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The Transition Experience of Hungary

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The private sector now accounts for over 80% of Hungary's GDP. ... Austerity Program of the Second Democratic Government, Shock Therapy ... – PowerPoint PPT presentation

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Title: The Transition Experience of Hungary


1
The Transition Experience of Hungary
  • March 9th
  • Matthew Gross

2
Background
  • Hungary is located in Eastern Europe, near
    several other transition countries.

3
Quick Facts
  • The private sector now accounts for over 80 of
    Hungarys GDP.
  • Industries mining, metallurgy, construction
    materials, processed foods, textiles, chemicals
    (especially pharmaceuticals), motor vehicles
  • Population 10,006,835 (July 2005 est.)

4
A Glance at Hungary Today, Macroeconomic
Indicators
  • Real GDP per capita 5,339 (2004)
  • (16,800 when adjusted for purchasing power
    parity)
  • Real GDP per capita growth 5 (2004)
  • Real GDP 53,775,700,000 (2004)
  • Real GDP growth 4
  • FDI, of GDP 3 (2003)
  • Inflation, of GDP 7 (2004)
  • Source WDI

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Transition Under Communism
  • Early reforms, called the New Economic Mechanism,
    began in 1968 under communism
  • Opened Hungary up to foreign trade
  • Allowed for some aspects of the market in
    Hungarys economy
  • Allowed a limited number of businesses to
    operate in the service sector

9
New Economic Mechanism, Phase II
  • Enterprise Economic Work Partnership (EEWP), 1982
  • Work subcontracted after normal hours, leading
    to higher wages (and higher incentives)
  • Workers become more productive, firms become
    more profitable
  • With the help of the IMF, Hungary begins to pay
    off its foreign debt (Today, Hungary no longer
    needs IMF assistance, and has paid off all of its
    debt to the fund)

10
By 1989, Hungary had
  • Legalized Bankruptcy (1986)
  • Instituted a two-tier banking system (1987)
  • Started price liberalization, with only 20
    percent of CPI prices controlled by the
    government
  • Instituted an income tax
  • Joined PHARE

11
PHARE
  • Pologne, Hongrie, Assistance à la Restructuration
    Economique (Poland, Hungary, Assistance to the
    Restructuring of the Economy)
  • Signed in 1989, for the purpose of bringing aid
    from EC to Poland and Hungary
  • Poland and Hungary selected because they were
    furthest along in economic liberalization
  • Czechoslovakia, Bulgaria, Yugoslavia, and Romania
    are later added to PHARE

12
The Collapse of Communism
  • Hungary already transitioning slowly towards a
    market economy when communism collapses in
    1989-1990

13
Antall Government 1990-1994
  • Gradualist Approach to Reforms
  • Price liberalization not moving past reforms
    already made under communism, 20 percent of CPI
    prices still centrally controlled through 1997
  • Failure to Reform Social Programs causes strain
    on budget deficit
  • Trade liberalization CEFTA signed, lowers trade
    barriers 1991 trade agreement with the EC lowers
    trade barriers and allows Hungary to keep its
    protective tariffs for a limited time.

14
Problems
  • High External Debt Hungary chooses to pay its
    foreign debt in whole, without rescheduling or
    restructuring, in order to improve its
    international credit rating
  • High Budget Deficit Government met resistance
    to attempted social benefit restructuring
    deficit exceeds IMF accepted levels

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Politics Impede Reform
  • A large portion of Hungarys population is
    dependent in some way upon government social
    expenditures, making reform difficult. Hungary
    spends, in particular, more on public health and
    non-aged related (unemployment, social
    assistance, disability, etc.) programs than the
    OECD average.

19
More Problems
  • Reduced exports to the former Soviet bloc
  • Declining industrial output
  • Sharply rising unemployment (12 in 1993)
  • High external debt
  • Budget and current account deficits approaches
    10 of GDP

20
Austerity Program of the Second Democratic
Government, Shock Therapy
  • New government elected in 1994
  • Economic Stabilization Package adopted in 1995
  • Budget spending slashed (15), finally
  • Fixed exchange rate eliminated, and replaced with
    a crawling peg
  • Currency Devaluation

21
Does it Work?
  • GDP growth slows, but . . .
  • Trade balance improves
  • Current account deficit falls 5.6 in 1996
  • Government deficit/GDP ratio falls 5.8 in 1996

22
FDI
  • Hungary traditionally attracts a very high level
    of FDI
  • Hungary allows for 100 foreign ownership
  • FDI per capita comparison
  • Slovakia 169
  • Bulgaria 121
  • Czech Republic 726
  • Hungary 1,519

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Why the Recent Decline in FDI?
  • Possible Answers
  • FDI has reached equilibrium
  • FDI is being impacted by decline in FDI source
    countries (Germany, US) economies
  • FDI is being directed to other transition
    countries who are catching up in liberalization
    of foreign trade barriers

26
Changes in Trade Partners
  • Prior to 1989, two-thirds of Hungarys trade was
    with CMEA countries
  • By 1997, trade has shifted primarily to the EU,
    with EU countries making up 70 of Hungarys
    trade.
  • Hungarys primary trading partner is now Germany
  • The U.S. has made Hungary a most-favored-nation

27
Hungary Today
  • Joined NATO in 1999
  • Joined EU in 2004
  • Unemployment rate 7.2 (2005)
  • Inflation rate (consumer prices) 3.6 (2005)
  • GDP - real growth rate 4.25 (2005 est.)
  • Debt - external 42.38 billion (2003 est.)
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