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Hungary - Economy (Notes)

The Hungarian economy prior to WWII was primarily oriented toward agriculture and small scale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources also have dictated a traditional reliance on foreign trade. In the early 1950s, the communist government forced rapid industrialization after the standard Stalinist pattern in an effort to encourage a more self-sufficient economy. Most economic activity was conducted by state-owned enterprises or cooperatives and state farms. In 1968, Stalinist self-sufficiency was replaced by the 'New Economic Mechanism,' which reopened Hungary to foreign trade, gave limited freedom to the workings of the market, and allowed a limited number of small businesses to operate in the services sector.

Although Hungary enjoyed one of the most liberal and economically advanced economies of the former Eastern bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s, and Hungary's net foreign debt rose significantly--from $1 billion in 1973 to $15 billion in 1993--due largely to consumer subsidies and unprofitable state enterprises. In the face of economic stagnation, Hungary opted to try further liberalization by passing a joint venture law, adopting an income tax, and joining the International Monetary Fund (IMF) and the World Bank. By 1988, Hungary had developed a two-tier banking system and had enacted significant corporate legislation which paved the way for the ambitious market-oriented reforms of the post-communist years.

The Antall government of 1990-94 began market reforms with price and trade liberation measures, a revamped tax system, and a nascent market-based banking system. By 1994, however, the costs of government overspending and hesitant privatization had become clearly visible. Cuts in consumer subsidies led to increases in the price of food, medicine, transportation services, and energy. Reduced exports to the former Soviet bloc and shrinking industrial output contributed to a sharp decline in GDP, falling 18% from 1990 to 1993.

Unemployment rose rapidly--to about 12% in 1993. The external debt burden, one of the highest in Europe, reached 250% of annual export earnings, while the budget and current account deficits approached 10% of GDP. In March 1995, the government of Prime Minister Gyula Horn implemented an austerity program, coupled with aggressive privatization of state-owned enterprises and an export-promoting exchange rate regime, to reduce indebtedness, cut the current account deficit, and shrink public spending. By the end of 1997 the consolidated public sector deficit decreased to 4.6% of GDP-- with public sector spending falling from 62% of GDP to below 50%--the current account deficit was reduced to 2% of GDP, and government debt was paid down to 94% of annual export earnings.

These reforms and a massive infusion of foreign direct investment (FDI) set Hungary on a path of high growth, falling inflation, and decreasing unemployment. Growth has averaged 4.5% since 1996; inflation fell from 28% to under 7%; and unemployment fell to under 6%, the envy of many EU countries. Eighty percent of GDP is now produced by the private sector, and foreign owners control 70% of financial institutions, 66% of industry, 90% of telecommunications, and 50% of the trading sector. Hungary is now one of Europe's fastest-growing and most open economies, deeply integrated into the European economy, a relationship that was enhanced with Hungary?s accession to the European Union on May 1, 2004.

The Orban government, elected in 1998, maintained the broad macroeconomic reforms of its predecessor. However, it did little to address structural problems in agriculture, health care, and the tax system. Under the slogan 'economic patriotism,' the government moved to increase the government's role in the economy and switch from an export- to a domestic demand-driven economy. In 2002, the consolidated fiscal deficit doubled to 9.9% of GDP, in part due to overspending by the previous administration prior to the last national elections and by the new government after the elections. The Medgyessy government sought to lower the deficit while creating a business-friendly environment. A large wage increase and a strongly appreciating local currency in 2002-2003, however, decreased Hungary?s competitiveness somewhat. Prime Minister Gyurcsany appointed Finance Minister Veres in April 2005 and continues to focus on deficit reduction.

As part of his economic reform plan, proposed in June 2006, Prime Minister Gyurcsany vowed to attack Hungary?s budget deficit, more than 10% of GDP in 2006, by raising taxes and combating waste in the public sector. The plan consists of austerity measures that involve cutting subsidies on gas, electricity, and medicines as well as a series of deep reforms in four key areas: healthcare, state administration, local government, and education. The Prime Minister aims to cut down on ministry staff by 23%. His goal is to cut the budget deficit to 6.6% of GDP in 2007, about 4% in 2008, and about 3% in 2009. Such reductions could put Hungary on the path to join the Euro zone by 2012, two years later than its original target.

In 1995 Hungary's currency, the forint (HUF), became convertible for all current account transactions, and subsequent to OECD membership in 1996, for almost all capital account transactions as well. In 2001, the Orban government lifted remaining currency controls and broadened the band around the exchange rate, allowing the forint to appreciate by more than 12% in a year. Conflicting fiscal and monetary policy in the summer of 2002 caused confusion briefly in the market, with the forint surging against the Euro for several months. In attempts to reassure the market, the Medgyessy government repeatedly said the country would join the ERM II as soon as possible, with hopes of adopting the Euro by 2008. Prior to the change of regime in 1989, 65% of Hungary's trade was with Comecon countries. By the end of 1997, Hungary had shifted much of its trade to the West. Trade with EU countries and the OECD now comprises over 75% and 85% of the total, respectively. Germany is Hungary's single-most important trading partner. The United States has become Hungary's sixth-largest export market, while Hungary is ranked as the 72d largest export market for the United States. Bilateral trade between the two countries increased 46% in 1997 to more than $1 billion. The United States has Normal Trade Relations with Hungary and has extended to it Overseas Private Investment Corporation insurance, and access to the Export/Import Bank.

Foreign investment was the key to Hungary's success. With more than $60 billion in FDI since 1989, Hungary has been a leading destination for FDI in central and eastern Europe--including the former Soviet Union. Of this, a little less than one-third has come from U.S. companies. The largest U.S. investors include GE, Alcoa, General Motors, Coca-Cola, Ford, IBM, and Pepsico. Foreign companies modernized Hungary's industrial sector and created thousands of new, high-skilled, high-paying jobs. As a result of extensive and continuing liberalization, the private sector produces about 80% of Hungary?s output. Currently, foreign firms control two-thirds of manufacturing, 90% of telecommunications, and 60% of the energy sector. Inflation declined from 14% in 1998 to 3.7% in 2005. Policy challenges include cutting the public sector deficit to 3% of GDP by 2008, from about 6.5% in 2005, and orchestrating an orderly interest rate reduction without sparking capital outflows.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Hungarian Forint Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Hungarian Forint Exchange Rates

Notes and Commentary
Government and Political Conditions
Foreign Relations
Relations with U.S.

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