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

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

6554.

Budapest, June 24, 1988, 1609Z

SUBJECT

• Lunch With General Secretary Grosz.

1. Probably the first Communist Party General Secretary to eat at the McDonald’s restaurant enjoyed his hamburger and listened with interest to my discussion of what makes America tick and what we should be trying to accomplish with his trip. He had some interesting things to say about the situation here.

2. I devoted the first part of our meeting to an extensive discussion of the nature of American society, our economy and politics. I stressed the strong engine of growth which in the first two months of this year alone has produced an increase which exceeds the total national gross product of Hungary and is now into its seventh year of expansion. I talked about the problems of poverty and wealth but stressed that what is most extraordinary about the United States is what is most ordinary—the lives of the vast majority who are middle class and whose quality of life is higher than that of any other country in the world in my view. I noted that we might seem somewhat confusing and messy as a society, but in this is our greatest strength—our willingness to allow for disorganized creativity, our suspicion of big government and big business. I noted that I had talked with IBM’s leadership about giving him a briefing on how they are decentralizing, trying to combine the benefits of some control at the center with enormous freedom and innovation at the base, the same challenge he is facing here. I explained why we see Hungary and other countries so much through the prism of human rights: the emigre nature of our society and our conviction that politicians must be controlled by the people or they inevitably become corrupt. I had sent Grosz a summary of “In Search of Excellence” which gave the eight principles that the most successful companies in America followed.²

3. Grosz said that his greatest fascination about the United States is how we have managed to create a society which is so dynamic and so middle class. What system has been followed to make this possible? I noted that we were lucky that we inherited a country without an already existent feudal class, that we deeply believe that there is nothing wrong with making money and in fact that most young Americans are urged to work even while they are still in school. We also tried to keep government to a minimum and to allow individuals and companies maximum room for their activity. Grosz clearly wants to discover during his trip some lessons that he can bring back to apply here to create more dynamism.

4. The second part of our discussion was devoted to his trip, US-Hungarian relations and the situation here. We both stressed the need for concrete accomplishments and not just more good words about the relationship. I noted our disappointment that U.S. exports appear to be down this year as a result of Hungarian import restrictions. I said that we should set an objective for a balanced trade relationship over the next four years and noted that Secretary Verity had suggested that a billion dollar two-way trade turnover was a good objective. Therefore, I said that perhaps Grosz could announce while he was in the United States that we are seeking a one billion dollar turnover by 1992. But to achieve this we need to be much more active and we need to remove bureaucratic and other barriers. Things were just too slow here in Hungary and there were too many regulations and restrictions in the area of finance. I stressed that Hungary needed to attract more Western investment in the form of 100 per cent Western owned firms or joint ventures. These could serve as role models. I also urged Grosz to support the idea being promoted by Canadian investor Sarlos for a mutual fund for investment in Hungary. I urged that he allow 100 per cent foreign ownership of some companies here and cited an example in which they had just lost a million dollar a year hard currency payroll as a result of bureaucratic resistance to one American company getting 100 per cent ownership. I also urged Grosz to consider a Disneyland theme park in Hungary, perhaps on the road between Budapest and Vienna. I had talked with Disney World owner Sid Bass June 23 about this and urged Grosz to talk to the Disney people during his Los Angeles stop. I urged him to give Malev’s³ director the green light to go ahead to run Malev on a profit and loss basis, to purchase aircraft, and if he failed to fire him.

5. Grosz responded that he will announce in parliament a major new two-tier system in Hungary. For those 10 per cent of the companies which are genuinely doing well restrictions will be significantly reduced. They will be allowed to keep more of their income and to deal more freely in foreign trade. He hopes that this will be a magnet gradually to attract other Hungarian companies to improve and to join this first team. But Grosz noted that he has stirred up an intense fire storm of protest from within the system. People are coming up with all sorts of ideological and other reasons as to why there cannot be these two classes of companies. On reducing the party and government’s role in the economy, Grosz noted his frustration with pinpointing the blame and getting people to accept more responsibility. He said that he had told the head of Malev Jahoda that he could earn as much as he wanted if he would only galvanize Malev into a success story. Jahoda is now making 67,000 forints a month, but Grosz told him he could make 200,000 forints or even more if only he would make some changes—that Malev had not changed itself in ten years. But Jahoda said he would rather have the certainty of the 67,000 forints than try for anything more. Grosz said he agreed that foreign companies could provide role models to deal with this problem; this was precisely why he had agreed to a West German buying out a Hungarian company in toto. He would love it if other Western companies would buy Hungary’s troubled companies. As he sat there he could say that he would approve on the spot any American company I could think of that wanted 100 per cent ownership. I said that there was such a company—Jacky Bronner who is the world’s largest polisher of diamonds. Grosz said “agreed.” Grosz said that he did not agree that the government was using up too much of the national income: the money is being wasted by the companies whom the government is subsidizing. I stressed that the fact remains that too much of the national income is going through the hands of the government and that as the Chamber of Commerce President Beck had stated in a recent interview the successful companies simply don’t get to keep the revenue they make. Grosz stressed again that the government itself was only using about 2 per cent of the national income which he believed was low by international standards and underlined his hope that the new two-tier system will gradually lead to a change in the way that companies operate. I noted that the Governor of Iowa⁴ and his experts on meat packing companies had told us earlier this week that in an extremely up-to-date Hungarian meat packing company with new Western equipment there were three times as many Hungarian workers as in a comparable American plant. Grosz said he agreed that improved management was a key as was better morale and motivation. He had read the portions of “In Search of Excellence” which I sent him and seemed genuinely interested in pursuing this subject in the United States.

6. On the non-economic side of his trip to the United States I said that we were very pleased with his statement of support for student exchanges during Secretary Verity’s visit and said that Ron Lauder was prepared to announce a new student exchange program during his visit. I noted that he would be having an extended meeting with the President and that there would be time for a brief one-on-one. Grosz said that he would be having a five hour one-on-one with General Secretary Gorbachev in Moscow before his trip to Washington. He would be asking Gorbachev for his view on Budapest as a site for a possible fifth summit between President Reagan and Gorbachev. Therefore, he would be in a position to tell President Reagan during his meeting precisely what Gorbachev’s attitude is on Budapest as a possible site. We discussed the conventional forces conference coming up here at the end of August,⁵ and I noted that there is considerable interest in the United States in this subject. I stated that Congressman Les Aspin would be coming for the conference as would a number of other people that Grosz may meet during his visit to the United States. Finally, I noted that Americans like a give-and-take as opposed to monologues and urged that he take this approach, including plenty of time for questions and answers when he is giving presentations.

7. In that connection I noted that he may very well face questions on human rights as so many Americans view Hungary largely through a human rights prism. While Hungary has a good record on freedom of travel, we view its record as being mixed on independence of organizations like youth groups and trade unions and on handling of demonstrations. I would be presenting Deputy Foreign Minister Kovacs with a paper on our concerns over human rights. Grosz responded that he wished the opposition here would give him a little more room. It was not possible to reverse decade of Stalinist and other practices overnight. Why couldn’t the groups see that he was trying to let them do some things? For example, for the first time being able to honor Imre Nagy’s memory in the cemetery, but that staging events at a place where government ceremonies are held, like Heroes Square, was not acceptable. Why couldn’t they wait for the new law of associations to come out in a few months? Didn’t they know that it was important for him not to create additional difficulties for Gorbachev? Didn’t they know that he was under pressure from people within the system to clamp down. I told Grosz that he was fortunate in the nature of his opposition, a word that I said really didn’t fit them in any case. 95 per cent of them were extraordinarily moderate. I knew them personally—people like Janos Kis, Gabor Dembsky, Csoori⁶ and Gado.⁷ They wished Grosz success in bringing about changes. They were not his enemies. Grosz asked whether I really thought that Gado is a moderate. He said that Gado’s writings create a cycle of writings. They stimulated anti-Semitism which he is trying to clamp down on. I noted that I had myself been involved with the police in demonstrations during the civil rights era in the United States. Police sometimes use force when it is totally unnecessary; they had done so on June 16 when one of my Embassy officers had seen a Hungarian kicked in the head while he was lying on the ground. Grosz said you couldn’t teach police to be humanitarians; their task is to follow orders. If they are ordered to disperse a crowd, that is what they must do. For example, there is a demonstration coming up on June 27 over Romania in front of the Romanian Embassy. Grosz said he was permitting this demonstration to take place as he had others on other subjects, even though it is against national policy on Romania. But the first moment that the demonstrators try to break into the Romanian Embassy, or the first time they start chanting “irredentist” slogans, he has given orders that the demonstration will be dispersed. I noted that this could be difficult. There is a rumor going around Budapest that the Romanian Government blew up Hungarian houses. (We have since heard that the rumor has it that the seven families who were taken from the houses, after having threatened Securitate with a knife, were taken to a cave and executed.) Grosz said that he knew the people were angry over this event and that he was very angry also, but he could not allow his anger to show. Nonetheless, the crowds would be dispersed if they started to make certain chants.

8. Grosz seems genuinely eager to learn about the United States and to pursue various avenues of trade and investment and exchanges with vigor. He is a tough customer, stressed that he would speak his mind in the United States, and that he would not mind others expressing different views.

9. Moscow minimize considered.

Palmer

1. Source: Reagan Library, Rudolf Perina Files, Presidential Meeting with PM Groz Hungary 7/27/1988 (1). Secret; Immediate. Sent for information to Eastern European posts and Moscow.
2. In Search of Excellence by Tom Peters and Robert H. Waterman, Jr., published in 1982.
3. Hungarian airline.
4. Terry Branstad.
5. Documentation on the conventional forces conference is scheduled for publication in Foreign Relations, 1989–1992, European Security Framework, 1984–1992.
6. Sandor Csoori.
7. Gyoergy Gado.