IN Budapest one finds a city propelled by profit and ruled by a communist party. The ostensibly irreconcilable differences between Marxist-Leninist political leadership and decentralized, market-oriented economics have diminished - in Hungary, in China, and even, to a small degree, in the Soviet Union. But, to the extent that a communist party rules a system more capitalist than socialist, it leads less and less. This is not a paradox for academic discussion alone.
The ruling Hungarian Socialist Workers' Party (HSWP) can legitimize itself only by its performance. First Secretary Janos Kadar, installed in 1956 with Soviet approval, surely knew three decades ago that the HSWP would never win Hungarian hearts and minds. Yet the HSWP won a kind of grudging allegiance by implementing reforms that gave Hungarians a much higher standard of living.
``Goulash communism'' and ``socialism with a bourgeois face'' were only two tongue-in-cheek expressions used in the West to describe the past two decades of a mixed economy in Hungary. Formally known as the ``New Economic Mechanism'' (NEM), the reforms have involved two major packages of innovations, in 1968 and 1980, that have broadened considerably the range of private business in Hungary, lessened (but not eliminated) the state's role in planning production and controlling prices, and involved Hungary in a great many foreign trade and joint ventures with Western firms.
The NEM was out front in the reformist movement in communist states, enduring years of suspicion from Soviet observers. There was, of course, talk of economic reform in the USSR during the Khrushchev years. Then Edward Gierek launched Poland into frenzied borrowing and an industrial buildup that led Westerners to think that something positive was happening when, in fact, horrendous investment decisions were being made amid massive corruption.
Only in Hungary, however, was there a consistent commitment to moderate reforms that dismantled the rigid centralization of Stalinist economics. For Mr. Kadar, NEM was the only route to ensure leadership authority, and for more than a decade the strategy worked.
It worked because Hungary is a small country of 10 million people, because it has historic and intellectual ties to central Europe rather than the Slavic world, and because the West wanted NEM to survive.
However, structural limits exist that constrain where and how far the Hungarian economy can go. By the early 1980s Hungary had got into an economic malaise from which it may have grave difficulty extricating itself.
Hungary has borrowed heavily, and on several measures (per capita debt, for example) it now has the largest burden in Eastern Europe - over $14 billion. Borrowing to invest to create enterprises that produce for export is logical, if the productivity of labor is high and if the product has a natural market. If borrowing serves to prop up unproductive industry with no export market, however, the debt won't be paid off. Unproductive industry siphons off funds for investment elsewhere and, with debt payments, slows growth. Indeed, growth of the Hungarian gross national product had slowed to a crawl by the mid-1980s.
Thus far, the HSWP has been unwilling or unable to cut the umbilical cords from any number of money-losing enterprises. The notions of bankruptcy and unemployment are, in capitalism, the economic consequences of such poor performance. But for the HSWP to sanction more than extremely rare cases of officially recognized unemployment or bankruptcy would be to admit the inability of the party to ensure the survival of elements of the Hungarian economy.
Further, abandoning principles of socialist economics - by accepting bankruptcies, unemployment, the free exchange of currencies, etc. - reduces the distinction between the systems ruled by communist parties and Western capitalism. At some point a population may well ask whether the differences in economic systems still justify the authoritarian rule of a single party. With no fundamental differences between the economic policies of a communist state and a capitalist one, the raison d'^etre for communist parties would disintegrate.
Thus, we see the most crucial dilemma for communist party elites - the necessity of reform to ensure their legitimacy through economic performance confronted by the necessity of halting reform before the distinctions between socialism and capitalism disappear.
For the HSWP this dilemma is made critical because both alternatives connote political demands that Marxist-Leninist parties cannot accept with equanimity. These are the demands for pluralism and, implicitly, for political competition. From intellectuals and factory workers, the need for a more radical departure from central planning and state ownership to keep the Hungarian economy moving is recognized. At the same time, demonstrations involving 5,000 people on March 15, 1987 - the anniversary of the 1848 uprising - revealed a strong nationalistic sentiment intermingled with a desire for political liberties. Samizdat publications such as Beszelo and Demokrata articulate these demands as well. Expanding economic reforms might thus be interpreted as a positive response to demands for political pluralism, something clearly anathema to the HSWP hierarchy.
Hungary's prosperous appearance today belies a host of festering economic and political ``wounds,'' inflicted by the HSWP and its association with the USSR. For Hungary, however, the only path to revived economic growth is an extension of NEM that would weaken perceptibly the HSWP's ``leading role'' in society by widening the realm of policymaking and economic activity outside the socialist sector. Without deepening reform, however, Kadar and his successors face heightened economic problems that weaken leadership by undercutting legitimacy based on performance. For communist states there are no safe paths.
Daniel N. Nelson is a professor of political science at the University of Kentucky and a senior research fellow at the Hoover Institution at Stanford University.