Everything about Economy Of Hungary totally explained
The 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 econonomy 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. 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.
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." 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."
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, currently set at 0.8% per month. 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.
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 (External Link
). 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.
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.
Further Information
Get more info on 'Economy Of Hungary'.
|
External Link Exchanges
Do you know how hard it is to get a link from a large encyclopaedia? Well we're different and will prove it. To get a link from us just add the following HTML to your site on a relevant page:
<a href="http://economy_of_hungary.totallyexplained.com">Economy of Hungary Totally Explained</a>
Then simply click through this link from your web page. Our crawlers will verify your link, extract the title of your web page and instantly add a link back to it. If you like you can remove the words Totally Explained and embed the link in article text.
As long as your link remains in place, we'll keep our link to you right here. Please play fair - our crawlers are watching. Your site must be closely related to this one's topic. Any kind of spamming, dubious practises or removing the link will result in your link from us being dropped and, potentially, your whole site being banned. |
