Hungary

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Hungary
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Background

• Hungarians descended from the Magyars, an ancient
  Finno-Ugric people from central Russia
• i.e., not Slavic
• distinct Turkish cultural influence, especially
  in south
• strange language much more related to Finnish
  than the Slavic languages of neighboring
  countries
• not much in common with Slavic neighbors,
  especially Russia

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• Small country
• a little larger than Indiana
• population about 11 million
• Good agricultural land
• flat
• good climate

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• Fairly urbanized
• about 50
• Middle income relative to other CMEA countries
• lower per capita GDP than Czechoslovakia or East
  Germany
• higher than Poland, Bulgaria, Yugoslavia
• about on par with Greece (among capitalist
  countries)
• http//www.countryreports.org/hungary.htm

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If Poland is the former Soviet satellite that has
engaged in shock therapy, Hungary is the former
Soviet satellite that has engaged in gradual
transformation. It underwent a gradual movement
toward a market economy since introducing its New
Economic Mechanism (NEM) in 1968.
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New Economic Mechanism

• Attempt to create a market socialist economy
• Launched in late 60s
• Some enterprises given authority to make own
  production decisions and to keep profit
• Enterprises allowed to engage in foreign trade

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Evaluation of NEM

• Not a success
• Never fully implemented
• only about half of enterprises
• least important
• Subsidies continued
• soft budget constraint
• Performance probably would have been better
  without it

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Reforms of Mid to Late 1980s

• Directors chosen by workers
• incentives of directors shifts to greater
  responsiveness to workers
• FDI encouraged
• Enterprises allowed to sell bonds and stocks to
  raise capital
• an attempt to get enterprises off subsidies

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• In June, 1988 enterprise workers allowed to
  initiate privatization
• spontaneous privatization
• managers in position to sell to themselves,
  friends, or foreigners at ridiculously low prices
  and keep proceeds
• many of the new owners were the old nomenklatura
• not real popular with the ordinary people

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Economic Problems Prior to Transition

• Stagnation
• one of slowest growing CMEA countries
• real per capita growth of 1 in 80s
• Low factor productivity
• misallocation of capital
• inefficient investment to prop up failing
  enterprises
• low labor productivity and high absenteeism

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• Foreign trade imbalances
• more involved in trade with non CMEA countries
• most exports were raw materials whose prices were
  falling
• most imports were manufactured goods whose prices
  were rising
• terms of trade going against them
• trade deficit throughout 80s
• losing foreign currency reserves
• lost Soviet subsidy in form of oil purchases at
  low prices that were then resold at high prices
• had been an important source of foreign currency

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• Inflation
• high but not like Poland (244.1 in 1989)
• around 30 in 1989
• Foreign debt
• mushroomed during 80s
• cost of servicing foreign debt a major drag on
  economy
• Budget deficit
• accumulated budget deficits resulted in
  unsustainably high debt
• cost of servicing domestic debt a major drag on
  economy

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Privatization

• Began earlier than elsewhere
• by 1991 between 20 and 30 percent of GDP from
  private producers
• First attempt started in 1989 when enterprises
  allowed to transform themselves into private or
  mixed firms
• virtual theft of state property
• tremendous public dissatisfaction

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• State Property Agency created in 1990 to manage
  privatization
• state property transferred to it
• hired consultants to value assets
• selected enterprises it thought would be most
  attractive to buyers
• sold generally through bids
• mostly to foreigners
• Began with shops and service enterprises
• Large SOEs much more a problem
• Pace slow but fairly steady

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Forms of Privatization

• Restitution
• not as big a factor as in Czechoslovakia
• 1.2 million given coupons to but land, business,
  apartments
• compensation to those whose property nationalized
• Buyouts by managers and workers
• short lived and not encouraged

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• Direct sale mostly to foreign investors (sale to
  cash-paying buyers)
• the major form of privatization
• Liquidation of unprofitable SOEs
• privatization of an indirect form
• gets state out of enterprise ownership
• reduces need for subsidies

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Banking

• Two-tiered banking introduced early
• 1987
• Commercial banking dominated by five formerly
  state-owned banks
• Major part of banking industry foreign owned
• over 50

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Public Finance

• Major source of revenue
• social security payroll tax
• VAT tax is next
• Income taxes next

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Evaluation of Transition

• Start similar to others
• sharp drop in output
• about 18 between 1989 to 1993, but less than
  most other former Soviet bloc countries
• Recession lasted longer than in Poland and
  Czechoslovakia
• longer J-curve
• Recovery slow but constant
• has now overtaken Czech Republic

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• Inflation steadily declining
• Unemployment steadily declining
• Macro balances steadily improving
• Attract more FDI than any other former CMEA
  country

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