Foreign Relations of the United States, 1981–1988, Volume X, Eastern Europe

340. Telegram From the Embassy in Hungary to the Department of State¹

10806/Depto 6027.

Budapest, November 14, 1987, 1827Z

SUBJECT

• Deputy Secretary’s Meeting With Prime Minister Karoly Grosz, November 13, 1987.

1. Confidential—Entire text.

2. Summary: In meeting with DepSec Whitehead, Prime Minister Karoly Grosz emphasized Hungary’s determination to move ahead with its economic program and carry out the restructuring of the economy. He stressed the need to encourage a greater entrepreneurial spirit within the country in an effort to achieve greater efficiency. Hungary was determined to stop the growth of its debt and planned to stabilize debt levels by 1990. The rate of debt increase would be slowed to U.S. dollars 500 million in 1988, and half that amount in 1989. By 1990 there would be no further growth in debt, although the country did not plan to reduce debt levels substantially. Economic austerity would require decrease of consumption of four and one-half percent in each of the next three years. Grosz stressed the GOH’s desire to reduce government interference in the affairs of commercial enterprises to an absolute minimum. At the same time, he made a strong pitch for the support of the U.S. and other Western countries to help Hungary get through the three difficult upcoming years. Mr. Whitehead emphasized our satisfaction with the favorable trends in U.S.-Hungarian relations and stressed our special interest in Hungary’s reforms and their continuation. He also conveyed our views on the prospects for improvement in U.S.-Soviet relations, touching on arms control, regional issues and human rights. End summary.

3. Grosz opened the meeting by noting the considerable improvement which had taken place in U.S.-Hungarian bilateral relations in recent years. It had seemed like only yesterday that the Crown had been returned and the original bilateral trade agreement signed,² but, in fact, these events had taken place almost ten years ago. U.S. efforts to ease international tensions were appreciated by the GOH, though achievements in the area of arms control and an improved dialogue with the Soviets had brightened the prospects for a further improvement of bilateral relations with Hungry as well. Prospects for boosting commercial ties were promising and Hungary was particularly interested in both U.S. capital and American equipment to modernize its economy. Grosz said he had just spoken by telephone with Deputy Prime Minister Marjai, who had provided him a positive assessment of his ongoing visit to the U.S. Although Hungarian trade had traditionally been heavily oriented towards Western Europe, Grosz said he now wished to change this to some extent and develop economic ties with both the U.S. and countries of the Far East. He welcomed the establishment of the management institute as a useful step in fostering economic relations.

4. The Deputy Secretary began his remarks by stressing our appreciation for the distinctiveness of each Eastern European country and noting that we considered U.S. ties with Hungary to be of particular importance. The large number of Hungarians living in the U.S. provided a constituency which sought an improvement of relations. In addition, Hungary had adopted an economic system which had incorporated market features and decentralization to a greater extent than other countries in the area. The success of these experiments were important to us. Mr. Whitehead felt that there had been a substantial improvement in bilateral relations since his visit in November 1986.³ Bilateral trade had risen 30 percent and we had succeeded in our goal of creating a management institute in Hungary to train a new generation of business leaders. The U.S. very much hoped that Hungary would continue to move ahead vigorously with its economic reforms and overcome the temptation to pull back in the face of difficulties. Mr. Whitehead urged the GOH to get its international debt problem under control by eliminating its growing debt burden, as quickly as possible.

5. The DepSec then reviewed the state of U.S.-Soviet relations. He described them as “better than they have been for some time with real prospects for very meaningful achievements.” In December we expected to sign the first arms control agreement which would actually reduce armaments levels on both sides and hoped that this would be followed up by an accord to reduce strategic weapons by 50 percent to be concluded at a Moscow summit in the spring of 1988. In addition to progress in the arms control area, we also hoped that Gorbachev’s December visit to Washington⁴ would generate meaningful forward movement on human rights. We would also use this meeting to discuss regional issues with particular emphasis on Afghanistan. A Soviet willingness to withdraw from Afghanistan and terminate military intervention in other small neutral countries would create an environment where genuine progress toward the creation of a more peaceful world could be achieved.

6. In response, Grosz expressed his appreciation for the DepSec’s remarks on bilateral relations. He acknowledged that the large number of Hungarians in the U.S. play a very positive role in fostering these ties, noting that his mother’s sister lived in the U.S. and that he had several cousins there. It was an important tenet of GOH policy to maintain contact with Hungarians all over the world. An interesting recent development in this regard was the sizeable jump in the number of Israelis of Hungarian extraction who were coming back to visit the land of their birth. Grosz insisted that the GOH considered it a right for citizens to be able to travel abroad and, if they wished, to be able to remain there. Beginning in January 1988, there would be a very significant liberalization of travel requirements. This was an expensive policy to implement, particularly at a time of economic austerity. Nevertheless, the GOH was determined to proceed. Hungary was also pushing Western European countries hard on the mutual abolition of visa requirements, but so far these efforts had achieved little success.

7. On the economy, the Prime Minister insisted that the government had a clear scenario. He described the introduction of the new tax system, scheduled for January 1, as the greatest single event which had taken place in Hungary during the last thirty years. At the same time, Grosz acknowledged that as a pioneer among socialist countries in introducing a VAT and an income tax, Hungary possessed little expertise to implement the program. Programs for wage reform and social security reform were also on the 1988 agenda and overall price reforms would be implemented by 1990. Action would begin soon to shut down unprofitable enterprises. Grosz said that the reason that the number of enterprises to be closed would initially be rather small stemmed not from an absence of political will, but rather the need to wait for “the right conditions.”

8. The Prime Minister insisted that the private sector in Hungary was actually receiving preferential treatment at the present time in comparison to the rest of the economy. He estimated that at present the private sector contributed about 25 percent of the country’s national product but provides only 2.5 percent of government revenue. While this sector was unquestionably highly productive, something needed to be done eventually to rectify this imbalance. However, there would be no steps to deal with this question for two-three years. On joint ventures, Grosz felt that the GOH had gone about as far as it could. It had taken steps to increase the security of investments and allowed repatriation of up to 100 percent of joint venture profits. At the same time, joint ventures were treated no differently than the rest of the economy, for tax purposes.

9. Grosz described the debt situation as Hungary’s most pressing problem. The increase in net debt in 1987 would be between U.S. dollars 950 million and one billion. This needed to be cut in half in 1988 to between 500 and 550 million and halved again in 1989. By 1990, the debt situation would be stabilized. The government foresaw a sizeable debt to be part of Hungary’s economic structure for the next 20 years, but was prepared to accept this. A second economic alternative was to radically reduce consumption which in any event was slated to drop by 4.5 percent annually for the next three years. Grosz expected consumption to begin to rise again only after 1990. He described the structure and pattern of Hungarian industry as being far too wide, but stressed that rationalization required a great increase in the level of international cooperation. Profits could also be made from semi-finished products to be completed with the assistance of foreign partners. The government also wanted to withdraw from managing foreign exchange policy and direct involvement in foreign trade. However, this would take some time because of the precarious state of the economy. Grosz concluded that if the international community supported Hungarian efforts to restructure its economy with continued loans, desired goals would be achieved without political conflict. If the requisite financial support was lacking, the chance of such conflicts would increase significantly—and if conflicts broke out, this would adversely affect reform efforts in other socialist countries.

10. Grosz expressed his appreciation for the DepSec’s review of the state of the U.S.-Soviet relations and said that the GOH would try to be helpful where it could in assisting this process. He asserted that the current Soviet leadership was a serious negotiating partner and had a very different world outlook from its predecessor. The Eastern European countries had reached the conclusion that Western societies were dynamic and permanent fixtures; the West should give the East similar recognition. On Afghanistan, Grosz voiced the belief that this issue would be settled in due course, but pointed out that Russians like Americans were proud people and that the factor of national pride needed to be considered in trying to arrange a workable solution.

11. Participants in the meeting were: Prime Minister Grosz, MFA State Secretary Gyula Horn, MFA U.S. Desk Officer Bela Szombati (interpreter), Deputy Secretary Whitehead, Ambassador Palmer, EE Director Wenick, D Staff Assistant Kelly, and DCM Kursch (notetaker).

12. Moscow minimize considered.

Palmer

1. Source: Department of State, Central Foreign Policy File, D870939–0176. Confidential; Immediate. Sent for information to Eastern European posts, Moscow, and Bonn.
2. See Foreign Relations, 1977–1980, vol. XX, Eastern Europe, Documents 163 and 164.
3. November 11–12, 1986. See Document 329.
4. See footnote 5, Document 52.