For a long time, Hungary’s economy was dominated by foreign powers, starting with Ottoman rule in the 16th century. Development thus followed a painful, inefficient, up-and-down course. When textile fabrics, coal mines and iron works began appearing in Britain in the mid-18th century, the course of Hungary’s economy was being decided in Vienna. The Habsburg rulers attempted to stimulate the economy of their realm using the widely prevalent mercantilist concepts, and assigned the Hungarian part of their realm the role of food production. Scarcely any manufactories, the predecessors of factories, were founded. In spite of this, Hungary’s agricultural sector remained backward for a long time, as the countryside was dominated until well into the 20th century by a division between large landowners and a mass of small farmers who could barely feed themselves.
Thus, the general growth in population that Hungary also underwent resulted in widespread poverty and unemployment in rural regions. Nor did the liberation of the peasants from their subjugation to the landowners following the revolution of 1848 result in any productivity gains. The Swiss foundryman Abraham Ganz is numbered among the few industrial pioneers of this era; he built an innovative enterprise in Budapest that initially sold railway wheels before soon moving on to manufacture turbines and, later, electric vehicles. The economy developed only gradually, when the country received greater autonomy with the founding of the Austro-Hungarian dual monarchy in 1867. In the subsequent years, Budapest developed into a booming metropolis, and new railways improved transportation.
The industrial upswing in the core Austrian territories toward the end of the 19th century brought more and more factories to Hungary as well. Due to the significance of agriculture the food industry predominated, with flour mills concentrated in Budapest. Wood-working and metal-working operations also expanded, and machine tool makers set up shop in the suburbs of the capital. Toward the end of the century, the company Rába began manufacturing railway carriages, and, soon after, automobiles as well. In 1911, Manfréd Weiss founded the steel works of the same name in Budapest’s Csepel district, which went on to become a major arms company.
Although still mainly agricultural, the Hungarian economy seemed to be slowly catching up with western Europe. But the radical reordering of south eastern Europe following the First World War brought progress to a standstill: Hungary was partitioned from Austria and its sovereign territory reduced to a third of its former size. The consequences impacted the country even more severely than the newly created nations of eastern Europe: as the deposits of natural resources, in particular iron and coal, were now on the other side of the borders, production collapsed. At the same time, established trade ties were broken. The already weak domestic market could not take up the slack. The situation was exacerbated by the severe dependence on foreign capital and continuing rural unemployment.
By the start of the Second World War, industry had still not recovered to its previous level, the economic crisis triggered in 1929 added to the severity of the situation. In traditional products such as agricultural machinery and railway carriages, Hungarian factories were not competitive due to high costs. New industries such as chemicals, electrical goods and telecommunications were not growing fast enough. The discovery of bauxite, the key raw material for making aluminium, offered a ray of hope and led to the erection of large plants in the area of Veszprém, financed by German capital.
This trend continued through the Second World War: Hungary’s economy boomed, particularly in the arms, chemicals and electrical equipment industries, but only thanks to financing from National Socialist Germany. This was essentially a prelude to the extensive nationalisations which the socialist governments carried out after the war on the Soviet model. Now the massive expansion of heavy industry dictated by the USSR finally created an opportunity for the many rural unemployed. The production of steel, machines and artificial fertiliser increased significantly. However, as this investment neglected agriculture and the production of consumer goods, in order to better supply citizens’ needs, the Kádár government began integrating market elements into the planned economy starting in 1956 in its “Hungarian Model”. By the 1960s, Hungary had been transformed into an urban-oriented industrial society.