Hungary is an early leader in attempts to establish a constitutional system, but in the waning days of the Hapsburgs, the country is part of the Austro-Hungarian Empire. Though Franz Joseph is king, each country has control of its domestic affairs, while foreign policy, defense, and their related financing are under joint control.
In June 1914, the heir to the Austrian throne is assassinated in Sarajevo, plunging Europe into war. In Hungary inflation skyrockets, wages are frozen, and food shortages mount. Two-thirds of Hungary's 3.6 million soldiers sent to war are killed. In October 1918 the exhausted people of Budapest, backed by the military, revolt and declare Hungary an independent republic. The monarchy collapses.
After World War I ends in defeat for Austria and Hungary, victorious powers signal their intention to give territory to Romania, Yugoslavia, and Czechoslovakia. The Hungarian Communist Party, including many ex-soldiers, intellectuals, and Jews, holds power for four months before an authoritarian government composed of military officers ousts them and begins a violent purge of Jews and leftists.
Hungary signs the Treaty of Trianon and loses massive amounts of territory, population, and natural resources, in particular timber, arable land, and iron ore. Budapest industries are cut off from raw materials, and for decades Hungary will rely on foreign trade. In 1920 parliament restores the monarchy but instead of a king names Miklos Horthy regent, a position he will hold till 1944.
Grain prices crash when the Depression hits, and the economy stumbles. Hungary seeks financial help from the League of Nations, which imposes strict financial controls. Unemployment increases; industrial production drops; the standard of living falls. By 1933, about one in five in Budapest live in poverty. The country moves to the right politically when Horthy appoints Gyula Gombos prime minister.
Alliance with Germany in WWII helps Hungary regain lost territories. In 1941 Hungary declares war on the USSR and the U.S. and deports Jews, which will continue off and on throughout the war. The government attempts to switch sides in 1944, and Hungary is occupied by Germany. The Soviet army invades and ousts the Germans in 1945. Postwar Hungary suffers the worst documented hyperinflation in history.
A coalition government chosen in 1945's free election begins land reform and nationalizes mines, electric plants, heavy industry, and some banks. The Soviet-backed Communist Party presses opposition to merge, and the Hungarian Workers' Party claims key offices. In '49 the Party holds an election, its candidates unopposed; adopts a Soviet-style constitution; and forms the Hungarian People's Republic.
Hungary adopts the Soviet economic development model: Agriculture is collectivized, with farm profits used to expand state-owned heavy industry. Wage controls and different pricing systems for producers and consumers fuel discontent as foreign debt and shortages grow. Prime Minister Imre Nagy attempts reforms after Stalin dies in 1953, but conservatives in his own HWP thwart him and reclaim power.
Public protests in Poland spark a popular uprising in Hungary. Nagy, renamed prime minister, unsuccessfully negotiates for the withdrawal of USSR troops from his country. Hungary quits the Warsaw Pact, appealing in vain to the UN and the West. The USSR crushes the revolt. Onetime Nagy supporter János Kádár flees to Moscow and announces the formation of a Soviet-backed government.
Severe reprisals follow the '56 uprising; some 200,000 flee to the West. Nagy is arrested, then executed. Kádár returns to Budapest, declaring a general amnesty and relatively liberal cultural and economic policies in an effort to overcome hostility and ensure political stability through prosperity. Collectivization persists, but now peasants are offered incentives to join cooperatives.
The New Economic Mechanism tries to overcome central planning's inefficiencies, motivate people to work harder, and reopen Hungary to foreign trade. A few small businesses are allowed to operate in the service sector. The economy grows steadily at first, with unemployment and inflation held in check, but when world oil prices jump in 1973, Hungary begins to reverse reforms and the economy stagnates.
Having signed a 1978 bilateral trade agreement with the U.S., Hungary has one of Eastern Europe's most liberal economies. But as investment falls, agriculture and industry decline. Consumer subsidies and unprofitable state-owned enterprises cause foreign debt to jump from $1 billion in '73 to $15 billion in '93. In response, the government institutes an income tax and joins the IMF and World Bank.
Hungary becomes the first Soviet bloc member to move toward Western-style parliamentary democracy. From 1989-93 the U.S. provides about $136 million for economic restructuring and private-sector development. In 1988 Communist leader Kádár is ousted; in 1989 legislation is adopted for multiparty parliamentary elections, thus establishing the Republic of Hungary.
A center-right coalition government wins the first free parliamentary election in 1990. Led by Prime Minister Jozsef Antall, it begins free-market reforms, succeeding particularly in making strides toward privatization. Prices of food, energy, and other consumer goods rise as subsidies are cut. Exports to the former Soviet bloc drop, unemployment rises, and the GDP declines by about 18 percent.
More than a third of Hungarians see their incomes drop after 1989. This decline in living standards is the major issue in the 1994 elections, and socialists gain power. The government continues reform and privatization, adopting an austerity program to reduce debt, deficits, and public spending. The moves are painful, but by 1997 results are evident: GDP grows by 4.6 percent that year.
In 1998 elections, a center-right coalition again takes power, led by Prime Minister Viktor Orban. He promises faster economic growth and lower inflation and taxes. But heavy winter snows, spring flooding, and conflict in neighboring Kosovo put pressure on the country's budget. The economy slows, though the GDP in 1999 is still a robust 4.5 percent. The country becomes a full NATO member in 1999.
Monetary policy drives down inflation with high interest rates; after the currency, the forint, is fully liberalized, it attracts speculators, pushing up exchange rates and pressuring Hungary's vital export earnings. About half of GDP now originates in the private sector. Former finance minister Peter Medgyessy leads a Socialist Party government. Hungary is confirmed to join the European Union in 2004.
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