Free enterprise eases the control of collectivism

There's a small ice cream shop on October 6 Street in downtown Budapest that usually has a line out onto the street. It's privately owned. This is just one part of Hungary's thriving small-business sector, its entrepreneurial activities encouraged by a communist government.

At the state-owned Ikarus bus factory in Szekesfehervar, about 35 miles west of here, some of the better employees are offered weekend work under special contracts to ''customize'' big passenger buses to meet the desires of the buyers. The workers make more money than they would on overtime; the company gets more value for its costs. Further, when there aren't enough rail cars to handle bus deliveries, three small private companies bid for contracts to drive some buses to Hamburg for overseas shipment to customers.

These activities, too, are part of an extensive effort to introduce more flexibility, efficiency, and enterprise into a socialist economy. Hungary, a small nation of 10.7 million in the middle of Europe, is engaged in a fascinating economic experiment. It is attempting to mix the advantages of the market system into a basically communist economy - so far with considerable success.

Hungary's Socialist Workers' Party has not given up basic control of the nation. It tolerates only limited dissent. But the party, since Jan. 1, 1968, has been gradually moving to decentralize the economy, make prices more realistic and incentives more effective. The ''New Economic Mechanism,'' as it was dubbed, is seen as a necessity in a nation too small and too short of natural resources to be an industrial power, and thus highly dependent on international trade.

Hungary did try the Stalinist route of forced heavy industrialization after World War II, and it remains stuck today with a loss-ridden steel company and a marginal aluminum works.

''Both industry and services were overcentralized, too big, too slow, too bureaucratic,'' recalled Tamas Ory, general manager of the National Council of Industrial Cooperatives and expert on small business.

The purpose of the New Economic Mechanism, which continues to evolve, is to encourage people to start their own new businesses or, if employed within a state company or cooperative, to exercise more initiative and be more efficient, Mr. Ory explained.

He may sound like an advocate of free enterprise, and, in a way, he is. But some facts should be kept in mind. For instance, state enterprises are still responsible for 93 to 94 percent of Hungarian industrial production. Cooperatives carry out 5 or 6 percent of industrial output on average, although it's as much as 15 to 20 percent in some industries. Private enterprises produce only a tiny fraction of total industrial goods.

Small private businesses and artisans do play a bigger role in the service area, including the retail trade, restaurants, home building, repairs, and so on. Nonetheless, for the whole economy, the private sector only amounts to something like 3 or 4 percent. The small farm plots of people employed in state or cooperative farms and elsewhere amount to another 4 percent.

With something of a pause in the mid-'70s, the government has persistently eased the limits and regulations on small business. More ''reforms'' are on their way. At the start of 1985, state enterprises will get more independence from government ministries to alter their business activities without permission; their top executives are to be elected by employees or their representatives, rather than appointed by the responsible ministry. Further, the system will be altered to force these enterprises to set more prices at world-market levels, i.e., those in the noncommunist nations.

Although small business activities are just that - small - they get special attention in Hungary because they have had much to do with the sharp improvement in the ''quality'' of living (vs. money income).

The raising of pigs and chickens by farmers in their spare time, or the growing of vegetables and fruit by nearly anyone, has assured Hungary of an abundance of food. With competition in the service sector, store clerks are more polite, repairmen more concerned with doing a good job. The nation earns enough foreign exchange through tourism or exports of farm and other goods to import some consumer goods from the West.

''There is an element of choice and variety in the stores,'' a diplomat noted. ''There are no long lines in front of empty shelves. There are new shops, new stands, new restaurants. The entrepreneurial spirit is flourishing. The Hungarians feel like they have made progress. They have become very consumer conscious.''

Stereo sets were big two or three years ago. Now some store windows display videotape recorders or personal computers. They are expensive, and thus out of the reach of most Hungarians. But a growing number of forint millionaires (1 million forints equals $22,000) can buy them.

''This is not a classless society,'' noted one observer, referring to wide differences in wealth and in culture.

Although most cars are Soviet Ladas or other Fiat designs of East European origin, there are some West German Mercedes or Swedish Volvos on the streets with private license plates. A few shops display expensive and stylish fur coats in their windows.

Western journalists have paid much attention - perhaps too much - to Hungary's efforts to introduce elements of the free market in its economic system. But these reforms give the Hungarian economy a special vitality compared with those of their East-bloc neighbors.

Here are some new signs of greater enterprise:

1. State enterprises:

These can now freely form subsidiaries to carry out certain manufacturing activities. These are taxed separately. They can employ as many people as they need.

Also, state-owned companies can set up a small company to carry out service activities employing up to 100 workers. (There are more than 130 of these.)

Or they can encourage the creation of ''intra-enterprise work collective'' (called VGMs). Full-time employees of the company, in an arrangement with the enterprise, will use the equipment of the company either to fill in some gaps needed by the company or to do work for outside clients. They do this in their spare time, acting like private contractors. There are more than 7,500 of these today, employing some 100,000 workers part-time.

Adam Juhasz, secretary of state in the Ministry of Industry, complained that the two-year-old VGM system ''has not developed the way we expected.'' They are mostly doing work for the state enterprises, rather than outside projects. ''We made the enterprises independent,'' he said. ''We are not entitled to intervene.'' But he wondered if their economic benefits were worthwhile.

State-owned retail or restaurant chains can now lease out a store or restaurant to employees. They pay a rental on the basis of an estimated turnover , and the lessee reaps any profits.

2. Cooperatives:

The law, according to Mr. Ory, makes it easy for a group of as many as 15 or 20 people to set up a small cooperative for manufacturing or some service activity. The administration is simple, allowing flexibility. Members can be moonlighters. Some 250 of these have been started up within the last two years.

Small groups can be set up within the 860 larger industrial and service co-ops, much like VGMs in state enterprises. They use the facilities of the co-op to carry out some enterprise. There also are co-op branches - more than 925 of them. Co-ops are active not only in simpler retail or manufacturing activities, but in such areas as computer engineering, software, and consulting services.

Members of these co-op work enterprises must take financial risks, much like those setting up a small private business. Should the enterprise go bankrupt, they can lose their financial interest in the co-op.

''This is a departure from the usual socialist form of securing the individual from risk,'' Mr. Ory noted. ''But this recognizes that rewards are relative to risks.''

3. Private firms:

As long as an individual has no criminal record and does have the necessary qualifications, he can set up a private business. One form is known as a ''work collective'' (GM), which seems to be something like a partnership in Western terms.

Local councils cannot block the creation of a new private business. Previously, if there were, say, several hairdressers in an area, the council might forbid the establishment of another hairdresser. Now the new one can compete with the older establishments. Losing enterprises can go bankrupt, with their owners even losing their homes.

By now there are more than 13,500 private shops, compared with 9,000 in 1970. These employ some 123,000 workers, or about 2 percent of the entire work force. There are some 4,800 GMs, employing about 24,000.

Some of these forms of business activity - private, co-op, or within state enterprises - are so new that their nature is still evolving. In any case, Mr. Ory notes, they are ''growing fast.''