04/23/2014 10:50 am ET Updated Jun 23, 2014

Managing the Economic Transition in Hungary

For most countries in East-Central Europe, capitalism didn't arrive overnight in 1989 or 1990. Even in the more controlled environments like Romania, people could get a taste of capitalism by buying or trading on the black market. Hungary, on the other hand, was far ahead of its neighbors in this respect. It had been experimenting with a mixed economy since 1968 and the New Economic Mechanism. Following a push for recentralization in the early 1970s, another round of liberalization opened up the economy after 1979. By the early 1980s, the government was even permitting small-scale private enterprise in the retail sector and for services like taxis.

By 1988, with Ceausescu squeezing the Romanian economy to pay back its foreign debt and Albania as isolated as ever, Hungary was beginning to train its first Western-style managers. Zsuzsanna Ranki was a pivotal person behind the training of a new managerial elite. She'd started out in foreign trade marketing and eventually acquired a PhD in economics from a Hungarian university. And in 1983, she was the first Hungarian to receive an MBA -- at Indiana University.

After receiving her MBA in the United States, she returned to Budapest and worked with the Hungarian businessman Sandor Demjan, U.S. ambassador to Hungary Mark Palmer, and Hungarian-born financier George Soros to set up the first Western-style management training school in the region, the International Management Center. This all happened before the fall of the Berlin Wall and the change of political system in Hungary. When I talked with Ranki in 1990, the program was no longer unique in its approach. By that time, there were already over 100 management training programs in Hungary alone. The International Management Center eventually became the business school for the Central European University in Budapest.

Today, Ranki is at the International Business School, where she heads up the business network center, the career office, and alumni relations. She has watched Hungary, once at the head of the region in terms of economic change, slip from its position as frontrunner.

"When I was traveling more, during my days at the executive search company, I thought that Hungary was special and an ideal location for companies," she told me in an interview at her office last May. "For many years, we were the leading country in attracting foreign direct investment. But soon, I started to think that Poland was a big competitor -- it's a much bigger country. Many companies went there to set up manufacturing centers. Then I saw Slovaks introducing more preferential tax rates, and the cost of operations is more privileged there. So, slowly, you feel that the ground is moving out from under your feet because other markets are picking up and can offer preferential advantages for international investors. It's very sad to see Hungary losing its 'leading position' in the region and how FDI is not coming in so much any more."

The current political situation in Hungary doesn't seem to be helping in this regard. "There are tremendous disputes about how the country is operating," Ranki reports. "It's not so good to hear these harsh criticisms. While I myself am fortunately not directly influenced by these changes -- at the moment at least, although I have many friends who are -- it's not too good to feel that you are losing your attractiveness as a country. Before we were talking about Hungary as the frontrunner and the pioneer and now we keep getting phone calls from international friends asking, 'So, what is happening in your country?'"

The Interview

Tell me how you first became involved in business and management.

The answer is easy. I am an economist, with a PhD from here in Budapest. I got an MBA at Indiana University at Bloomington. At that time, I was the first Hungarian ever to get an MBA.

When was that?

In 1983. When I studied in the United States, I enjoyed my business studies so much that I was determined to do something with this in Hungary. So I came home. I didn't stay in America. Fortunately, that was the year when Sandor Demjan, at that time and even now a leading entrepreneur and businessman in Hungary, started to set up a special in-house management program. At that time he was heading up the Skala department stores, a retail company something like Sears. This management program was designed despite and against the typical management and selection process at the time, which was primarily based on political associations. They would consider skills, personality, and fit, but the main basis for promotion was affiliation with the Party. Mr. Demjan decided to go against that with a Western-style management training program. He would publicly advertise this program and recruit 20-some young people whom he would then train. Then they would become mid-level and later on top-level managers of his company.

When he set that up, he had no idea what Western-style management training was. He didn't have adequate training for it. Somehow he heard about me. Since I was the only one at that time who knew anything about Western-style management training, he contacted me and recruited me for the job. For two years, we managed this unique Skala management training program. George Soros was financing part of it, mostly the computers and technical facilities.

Parallel with this, the U.S. Ambassador Mark Palmer, who was then the very innovative and courageous ambassador here in Hungary, was determined to help the country. A World Bank study was prepared about Hungary's economic issues. The study highlighted a strong need for Western-style managers, and this was where the U.S. government could help Hungary. So Mark Palmer decided to set up a business school. It was primarily his idea. He heard about the Skala management program and about me. He contacted me and said, "Let's set up a Harvard business school in Budapest." This tireless ambassador set up an office within the embassy, and USAID sent some consultants to work with me. So, the U.S. government was very deeply involved in supporting this project. George Soros was one of the the main financiers while Demjan put up the money for the building and employed me for the project. For the next year and a half, we were basically designing a business school, which became the International Management Center and which is now the Central European University business school. This is how I got into it: through my business education and my determination to bring this kind of education to Hungary.

When you were studying economics at university, did you have any idea that you might be interested in doing a business degree?

No. I had no idea. When I graduated, I specialized in foreign trade marketing. At that time, I thought I might be interested in business, in trading and commercial activities. Actually, my first job was at a foreign trading company, working as a salesperson for one of the leading Hungarian trading company. I was responsible for selling Hungarian-made X-ray equipment to French African countries. It was a very challenging job: Chad, Togo, Benin, Mali. They had no money even to pay for the custom fees to let the Red Cross supplies into their countries. And I was trying to sell $10,000 X-ray equipment! You can imagine what kind of work that was. Then I went to the Foreign Trade Bank, and I was working there before I went to the United States to do business studies. The idea for the MBA came up because my father was appointed to set up the Hungarian chair at Indiana University, and this was an opportunity to go with my parents to the United States. It was natural that I'd be interested in business. That's how it came about.

In 1983, when you were doing the MBA, did you ever think that your training would be difficult to apply in Hungary?

I wasn't looking at the content of what I was studying, but rather it was the method and the approach that excited me. The method was very case-oriented, interactive, and focused on very practical knowledge. I was not thinking that I would teach capitalist business or economics to the people. Rather, what excited me was the fact that finally I was studying something I thought I could do something with. It was real life, real cases. The approach was not memorizing pages of material but rather solution-oriented and creative. I didn't think that the textbooks should be brought into the country. But I was excited about the approach of business education compared to the way that university education was done at that time in Hungary.

What did you imagine the situation would be in Hungary ten years later? Did you expect that Hungary would evolve in the way that China has evolved: a one-party state with a capitalist economic order? Or did you expect the political and economic transformation of the country?

To read the rest of the interview, click here.