The Revolution of 1956 discredited Hungary's Stalinist political and economic system and sent a clear warning to the leadership that popular tolerance for its policies had limits, and that if these limits were exceeded, popular reaction could threaten communist control. In response, regime leaders decided to formulate economic policies leading to an improvement of the population's standard of livings. Pragmatism and reform gradually became the watchwords in economic policy-making, especially after 1960, and policymakers began relying on economists and other specialists rather than ideologists in the formation of economic policies. The result was a series of reforms that modified Hungary's rigid, centrally planned economy and eventually introduced elements of a free market, creating a concoction sometimes called "goulash communism" (see Economic Policy and Performance, 1945-85 , ch. 3).

In late 1956, the party named a committee of mostly reform-minded experts to examine Hungary's economic system and make proposals for its revision. The committee's report marked the first step on Hungary's road to economic reform. Its proposals presaged many of the changes implemented a decade later, including elimination of administrative direction of the economy, introduction of greater enterprise autonomy, cooperation between private and collective sectors in agriculture, economic regulation using price and credit policies, and central planning focused only on long-term objectives. However, the committee's proposals were never really implemented. Some observers suggested that the party had solidified its power so quickly that it no longer needed to enact such drastic measures; others claimed that Soviet leaders opposed such reform until they ensured that the party (on November 1, 1956, renamed the Hungarian Socialist Workers' Party--HSWP) had consolidated its power and demonstrated a clear need for a fundamental economic change. During the chaos of the revolution, Hungary's collective farms lost about two-thirds of their members. Many left to become private farmers. In July 1957, Kadar appeased hard-liners in Hungary and abroad by agreeing to recollectivize agriculture, and in early 1959 the drive began in earnest. The regime combined force and economic coercion with persuasion and incentives to drive peasants back to the collective farms (see Agricultural Organization , ch. 3). The government abolished compulsory production quotas and delivery obligations and substituted voluntary contracts at good prices. It also permitted profit-sharing schemes and programs to promote technical innovation. The regime allowed peasants to retain sizable private plots and ample livestock and to choose between collective or cooperative farms. The farms also received substantial government investments. As a result, Hungary became the only country with a centrally planned economy where crop output increased as a result of collectivization. By 1962 more than 95 percent of all farmland had been collectivized either in the form of state farms or cooperatives. The collectivization drive deflected the hard-liners' criticism of Kadar for his advocacy of reform, and problems with the program's implementation, including excessive coercion of the peasants, later helped Kadar oust the hard-line agriculture minister.

By the early 1960s, Hungary was ripe for a political shakeup . Khrushchev had consolidated his position in the Kremlin and had begun a second wave of de-Stalinization, thus leading Kadar to believe that the Soviet leadership would support political changes in Hungary. Kadar replaced Ferenc Munnich as prime minister (who had served in that position since January 28, 1958), and thus assumed the top government post, as well as the leadership of the HSWP. He then dismissed other hard-line officials. Kadar's consolidation of power led to a more flexible, pragmatic atmosphere in which persuasion took on greater importance than coercion. Kadar relaxed government oppression and released most of those imprisoned for participating in the revolution. Soon Hungary became the leader of the reform movement within the Soviet alliance system. Kadar intended to provide the regime with some legitimacy and political stability based on solid economic performance. The Soviet Union demonstrated its support with its decision to withdraw its advisers to the Hungarian government.

Kadar next sought a modus vivendi with the population, summarizing the new policy with the slogan "He who is not against us is with us." As part of this "alliance policy," in 1961 he denounced the practice of making party membership a prerequisite for jobs demanding specialization and technical expertise. Kadar sought to remove opportunists who had joined the party solely for the status and economic benefits that membership conferred. Rather, Kadar wanted to open the government and economic enterprises to talented people who were prepared to cooperate without adhering to party discipline or compromising their political beliefs.

At the Eighth Party Congress of the HSWP in November 1962, Kadar supporters replaced Stalinists and incompetent officials in leading party positions. The congress also called for higher party recruitment standards, for elimination of political and class considerations in university admissions, and for allowing nonparty members to compete for leading public positions. Although the party still had influential conservative members after 1962, the Eighth Party Congress removed them from the party's policy-making core. As a result of these changes, by 1963 Kadar had acquired genuine popular support.

Plans for reforming the centrally planned economy steadily took shape after the Eighth Party Congress. Central Committee secretary Rezso Nyers, who supported a comprehensive reform rather than continued piecemeal adjustments to the economic system, took charge of economic affairs. The regime also appointed committees to prepare reform proposals. By 1964 the government had identified problems in the economy, including excessive investment, decreases in output and labor shortages in agriculture, misuse of inputs, hoarding of materials, and production of unsalable goods. Since the Treaty of Trianon, Hungary had depended on foreign trade, and in the early 1960s the government placed top priority on improving the trade with the West and the Comecon countries. Despite improving the terms of trade, however, by 1964 Hungary had accumulated a serious trade deficit, and the government could not slow imports without cutting material supplies and personal consumption. Officials realized that because Hungary had to boost exports, it would have to meet the needs, quality standards, and technological requirements of the world economy.

Data as of September 1989