End of the liberal dream: Hungary since 1989

Issue: 124

Adam Fabry

This year marks the twentieth anniversary of the political revolutions that shook Central and Eastern Europe.1 The authoritarian one-party regimes that had dominated societies in Bulgaria, Czechoslovakia, East Germany, Hungary, Poland and Romania since the late 1940s disintegrated almost overnight, and with remarkably little resistance, under the pressure of economic crisis and public discontent.2

With the Berlin Wall in rubble, many commentators drew the conclusion that liberal democracy and capitalism represented the only viable future in Central and Eastern Europe. According to this view, which quickly became hegemonic in East and West alike, the downfall of Stalinism symbolised “the failure of an entire system”;3 the ultimate proof of the market’s superiority over central planning as an organisation of society.4 This idea was most famously summed up in a highly influential article by the neoconservative American philosopher and political economist Francis Fukuyama which argued that the demise of Stalinism represented the “unabashed victory of economic and political liberalism”, marking not only the “triumph of West”, but also “the end of history as such…the end point of mankind’s ideological evolution and the universalisation of Western liberal democracy as the final form of human government”.5 In many ways Fukuyama’s article summed up the spirit of the time.6 The political and economic conclusions of his argument were simple enough. Accordingly, socialism, as a political philosophy as well as a project of human development, was now only a memory from the past.7

Such arguments came to provide the ideological basis for the neoliberal reforms in Central and Eastern Europe after the toppling of the Stalinist regimes. At the heart of these reforms was the idea that the combination of political reforms and a rapid liberalisation of the economy would bring not only greater individual freedom, but also economic success and higher living standards to the crisis-ridden economies of the region.8 Hungary, with its history as a front-runner of market reforms within the Soviet Bloc, was generally considered to be a future model for successful transformation in the region.9

However, two decades on, the outcome of transition-associated adjustments in Hungary has been far from satisfactory. The effects of neoliberal restructuring on Hungarian society have been at best highly uneven and more often devastating. The country has seen a significant decline in economic output, a sharp rise in unemployment (a factor that remained unknown prior to 1989 as a result of the enforced nature of labour under the authoritarian regimes), declining standards of living for the majority of the population, growing social inequality and the development of poverty as an emblematic feature of Hungarian society.10 Trends elsewhere in the region point in the same direction.11

As if this were not enough, the current world economic crisis has placed further strains on the already beleaguered economies of the region. The Hungarian economy has been particularly badly hit by the downturn and the government was forced to ask for a $25 billion bailout from international lenders when faced with a mounting debt crisis and a potential risk of a “run on the banks” in late 2008.12 Adding to Hungary’s woes, its economic crisis is rapidly turning into a political crisis: the ruling socialist-liberal coalition is in complete disarray, and the recent European Parliament elections confirmed the rise of the extreme right, with the fascist Jobbik Party coming third in the elections with around one sixth of the overall vote. But Hungary’s problems are nowadays not only a cause for concern among its own politicians. Increasingly its fate is being watched with interest and alarm in Washington and Brussels as well.13

Between state capitalism and the market

Arguably, the question of why the liberal dream of 1989 turned out so badly in Hungary cannot be understood through the lenses of a nation-state perspective but must instead be understood in relation to recent changes in global capitalism.

For the region as a whole, dark clouds began to gather more than two decades before the fall of the Berlin Wall with the structural crisis of global capitalism in the early 1970s and the end of the long period of post-war economic boom.14 Leaders across the world were faced with lower returns on investment and the reappearance of mass unemployment. However, the response taken to the crisis differed markedly between the two sides of the Berlin Wall.

In the West leaders chose to abandon Keynesian policies of state-led economic development, which had been accepted as “self-evident” within economic policymaking since the late 1940s, instead opting for “the discipline of the world market”.15 In order to restore profit levels to their pre-crisis levels, governments in the West allowed capital to break free from the fetters of national regulation. First evidenced in Washington and London, this shift in policymaking accentuated what has sometimes been described as “the logics of competitive deregulation”,16 with other governments compelled to follow similar policies in order to maintain their competitive position within the world system. While these changes contributed to a spectacular growth and centralisation of international finance, and the rise of transnational corporations, they placed increasing difficulties on the economic policymaking of nation states.17 The age of the Keynesian “regulatory state” was rapidly giving way to what Phil Cerny has described as “the competition state”, whose primary objective was to adapt the domestic economy to the exigencies of the global market.18

The initial reaction in the East was to resist the pressures of the world market. However, as it turned out, this policy only came to reveal the shortcomings of the state capitalist economies. Internally, the structure of the command economies remained heavily in favour of industrial production over specialisation in goods and services.19 As Mike Haynes has pointed out, the Soviet Bloc economies “developed over-large industrial sectors which gave them the base for military and great power competition, but which made little sense from the view of the world market as a whole”.20 Externally, pressures to comply with Soviet interests meant not only that the integration of the East European economies into the world market remained limited, but also that the mode of integration was fundamentally flawed. And by the late 1970s the effects of the slump in the world economy became increasingly evident. Faced with the fear of growing public discontent, the leaders of the one-party regimes began to seek alternative approaches, eventually looking to seek greater integration with the world economy.21 This was to be achieved through a policy importing technologically advanced goods from the West in return for exports of industrial and agricultural products. As often before, Hungary proved to be a regional forerunner, with its Western imports growing at a faster rate than those from other Soviet Bloc states.22 But the question that remained was how this increasing trade was to be paid for.

East European governments sought to overcome the problem by seeking loans in convertible currencies from Western countries, banks and international organisations.23 As a result, their debt burden rose significantly from the 1970s and onwards. Once again Hungary proved to be a model, this time in a negative sense: its convertible currency trade deficit amounted to more than $3 billion by 1978.24 For the region as a whole, the negative trends showed no signs of lessening in the 1980s (see table 1).

Table 1: The growing debt burden of the Eastern Bloc ($ billions)
Source: OECD

1985 1986 1987 1988 1989 1990
Bulgaria 1.6 3.6 5.1 6.1 8.0 9.8
Czechoslovakia 3.6 4.3 5.1 5.6 5.7 6.3
Hungary 11.5 14.7 18.1 18.2 19.4 20.3
Poland 28.2 31.9 35.8 34.1 37.5 41.8
Romania 6.5 6.3 5.1 2.0 -1.3 1.3
USSR 15.8 16.6 25.1 27.7 39.3 43.4
Total 67.3 77.5 94.3 93.8 108.9 122.9

Leaders of the one-party regimes were now increasingly caught in a bind as external pressures from the world economy came together with growing demands for reforms—from within the ruling bureaucracy as well as by opposition groups.25 The election of the reform-minded Mikhail Gorbachev in March 1985 as the general secretary of the Communist Party of the Soviet Union initially seemed to ease this pressure. Gorbachev’s policies of glasnost (openness) and perestroika (restructuring) sought to undertake fundamental reforms of the command economies.26 The idea was to allow greater political freedom, while at the same time seeking to remove corruption by introducing market incentives in the economy.27 But Gorbachev’s reforms opened a Pandora’s box among the ruling layers of the bureaucracies within the Soviet Bloc.

Once more developments in Hungary were to be an indication of things to come throughout the region. Its ruling class started to show increasing signs of insecurity and desperation in the face of the country’s mounting debt problems. In what was somewhat of a last-ditch effort to save its rule through methods of social engineering from above, the ruling party (MSZMP) introduced economic reforms in 1985 and 1986 which enabled managers of state enterprises greater freedom in hiring and firing workers, while also introducing a bankruptcy law and unemployment benefits.28 However, as these efforts failed, voices for change were raised, not only in society in general,29 but also within sections of the MSZMP. Reform-minded nomenklatura30 members started to raise demands for the removal of the ageing party leader, János Kádár, and he was replaced as general secretary by the reformist Károly Grósz in May 1988. There then followed a period of fierce power struggle within the MSZMP as “hardliners” and “reformers” fought for the control of the party.31 However, rather than strengthening its position, these internal struggles made it increasingly difficult for the ruling party to uphold its hegemonic role in society—instead allowing opposition forces to grow increasingly assertive.32 The ruling party was increasingly squeezed from two sides, and within a year the bureaucracy had decided to “jump before it was pushed”.33 It initiated discussions with a combination of opposition forces from June to September 1989 over the dismantling of the one-party regime and the passage to a multi-party system.34 In the autumn of 1989 the parliament accepted a law transforming Hungary into a parliamentary democracy and from 23 October the country was no longer a “socialist people’s republic”. The door was now open for Hungary to step into the wonderland of liberal democracy and free-market capitalism.

The logic of economic reform

During the first couple of years following the end of the one-party regime the mood in Hungary was generally optimistic. People believed it was possible to enjoy the same freedom and living standards as their neighbours in the West.35 Some of the country’s newly elected leaders made overblown claims about the possibility of “convergence” with Western Europe in the not too distant future.36 The hopes of the time were summarised well by the author and politician Miklós Vásárhelyi. In 1989 he told the New York Times:

First of all there will really be a Europe again. The countries of Central and Eastern Europe will finally get an opportunity to unite with the West. We will begin to live under the same conditions. It will take time, but socially, politically and economically we will achieve what the Western countries have already achieved. The door is now open.37

The answer to how to achieve this was provided by mainstream economists, policymakers and international financial organisations, such as the IMF and the World Bank. Building on a combination of conservative and liberal political economic theory, derived from the likes of Friedrich Hayek and Milton Friedman, they argued that “catching up” with the West would be achieved through a quick and radical overhaul of the economy. What the Austrian economist Joseph Schumpeter had called “creative destruction” would cause previously unproductive sectors of the state capitalist economies to disappear, making room for new innovative capitalists that would provide the basis for a period of sustained long-term economic growth.38 To this end, emphasis was placed on the rapid removal of controls on the economy, marketisation and privatisation. Governments were encouraged to pursue what became known as “shock therapy” reforms, which encouraged them to move away from their state capitalist habits of active state intervention towards pursuing restrictive fiscal and monetary policies. However, while this model provided a rather different view of the role of the state within the economy than the “regulatory state” envisioned by Keynesianism, it is important to underline that it did not argue for a complete abandonment of the state’s capacities. On the contrary, adherents of the neoliberal paradigm have continuously stressed, in theory as well as in practice, the need for a “strong state” in order to provide for a suitable environment in which “growth-promoting mechanisms” could work properly.39

To its supporters, the success of neoliberal transformation was virtually a certainty. As the liberal Hungarian economist László Csaba put it, this “market-based approach to development”40 would allow for a fast integration with the global economy, which in turn would bring economic success and higher living standards to the peoples of Eastern Europe.41 On the basis of these claims, policymakers throughout the former state capitalist economies fell for the lure of the market.

As the front runner of market reforms, Hungary was generally predicted by experts in the West to develop into a future model for successful political and economic transformation in the region.42 The dominant political forces in the country believed neoliberal reforms were going to spur the arrival of foreign direct investment, and thereby transform Hungary into the financial hub of Central Europe.43 Reality, however, has proved to be radically different from the neoliberal dream.

“Creative destruction” without creativity

With two decades of hindsight, the results of these transition-associated adjustments opening up the former state capitalist economies to the circuits of global capital have been far from impressive. For the region as a whole economic restructuring in the 1990s contributed to an unprecedented collapse in output.44 The results of the first decade of economic transformation were so bad that even the World Bank, which throughout the period remained one of the staunchest advocates of free-market capitalism in the region, had to admit, “The magnitude and duration of the transition recession was, for all countries, comparable to that for developed countries during the Great Depression, and for most of them it was much worse”.45

The 1990s became something of a “lost decade” for the Hungarian economy. There were prolonged crisis and economic stagnation, with output only returning to its 1989 level by 1999.46 The economy finally started to recover after 2000, growing by a rate of 4 percent annually until 2006. Then it hit new problems with the introduction of further austerity measures, instituted in the name of “global competition” as well as to curb the country’s growing budget deficit, which reduced annual growth to less than 3 percent.47 The current economic downturn has brought an end even to this meagre growth. In 2009 the economy might contract by as much as 10 percent and experts see few, if any, signs of recovery ahead.48

As a result of the sharp drop in production, chronic unemployment developed into an emblematic aspect of the Hungarian economy.49 The foreign capital and new technologies attracted by the abundance of cheap and well qualified labour did not in any way prove to be enough to counterbalance the jobs being shed. Between 1989 and 1997 the Hungarian labour force decreased by 1.5 million, from 5 million to 3.5 million, and the official unemployment rate is currently 9.6 percent.50

Economic restructuring also contributed to a major decline in living standards and general welfare until 1995, with little recovery afterwards.51 Real wages only reached their 1980s level by 2003, and according to a study conducted by the United Nations Development Programme in 2003, the number of poor people was as high as one third of the Hungarian population (nearly three million people).52 As a telling indication of the widespread malaise characterising Hungarian society today, meat consumption still lags behind its 1980 level (which is even more telling considering that Hungary is a country renowned for its preference for meat).53

To make things worse, welfare provisions have been strenuously cut by both social-liberal and right wing governments since the transition to the free market. Fees have been introduced in public hospitals and unemployment benefits reduced to six months only, and now the current global crisis is further raising unemployment and reducing real wages, while the government is promising to carry out further cuts in social spending.

Adding to Hungary’s woes, its post-transition depression has increased class, ethnic and regional inequalities. Recent figures on class inequality levels show that the ratio between the highest and lowest 10 percent of per capita household income has increased from 7.5 in 1992 to 8.4 in 2003.54 The major beneficiaries of the economic transformation have been a small minority of the population (10 to 12 percent), which has clearly improved its status in the new system.55 Comprising a combination of former nomenklatura members benefiting from privatisation schemes and those who have gained from the arrival of foreign multinationals, the members of this group today live similarly lavish lives to their counterparts in other parts of the world. In addition to this group there is the middle class (constituting about 30 percent of the population) for whom the transformation has been something of a mixed blessing.

Apart from these two groups there are the working class and the “deprived”. Comprising around 40 percent of society, the working class has been severely hit by the effects of the economic crisis and the narrowing labour market in the 1990s.56 The situation has hardly been better for those workers who managed to survive the initial transition depression. Since 1989 these workers have experienced a significant rise in exploitation, as evidenced by an increase in working hours while real wages have fallen. At the bottom end of the scale are the remaining 20 percent in society—the “deprived”. Mainly comprised of peasants, unskilled manual workers, the unemployed and homeless people, they have fared worst as a result of transformation and face little, if any, hope of improvement in the future.57

Poverty also has an ethnic dimension in Hungary.58 The economic transformation had catastrophic consequences for the Roma population. The employment rate of the Roma dropped by more than half, falling from 75 to 30 percent in the period between the mid-1980s and mid-1990s.59 The incidence of poverty is almost seven times as high for households with a Roma head of the family as for others.60 Today the Roma are not only exposed to the dangers of unemployment and poverty, but also face widespread discrimination and segregation, as well as increasingly serious threats to their lives.

Finally, regional differences tend to further accentuate inequalities within Hungary. While Budapest and the western parts of the country bordering Western Europe have received the bulk of investment flowing into the country since 1989, other parts of the country have seen little of this. Particularly badly hit have been the industrial areas in the north and the east, which suffered heavily from “the collapse of heavy industrial production and mining soon after 1989”.61 In a striking parallel with the areas of Britain that have seen the greatest job losses in manufacturing and the mining industry, these are today the areas of Hungary that exhibit the highest levels of unemployment, poverty and related social problems.


The contradictions involved in Hungary’s post-1989 development need to be viewed in the light of recent changes in global capitalism, a process that has involved a “shift from national capitalism to multinational capitalism”.62 This change, which came about as an attempt by nation-states to restore profits to the levels enjoyed prior to the prolonged economic crisis of the 1970s, contributed to the growth of global trade and financial markets, as well as the rise of transnational corporations. At the same time “the logics of competitive deregulation”63 heightened the contradictions of capitalism. These contradictions of capitalist expansion, between a tendency for “unification” and a counteracting tendency to “divergence”, were brilliantly captured by Leon Trotsky:

By drawing the countries economically closer to one another and levelling out their stages of development, capitalism…operates by methods of its own…by anarchistic methods which constantly undermine its own work, set one country against another, and one branch of industry against another, developing some parts of world economy, while hampering and throwing back the development of others. Only the correlation of these two fundamental tendencies—both of which arise from the nature of capitalism—explains to us the living texture of the historical process.64

In the light of this, it becomes clear that Hungary’s thorny road since 1989 has not been the result of “bad policies” (in the shape of neoliberal reforms) or “corrupt governments” (though these factors have certainly added to Hungary’s woes), but of the general contradictions inherent in capitalism. To make things worse for small countries such as Hungary, recent shifts within capitalism, together with its corollary feature of imperialist rivalry, “itself…the outgrowth of the workings of capitalism’s inner tendencies to expansion and centralisation”,65 have tended to accentuate the burdens of “backwardness”.

This fact has been brutally reinforced by the current crisis, which has left the small and fragile economies of Central and Eastern Europe as “the weakest link in the capitalist chain”. In Hungary “the whip of external necessity” has led the government to vehemently pursue its policies of downsizing, privatisation and economic liberalisation in the desperate hope that these would sooner or later help to turn the economy round. But such policies only worsen the situation. The economy is in virtual freefall; living standards are falling; and social inequalities are rising. Public discontent with the current state of affairs is near total. The extreme right has been able to mobilise parts of the middle class, blaming “conspiring Jews” for causing the crisis, and “benefit scroungers” (and the Roma in particular) for supposedly stealing the little money still left in the state’s treasury. At the same time the working class is left without any political representation, making it particularly vulnerable to attacks from the ruling class.

To offer a progressive alternative to the forces of reaction, a return to classical Marxism seems to be particularly pertinent. Building on the works of Karl Marx, Trotsky and others within this tradition, we can not only develop a stronger understanding of the reasons behind Hungary’s uneven development since 1989 but also awaken the working class, which still remains, in Trotsky’s words, “the initiator of the liquidation of world capitalism”.66


1: I am grateful to Gareth Dale for comments on earlier drafts of this paper.

2: With the exception of Romania, the absence of large-scale social conflict and violence was a remarkable feature of the East European revolutions. In fact, as Tony Cliff noted, “there were fewer violent clashes in East Germany, Czechoslovakia and Hungary during the fall of these regimes than there were between the police and striking miners in Thatcher’s Britain of the mid 1980s”-Cliff, 1996, pix.

3: Jeffries, 1993, p1.

4: Åslund, 2002; Kornai, 2006.

5: Fukuyama, 1989, pp3-4. Interestingly, Fukuyama’s article actually preceded the political upheavals of 1989, written as it was in the summer of that year.

6: For a wider discussion on Fukuyama’s article, see Callinicos, 1991.

7: Callinicos, 1991, p10.

8: Åslund, 2002; Kornai, 2006; Marangos, 2004; Sachs, 1990; Williamson, 1992.

9: Jeffries, 1993.

10: Eurequal, 2006; UNDP, 2003; World Bank, 2002.

11: The works of Dale, 2004, and Hardy, 2009, point to similar trends in former East Germany and Poland.

12: The fear of a bank run was, as Gideon Rachman recently revealed in the Financial Times, a very real one. Those with a weak heart for conspiracy theories or superstitions might even read something into the actual date when this fear was supposed to have reached its climax: Friday 13 March 2009-Financial Times, 11 May 2009.

13: For example, referring in particular to the economic woes of Hungary and Ukraine, US president Barack Obama was warning Americans in a speech in March about the dangers of “these enormous ripple effects…wash[ing] back on to our shores”.

14: Aldcroft and Morewood, 1995. See also Brenner, 2006.

15: Maier, 1997, p91, in Dale, 2006, p208.

16: Dale, 2004, p193.

17: Harman, 1984, p116.

18: Cerny, 1990, in Dale, 2004, p14.

19: Aldcroft and Morewood, 1995, p126.

20: Haynes, 1994, p129.

21: As argued by Dale elsewhere in this journal, this decision, while raising the vulnerability of the Soviet Bloc economies to the fluctuations of the world market, was not a completely irrational one.

22: Köves, 1985, p101.

23: Aldcroft and Morewood, 1995, p157.

24: Swain, 1992, p131.

25: The most visible example of the growing unrest were the ship workers’ strikes that shook Poland in 1980-1, which gave birth to the opposition Solidarity movement.

26: Aldcroft and Morewood, 1995, p177.

27: Aldcroft and Morewood, 1995, p178.

28: Aldcroft and Morewood, 1995, p188.

29: The Hungarian opposition became increasingly organised following the creation of the first opposition party, the Hungarian Democratic Forum, in 1987.

30: This term is used here to refer to the lists of senior positions in the party, state and economy-Dale, 2006, p10.

31: This struggle is explained in detail by Ripp, 2006.

32: By 1988 the signs of the MSZMP’s moral crisis were evident: membership diminished by 7 percent in the first half of the year, while among those members who remained there was a growing tendency to push individual interests, instead of those of the party as a whole, resulting in growing corruption within the party-Ripp, 2006, pp242-249.

33: Aldcroft and Morewood, 1995, p195.

34: These discussions became known as the “Round Table Discussions”.

35: GM Tamás has described the years between 1988 and 1992 as being “a period of social imagination out of which nothing much came but it was a moment of perceived and hoped-for freedom”-Tamás, 2009, p28.

36: While only in my early teens at the time, I still remember Hungarian politicians seriously arguing in the early 1990s for the possibility of “catching up” with the West within a decade. Towards the end of the decade the time frame of this “promise” was changed to two decades.

37: Quoted in Gwertzman and Kaufman, 1990, pp225-226.

38: Schumpeter, 1975.

39: Csaba, 2007, p101. Since the early 1970s, when neoliberal theories came into prevalence within policy debates, the emphasis on the need for a “strong state” has resulted in private interests and many governments in the West directly supporting non-democratic regimes. The most obvious case in point would be the case of Pinochet’s dictatorship in Chile, which was viewed as the laboratory of monetarism in the 1970s. In Hungary violent demonstrations in 2006 were used as a pretext to strengthen the repressive arm of the state and crush resistance to the government’s neoliberal policies.

40: Csaba defines the central feature of this approach as resting on the view of the market as “the fundamental coordination mechanism through which the vicious cycle of poverty can be overcome”-Csaba, 2007, p101.

41: Åslund, 2002; Marangos, 2004; Sachs, 1990; Williamson, 1992. In their sober critique of neoliberal reforms in Eastern Europe, radical political economists László Andor and Martin Summers have described the architects of these policies as “Market Maoists”, whose blind fate in the blessings of the market could be likened to the utopianism that characterised the economic programme of China’s Cultural Revolution of the 1960s and 1970s-with the only difference that, this time around, the “great leap forward” was to be into capitalism and not Communism-Andor and Summers, 1998.

42: Jeffries, 1993.

43: Tamás, 2009, p36.

44: Kolodko, 2000, p109.

45: World Bank, 2002, p3.

46: Eurequal, 2006, p2.

47: Eurequal, 2006, p2.

48: Latest in line to express his doubts about the Hungarian economy was the former chairman of the National Bank, Péter Á Bod, who in a recent interview claimed that the economy would only reach its 2008 level in 2013-Népszabadság, 23 August 2009.

49: UNDP, 2003, p. 19.

50: Adam, 1999, p92. More recent studies have confirmed this trend-Eurequal, 2006; Tárki, 2004. For most recent unemployment figures, see the Economist, 15 August 2009.

51: Eurequal, 2006, p3.

52: Eurequal, 2006, p2; UNDP, 2003, p56. On the basis of this it is difficult to understand how the Economist could claim in 2005 that Hungary “has almost no people living in poverty”-the Economist, 26 November 2005. (It should be noted that the UNDP’s figures were calculated on the minimum subsistence level, while the Economist based its claims on the World Bank’s standards, which amount to a crude economic definition of poverty of $2.15 per person per day.)

53: Eurequal, 2006, p3.

54: Tárki, 2004, p51.

55: Tárki, 2004, p69.

56: Tárki, 2004, p69.

57: Adam, 1999, p120; Tárki, 2004, p69.

58: Adam, 1999, p161.

59: UNDP, 2003, p21.

60: Tárki, 2004, p103.

61: Eurequal, 2006, pp21-22.

62: Harman, 1990.

63: Dale, 2004, p193.

64: Cited by Barker, 2006, p82.

65: Barker, 2006, p82.

66: Trotsky, 1969, p. 108.


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