Lesson for Hungary's Rulers: 'It's the Economy'

You don't have to venture far from the swank hotels, office buildings, and boutiques of central Budapest to see the underside of Hungary's exhausting transition to the free market.

A few blocks' walk to the south or east and you're again surrounded by decaying turn-of-the-century apartment houses and the tired, worried faces of the country's nouveaux poor: young, working-class parents and their children crowded into the grandparents' apartment; old men carefully dressed in threadbare shirts and ties picking through garbage bins; teenage thugs out running errands for the local mafia boss.

It's a scene repeated across Hungary, from the rusting steel towns of the industrial northeast to the grinding poverty of the farming villages on the Hungarian plains.

These are constant reminders that despite Hungary's emergence as Eastern Europe's leading economy, nearly 2 million people - a fifth of the population - live in poverty.

On May 10 and again on May 24, those people got a chance to express themselves at the voting booth in Hungary's two-stage general elections.

For the third time since the fall of the Berlin Wall, the electorate turned out the governing parties in favor of those promising an end to the seemingly endless agony of the country's economic transition. In the process, voters have likely ushered in an era of greater political instability for Hungary and its neighbors.

Who's in, who's out

The big winners are a bizarre electoral alliance of the center-right Fidesz, or Young Democrats - who favor free-market economic policies - and the Smallholders, headed by Jozsef Torgyan, a populist demagogue who champions strong state subsidies and protection for the countryside.

Their only common bond seems to be their distrust and criticism of the Socialist Party, the renamed Communists, which regained power in 1994. Both Mr. Torgyan and the likely next prime minister, Young Democrats leader Viktor Orban, have taken the present government to task for not doing enough to protect the rights of ethnic Hungarians in neighboring countries.

The Socialists fell victim to the central problem for would-be reformers in the new democracies of Eastern Europe. To put their economies in order, they must implement policies that cause short- and medium-term pain for most people, who then vote them out of power. Even in comparatively well-off nations such as Hungary, an extremely successful economic and foreign affairs performance is no guarantee of electoral support.

Four years ago, the Socialists won a landslide victory by promising a kinder, gentler reform process. Instead, the government earned praise from economists, diplomats, and foreign investors for slashing spending and domestic consumption, reducing inflation, and devaluing the currency. In the process, Hungary has experienced one of the region's most remarkable economic turnarounds, outpacing the Czech Republic and Poland.

No 'trickle down'

"Unfortunately Hungary's macroeconomic gains haven't translated into improvements in the lives of ordinary people, and often quite the opposite," says Budapest-based political analyst Tibor Vidos. "There wasn't enough time for the positive effects of their economic policies to reach the population."

Negotiations on a coalition between the Young Democrats and the Smallholders are expected to last two or three weeks.

With 148 out of 386 seats in the new Parliament, Mr. Orban's Young Democrats have the largest number, but not enough to form a government by themselves. They are considered unlikely to cooperate with the Socialists.

"If the Young Democrats had won the election outright then it wouldn't be such a problem, but if they form a coalition government with the Smallholders it will be very destabilizing for both politics and the economy," says political documentary filmmaker Peter Upor.

"The big question is if Orban can keep the Smallholders from making any of the big policy decisions," he adds.

Nationalism a concern

The election results are causing concern in neighboring capitals. Under the Socialist government, Hungary has made amends with its longtime enemy, Romania, which has a large ethnic Hungarian minority. This has opened the way for Hungary to join NATO in 1999 and improved both countries' candidacy for membership in the European Union.

But Romanian officials are nervous about the nationalist overtones of many campaign speeches by Orban and Torgyan, which may signal a less cooperative attitude.

To make matters worse, an extreme right-wing party headed by nationalist poet Istvan Csurka had a strong enough showing to earn parliamentary representation, giving him a platform for provocative speeches and saber rattling.

"Mr. Torgyan and Mr. Csurka will have louder voices, and what they say will give our own extremists fresh ammunition," says Zoe Petre, chief adviser to Romanian President Emil Constantinescu.

"It is with great sadness that we've seen our former friends in the Young Democrats emphasize nationalist themes. If they start to undo all that has been accomplished in [Hungarian-Romanian] relations, it will be a tragedy for the whole region," Ms. Petre says.

The future direction of Hungary's economy and its relations with its neighbors largely lie in Orban's hands. In his mid-30s, Orban would be the nation's youngest freely elected prime minister this century, and has never before held government office. Investors reacted with concern to the election results, with the Budapest stock exchange dropping more than 8 percent May 25.

Some analysts worry that, having defeated his leftist rivals, Orban may make ill-advised compromises with his populist suitors.

"Hungary's society and economy are very stable now," warns political scientist Attila Agh of the Budapest University of Economics. "The Young Democrats won't be the only losers if they try to undermine that stability."