to survive a full term without being toppled by popular disenchantment. But as the end of the first four-year parliamentary term approaches, boasts of longevity by Antall’s Hungarian Democratic Forum are providing little solace for a ruling party that commands less than 10% support.

Antall died Dec. 12 after a long battle with cancer. He was swiftly replaced by a handpicked successor, former Interior Minister Peter Boross, who has vowed to uphold Antall’s policies and values in serving out the last months of his term.

Antall’s death deepened Hungarians’ gloom over their deteriorating circumstances. But the Forum’s popularity--or lack of it--has been little affected by his passing. Two liberal political factions, and even the successor party to the once-reviled Communists, have for months been getting more support in opinion polls than the Forum.

“You can’t find any sober person in Hungary who thinks this government will remain in power,” says Peter Szirmai, president of the National Assn. of Entrepreneurs. “It is impossible. There will definitely be a change. We just don’t know who or how.”

Szirmai’s group, which operates like a chamber of commerce in looking out for interests of private business, would be a natural power base for the purportedly right-leaning Forum, if Hungarian political forces would abide by their labels. But in the uncertain world that has unfolded since one-party Communist rule was thrown off, Antall’s Forum has shown itself to be more protective of social welfare than some socialist factions. It has pumped expensive subsidies into doomed industries to save jobs, pushing the national budget deep into the red to keep a bankrupt social welfare system afloat.

Most damaging to the Forum’s image and to the nation’s political balance sheet has been what both government and opposition politicians describe as a snail’s pace in privatization.

Other East European countries executed a rapid transfer from state to private ownership by distributing shares of public assets to citizens.

That has allowed the Czech Republic, where unemployment and inflation are both in impressively low single digits, to convert almost all of its property to private ownership. Even in Poland, which now has a Socialist-led government, the private sector accounts for more than half of the economy, while in Hungary the share has stalled around 40%.

In contrast with the distributive approach, Hungary sought to sell state-owned property to local or foreign investors. Many economists here still argue they were right to do so. “If you are given a dog, you don’t have the same attitude toward it as when you buy a dog,” says Erno Racz, director of privatization for the State Property Agency.

He and others who are dismissive of the practice of changing ownership by giving people something for nothing contend that only owners willing to plunk down their hard-earned money can provide the kind of self-interested management necessary for success. The problem, they now concede, is that there were far more enterprises on offer than there were interested and responsible owners.

The most promising companies sold early, especially those where former Communist Party bureaucrats were able to cash in on connections with investors abroad. More than a few former deputy ministers now earn handsome salaries managing private companies that were once part of the government offices they directed.

Privatization through sale or public stock offerings worked for state-owned firms accounting for about one-third of state assets, creating the foundation of a stable, if not thriving, Budapest stock market.

But toward the middle of the four-year term to which Antall was elected, the government decided to hold back 160 of the more profitable state operations from public offer in hopes of earning money for the state’s empty coffers. They include most public utilities, transportation and other vital services.

Despite that move, state-owned businesses performed abysmally in 1993, posting an overall loss and compelling the government to rethink its approach to privatization. “A bureaucracy is not able to act as a private owner. Never,” says Racz, who concedes that clinging to so much property was probably the government’s biggest mistake.

That left only the least attractive factories, like steel plants and other antiquated heavy industries, on the market for potential foreign or Hungarian investors. Most of the industrial white elephants have yet to be sold.

As much as 30% of the Hungarian labor force is still employed at the doomed enterprises--a colossal drain on the national budget as well as an unemployment time bomb set to go off as soon as this government or the next one is forced to closed them.

Critics of Hungary’s first post-Communist government also lament its formula for land privatization, which broke up agricultural cooperatives that had been the one sector of the socialist economy that performed well. Farm output tumbled by an estimated 40% last year.

To be fair, say opposition leaders poised to inherit control of Hungary’s flagging fortunes, much of the difficulty is the consequence of history rather than government bungling.

“All former Communist countries have problems with their economies,” says Tamas Deutsch, 28, a lawyer and vice president of the Alliance of Young Democrats, which tops the popularity polls and is widely expected to be part of the next government. “The previous 40 years of communism was more responsible for these problems than the last three or four years.”

Nevertheless, says Deutsch--whose jeans, pierced ear and fashionable stubble are almost a uniform among the party’s counterculture activists and yuppies--the Forum and its conservative partners must shoulder blame for fiscal indiscipline, putting brakes on privatization and tolerating wide-scale corruption.

The Young Democrats and their elders in the Alliance of Free Democrats have already worked out a political program that identifies economic growth as the highest priority for any government they might become part of.

Elections are still more than three months away--May 8 is the date considered most likely--and the vote distribution is far from certain. But the trading of coalition talks is already under way.

Fast on the heels of the Young Democrats is the greatly reformed former Communist Party, which renamed itself the Hungarian Socialist Party in the transition to multi-party rule that culminated in a March, 1990, election.

The Socialists, led by former Foreign Minister Gyula Horn, have been rising in the esteem of Hungarian workers nostalgic for the days when jobs were certain and prices were low.

Because at least nine parties are believed to have good chances of clearing the 5% minimum of voter support needed to win seats in Parliament, a coalition of at least three parties is likely if the current splintering continues.

Viktor Orban, the Young Democrats’ leader and likely candidate for prime minister, has loudly refused to take part in any coalition with the Socialists, saying that his liberal party, which only recently dropped a requirement that members be younger than 35, would rather join forces with the Forum than with the party that bequeathed Hungary its present crises.

But the Socialists’ early campaign theme of soothing transitional hardships is steadily winning support among those eager to hear that there might be one choice that would end their pain. Their growing popularity raises the prospect of repeating last year’s electoral results in Poland, where a reform-minded Socialist Party now heads the government.

Fears of such a popular retreat on market-oriented reforms explain part of the chill in Western investment here, which would have dropped by nearly half last year if not for the hurried selloff of 49% of the state telecommunications system to U.S. and German investors. The late-December deal, announced only two days after the bidding deadline, was pulled from the previously untouchable state property pool.

While Hungary is down after a year of disappointments, politicians from all sides say it is far from out. The Czech Republic, most concede, has outperformed Hungary in revamping industry. But they argue that they have nothing to be ashamed of in comparison with any other country in the former East Bloc.

“It would have taken any government more than four years to sweep away the ruins of 40 years” of Communist mismanagement, says Forum spokesman Karoly Herenyi. “Hungary has carried out much of the political and legislative reform yet to be tackled in Poland or the Czech Republic.”

Herenyi contends that the Forum is still in the running for partnership in the next government, and like most political forecasters he holds out the possibility of a grand coalition uniting the current ruling party with the allied Young and Free Democrats.

While alliances of such unlike factions in other countries often lead to parliamentary paralysis, Western diplomats here note that all leading parties have similar programs for economic recovery.

“Whatever the election outcome, the policies will have to get better,” says Szirmai, who has low expectations for this year but predicts economic growth in 1995. “Everyone, especially those in power, realizes it is time for change.”