In 1986 Hungary became the first communist country to enact a bankruptcy law. The law sought to induce enterprises to become profitable and less reliant on state subsidies, which in 1987 consumed about 23 percent of the national budget. Under the law, creditors, unpaid suppliers, and other enterprises could initÍÍÍÍiate bankruptcy proceedings against any insolvent or delinquent enterprise except agricultural collectives. The National Reorganization and Liquidation Board, which oversaw the bankruptcy process, attempted arbitration and reorganization before final liquidation. Workers who lost their jobs as a result of liquidation were entitled to unemployment benefits.

Although by 1987 claimants had filed bankruptcy actions against fifty-five enterprises, including one large construction firm, the government had not enforced the bankruptcy law vigorously. Government interference in the market remained so widespread that in bankruptcy proceedings unprofitable enterprises could justifiably argue that their losses were only marginally related to efficiency or managerial decisions. Despite proclamations that profitability was the main standard for judging enterprise performance, the government continued to compensate firms operating at a loss with subsidies, tax breaks, credits, preferential treatment in price setting, and other means. The government extracted the earnings of profit-making enterprises to fund these measures.

Data as of September 1989