Economy of Hungary

Infobox Economy
country = Hungary
currency = Hungarian Forint (HUF)
year = Calendar Year
organs = WTO, OECD, EU
rank = 50th
gdp = $194 bn
growth = 1.4% (2007)
per capita = $19,799 (2008 IMF est.)
sectors = agriculture (3%), industry (32%), services (64%)
inflation = 8% (2007)
labor force = 4.2 million (2007)
labor force by occupation = agriculture(6%), industry (33%), sevices (61%)
labor force participation = 61%
unemployment = 7.6% [ [http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2008/PGE_CAT_PREREL_YEAR_2008_MONTH_07/3-31072008-EN-BP.PDF Euro area unemployment stable at 7.3%] - Eurostat]
industries = mining, metallurgy, construction materials, processed foods, textiles, chemicals (especially pharmaceuticals), motor vehicles
exports = $86 bn f.o.b. (2007 est.)
export-goods = machinery and equipment 61%, other manufactures 29%, food products 7%, raw materials 2%, fuels and electricity 2%
main export-partners = Germany 30%, Italy 6%, France 5%, Austria 5%, UK 5%, Romania 4%, Poland 4%
imports = $86 bn f.o.b (2007 est.)
import-goods = machinery and equipment 52%, other manufactures 36%, fuels and electricity 8%, food products 3%, raw materials 2% (2003)
import-partners = Germany 27%, Russia 8%, China 7%, Austria 6%, France 5%, Italy 5%, Netherlands 4%, Poland 4% (2006)
gross external debt = $143 billion (June 2007)
debt = 70% of GDP
revenue = $62 bn
expenses = $70 bn
aid = recipient, $302 million in available EU structural adjustment and cohesion funds (2004)
cianame = hu
spelling = huThe Hungarian economy is a medium-sized, structurally, politically, and institutionally open economy in Central Europe and is part of the EU single market. Like most Eastern European economies, it experienced market liberalisation in the early 1990s as part of a transition away from communism.Today, Hungary is a full member of OECD and the World Trade Organization.OECD was the first international organization to accept Hungary as a full member in 1996, after six years of successful cooperation.

History of the Hungarian Economy

Hungarian economy prior to the transition

The Hungarian economy prior to World War II was primarily oriented toward agriculture and small-scale manufacturing. Hungary's strategic position in Europe and its relative high lack of natural resources also have dictated a traditional reliance on foreign trade. For instance, its largest car manufacturer, Magomobil (maker of the "Magosix"), produced a total of a few thousand units. [Georgano, G. N. "Cars: Early and Vintage, 1886-1930". (London: Grange-Universal, 1985)] 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, instating 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.

Transition to a market economy

After the fall of communism in Eastern Europe, the former Soviet satellites had to transition from a one-party, centrally-planned economy to a market economy with a multi-party political system. With the collapse of the Soviet Union, the Eastern Bloc countries suffered a significant loss in both markets for goods, and subsidizing from the Soviet Union. Hungary, for example, "lost nearly 70% of its export markets in Eastern and Central Europe." The loss of external markets in Hungary coupled with the loss of Soviet subsidizing left "800,000 unemployed people because all the unprofitable and unsalvageable factories had been closed." [cite web|url=http://www.koed.hu/medit/endre.pdf|title=The Political and Economic Transition in Hungary|format=PDF] Another form of Soviet subsidizing that greatly affected Hungary after the fall of communism was the loss of social welfare programs. Because of the lack of subsidizing and a need to reduce expenditures, many social programs in Hungary had to be cut in an attempt to lower spending. As a result, many people in Hungary suffered incredible hardships during the transition to a market economy. Through privatization and tax reductions on Hungarian businesses, there was a gradual decrease in unemployment and an increase in overall economic growth. With the stabilization of the new market economy, Hungary has experienced growth in foreign investment with a "cumulative foreign direct investment totaling more than $60 billion since 1989." [cite web|url=https://www.cia.gov/library/publications/the-world-factbook/geos/hu.html|title=CIA - The World Factbook - Hungary]

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. 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 raw 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.

The Government of Hungary no longer requires IMF financial assistance and has repaid all of its debt to the fund. Consequently, Hungary enjoys favorable borrowing terms. Hungary's sovereign foreign currency debt issuance carries investment-grade ratings from all major credit-rating agencies, although recently the country was downgraded by Moody's, S&P and remains on negative outlook at Fitch. 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. Since 1995, Hungary has pegged the forint against a basket of currencies (in which the U.S. dollar is 30%), and the central rate against the basket is devalued at a preannounced rate, originally set at 0.8% per month, the Forint is now an entirely free-floating currency. The government privatization program ended on schedule in 1998: 80% 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.

After Hungary's GDP declined about 18% from 1990 to 1993 and grew only 1%–1.5% up to 1996, strong export performance has propelled GDP growth to 4.4% in 1997, with other macroeconomic indicators similarly improving. These successes allowed the government to concentrate in 1996 and 1997 on major structural reforms such as the implementation of a fully-funded pension system (partly modelled after Chile's pension system but enclosing major modifications), reform of higher education, and the creation of a national treasury. Remaining economic challenges include reducing fiscal deficits and inflation, maintaining stable external balances, and completing structural reforms of the tax system, health care, and local government financing. Recently, the overriding goal of Hungarian economic policy has been to prepare the country for entry into the European Union, which it joined in late 2004.

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 70% and 80% of the total, respectively. Germany is Hungary's single most important trading partner. The U.S. has become Hungary's sixth-largest export market, while Hungary is ranked as the 72d largest export market for the U.S. Bilateral trade between the two countries increased 46% in 1997 to more than $1 billion. The U.S. has extended to Hungary most-favored-nation status, the Generalized System of Preferences, Overseas Private Investment Corporation insurance, and access to the Export-Import Bank.

With about $18 billion in foreign direct investment (FDI) since 1989, Hungary has attracted over one-third of all FDI in central and eastern Europe, including the former Soviet Union. Of this, about $6 billion came from American companies. Foreign capital is attracted by skilled and relatively inexpensive labor, tax incentives, modern infrastructure, and a good telecommunications system.

By 2006 Hungary’s economic outlook had deteriorated. Wage growth had kept up with other nations in the region; however, this growth has largely been driven by increased government spending. This has resulted in the budget deficit ballooning to over 10% of annual GDP and inflation rates predicted to exceed 6%. This prompted Nouriel Roubini, a White House economist in the Clinton administration, to state that "Hungary is an accident waiting to happen."

Hungarian economy today

In 2006 Prime Minister Ferenc Gyurcsany was reelected on a platform promising economic “reform without austerity.” However, after the elections in April 2006, the Socialist coalition under Prime Minister Ferenc Gyurcsany unveiled a package of austerity measures which were designed to reduce the budget deficit to 3% of GDP by 2008.

Hungary, as a member state of the European Union is liable for the adoption of the common European currency, the Euro. For this reason Hungary must fulfill the Maastricht criteria.

Because the austerity program the economy of Hungary was slow down in 2007, but due to many large investments, the GDP growth will pick up, in the 2.8-4.0 percent range in the second half of 2008. As looking at the foreign investments, Hungary enjoy the shift from low value textile and food industry to the high tech luxury vehicle producing, build up renewable energy system, and invest large amount money in the five-star tourism, large casinos in Bezenye, in North Budapest, and information technology.

The fulfillment of the Maastricht criteria

¹ Current EU member states that have not yet adopted the Euro, candidates and official potential candidates.
² No more than 1.5% higher than the 3 best-performing EU member states.
³ No more than 2% higher than the 3 best-performing EU member states.
⁴ Formal obligation for Euro adoption in the country EU Treaty of Accession or the Framework for membership negotiations.
⁵ Values from May 2007 report [http://www.ecb.int/pub/pdf/conrep/cr200705en.pdf] . To be updated each year.

The austerity measures introduced by the government are in part an attempt to fulfill the Maastricht-criteria.

The austerity measures include a 2% rise in social security contributions, half of which is paid by employees, and a large increase in the minimum rate of sales tax (levied on food and basic services) from 15 to 20%. While it was widely recognised that something needed to be done, investors have levelled criticism at the program for emphasizing tax increases as opposed to spending cuts.Fact|date=February 2008

The Hungarian Central Statistical Office reported a decrease in real wages in the first five months of 2007. Gross average income rose by 7%, while net average income increased by 1%. When adjusted for inflation, this corresponded to a 7% decline compared with real wages a year before. The drop was due mainly to the 2006 austerity package; however, state measures to combat the black economy may also have had an impact on pay developments.

Hungary's low employment rate remains a key structural handicap to achieving higher living standards. The government introduced useful measures in the key areas, namely early retirement, disability and old pensions.

References

Jon Adam: The transition to a market economy in Hungary

ee also

*List of Hungarian companies
*List of banks in Hungary
*Budapest Stock Exchange
*BUX
*Economy of Europe
*Hungary

External links

* [http://www.oecd.org/hungary/ OECD's Hungary country web site]
* [http://www.oecd.org/eco/surveys/hungary/ OECD economic survey of Hungary]
* [http://csrc.lse.ac.uk/asp/aspecis/20040059.pdf Hungarian IT: Coping With Economic Transition And Globalisation]
* [http://www.koed.hu/medit/endre.pdf The Political and Economic Transition in Hungary]
* [https://www.cia.gov/library/publications/the-world-factbook/geos/hu.html CIA The World Factbook]