REVIEW OF ECONOMIC PERSPECTIVES – NÁRODOHOSPODÁŘSKÝ OBZOR,
VOL. 14, ISSUE 1, 2014, pp. 55–88, DOI: 10.2478/revecp-2014-0004
Evaluation of Economic Transformation in Hungary
Libor Žídek1
Abstract: The paper analyses transformation process in Hungary between 1989 and
2004. The goal of this paper is to analyze and evaluate the transformation process in
Hungary. The structure of the paper follows this general goal. First of all, an analysis of
economic development of the country before the fall of the communist regime is carried
out because this determined the whole process which followed. Then we shortly
mention political development that had a significant impact on the transformation
process and its results. In the next part we concentrate on the main steps in the
economic transformation, and consequently we devote space to specific aspects –
privatization, for example. The main economic indicators of this period are analyzed in
the final part. We conclude that the transformation process achieved its main economic
goal and the economy’s ability to grow increased. At the same time, however, the
transformation process created environment for the subsequent economic problems.
Key words: Hungary, economic transformation, economic growth
JEL Classification: P2, N14
Introduction
The goal of this paper is to analyze and evaluate the transformation process in Hungary.
In the author’s opinion, the main goal of the transformation process was a shift in the
paradigm of the economy from the centrally planned system to a form of a market
economy. In our view, this goal was generally reached with the accession to the EU.
This is why we limit our paper to the period ending with 2004. We consider it an
indirect proof that the environment reached a well-functioning market economy
(formally it is a condition of the accession). The interesting question is how this state
was achieved. We should not take it for granted because we can see several
transforming countries that are still quite far from the state of a well-functioning market
economy (for example Belarus). A shift in the overall trend of the economic
development was the second goal of the transformation process, a more specific one, in
our view. The centrally planned economy was doomed to fail – economic growth was
declining and in fact negligible in the 1980s. As a consequence, the Hungarian economy
was lagging behind the market economies. Any change of the pattern of the economy
without improving its growth ability would be worthless. The paper tries to evaluate the
progress from this point of view.
We see the process of the change as highly interesting. One of the reasons is that the
country needed to overcome many obstacles on the way to become a market economy.
For example, it suffered from numerous imbalances in the middle of the first
1
Department of Economics, Faculty of Economics and Administration, Masaryk University,
Lipová 41a, 602 00 Brno, Czech Republic, email: zidek@econ.muni.cz
REVIEW OF ECONOMIC PERSPECTIVES
56
transformation decade. The situation was critical, and in some aspects similar to the
contemporary situation in Greece. The steps that were taken when dealing with the
crisis could be seen as an example for the contemporary problems as well. Generally,
we believe that we can always learn from history and the transformation process offers a
much interesting experience and a lot of ideas.
We will start by describing the long-run political development in Hungary, which had
an impact on the state of the Hungarian economy at the end of the 1980s, which is
analyzed in the second chapter. In the next step we will concentrate on the political
development during the transformation era, for which we consider the period between
1990 and 2004 (the accession to the EU). We believe that the accession to the EU can
be seen as a proof of the state of the Hungarian economy. The main economic
development is analyzed in the 3 following chapters. We concentrate on the sequence of
the reforms first of all. Then the privatization development is examined in a stand-alone
block. These two chapters describe the main economic steps. Then, in the last chapter,
we sum up economic results in the studied period. In specific subchapters, economic
growth, structure of the economy, inflation, unemployment and external relationship are
analyzed.
We would like to point out that while working on the paper, we were confronted with
troubles regarding data. Primarily, there were problems with length of consistent data
series because it was highly difficult to find relevant and homogenous data that would
cover the whole transformation period. As a consequence, we were forced to use shorter
series. The data that we use are in our view the best that could be obtained.
And we would like to mention that there are data for the Czech Republic
(Czechoslovakia) or Poland in some charts or tables. The primary goal of this article is
not comparison, and these data should only help the reader to see the Hungarian process
in a broader context. The Czech Republic and Poland are generally used as benchmarks
for development.
Long-run Political Development
This text focuses on development during the transformation process but it is necessary
to see Hungary in a broader prospect to understand it better. The long-run economic
development has deep roots in our point of view. The key event was the consequence of
the First World War. Hungary lost important part of its land to successor states of the
Austro-Hungarian Empire and large Hungarian minorities found themselves in the
neighboring countries – Czechoslovakia, Romania and Yugoslavia. It was deemed by
Hungarians as totally unjust. The main goal of Hungarian diplomacy in the interwar
period was unifying all Hungarians into a single state, or in other words to recreate large
Hungary. The way to achieve this goal was in cooperation with fascist Germany in the
1930s – and Hungary became Germany’s ally during the war.
As a consequence, we can hardly talk about “liberation” of Hungary by the Red Army at
the end of the war. Anyway, Hungary fell into the zone of the Soviet influence. And the
communists (Hungarian Workers’ Party) managed to establish a Soviet-style regime in
1949. But Hungarians were among the first that with force stood up against their regime
during the riots of 1956. This uprising was bloodily suppressed by the Soviet troops but
even the communist establishment understood that an important part of the Hungarian
Volume 14, Issue 1, 2014
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society disliked the regime. János Kádár (1912-1989) became the leader of the
collaborationist government after the uprising. His government first of all harshly
suppressed its opponents but in the 1960s started to relax the political and economic
environment. Due to this, the regime is sometimes called “goulash socialism” (Kornai,
1996), which means a situation where people are generally willing to accept the regime
in exchange for a more open economy (foreign goods) and more freedom. This trend is
clearly visible in the economic policy or reforms that were approved after 1968 (see the
next subchapter).
Political relaxing deepened during the time and led even to the forming of an opposition
in the middle of the 1980s. Negotiations around the round table took place in 1989,
resulting in a change of the constitution that guaranteed transition to democracy, market
economy, human rights and explicit ban of a single party government (even in the
situation when the party has majority in the parliament). This change was approved on
October, 23, 1989, and it is considered to be the beginning of new democratic Hungary.
This way, the country “jumped” directly into democracy with free elections in March
1990. Hungarians avoided any form of pseudo-democracy or government of national
unity.
Economic Situation and Development Before 1989
Political development had an immediate impact on the development of the Hungarian
economy. The centrally planned system had been established in the country after the
Second World War. There were of course differences to other centrally planned systems
in the region but the basis of the system was similar. The Hungarian system was
generally never as tough as in Czechoslovakia but even bigger differences started to
appear as they introduced reforms after 1968.
The core of the reforms (named New Economic Mechanism) consisted in
decentralization of the decision-making process in the economy that was shifted from
the centre to the companies. But the main decisions (for example about investment or
armament industry) were still made by the government. On the other hand, companies
were relatively independent – in contrast to their counterparts in Czechoslovakia.
The central government regulated prices, wages and interest rates but in the course of
time, more responsibility was shifted to companies. And there were many more striking
differences. In the 1980s, foreign direct investment was allowed and joint-ventures with
western companies appeared. As early as 1989, Hungary lured the first car producer –
Suzuki, and Tunsgram was purchased by GE Lighting Europe.
Hungary unified its exchange rate in 1981 already.2
And following 1988, all enterprises
were allowed to pursue international trade in convertible currencies after gaining a
(virtually automatic) registration with the Ministry of Trade (Medvec, Stone, 1990).
Hungary became a member of the IMF already in 1982. The country agreed on a standby
program as early as 1988 – in comparison, Czechoslovakia did not become a
member of the organization during the communist period at all.
2
Multiple exchange rates were common in centrally planned economies. They created distortion
and malfunctioning of the system. Unifying exchange rate was a step in the direction towards an
ordinary economic system.
REVIEW OF ECONOMIC PERSPECTIVES
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Hungary passed a bankruptcy law in 1986 (even though it was not used). A two-tier
banking system was introduced in 1987 – the previous monobank split into the central
bank and 3 commercial banks. The economy started to open that year, too; in 1990, 70%
of their production had already been under pressure of foreign competition (Stojanov,
2004). Hungarian companies were allowed to trade internationally on their own
accounts.
A new commercial code was approved in 1988. The main legal forms were the same as
in the market economy – and all of the legal forms were equal. The government started
to transform state companies into joint-stock companies in 1989.
Hungary was the first country of Central Europe to have incorporated value added tax
into the tax system, which occurred in 1988. Furthermore 63% of all prices were
liberalized already in 1989.3
There were continuous devaluations of the forint – from
45.8 to USD in 1986 to 63.2 in 1990 (Vintrová, 1992).
Ownership structure changed as well. Some private companies (especially in services
and trade) were allowed to exist and their numbers increased steadily, which can be
seen in the following table. There was even support for new private entrepreneurs.
According to a new act of 1988, newly created businesses got a discount on tax on
profit accounting to 55% in the first year, 35% in the second year, and 25% in the third
year (Earle at al., 1994).
Table 1: Number of Private Shops and Restaurants in Hungary
Year Shops Restaurants
1970 9,043 682
1980 9,946 1,457
1985 19,968 5,487
Source: Bethkenhagen, Hungary in GDR and Eastern Europe, 1989
Bethkenhagen (1989) wrote that private sector had created 3% of national product in
1970. In 1989 it created already more than one quarter (Holman, 2000) and two thirds
of Hungarians had an income from private activity in addition to their main jobs in a
state company or a cooperative. These numbers are several times higher compared to
Czechoslovakia´s numbers but are of course far from any market economy.
The previous text shows that Hungarian economy was ahead of the others and to a
certain degree prepared for the shift to the market economy. But at the same time, there
were significant problems on the macro-economic level, too: The country had huge
deficits of the public finance and trade. Both of them can be connected to the “goulash
socialism” because government had to “bribe” its citizens. Together, these deficits were
responsible for a large foreign debt – 70% of GDP (Markiewicz, 2003). This size of the
deficit was crucial for the following transformation steps. But this number was still
3
EBRD has a basket of 15 basic consumption goods. The statistics says that in 1989, only prices
of 7 out of the 15 goods were administrated by the government. The corresponding number for
Poland was 10, and for the Czech Republic 15 (EBRD, 26. 11. 2007).
Volume 14, Issue 1, 2014
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lower than in Poland. Another way of measuring external debt can be seen in the
following table.
Table 2: External Debt/Exports of Goods and Services in %
1985 1986 1987 1988 1989 1990
Czechoslovakia 32.4 33.8 36.2 40.2 45.1 56.3
Hungary 148.5 166 174.9 173.8 169.7 171.7
Poland 252.1 259.5 294.8 254. 261.7 251.5
Source: Jonáš, Ekonomická transformace v České republice, 1997
The role of the government in the form of redistribution used to be very high in
Hungary during the communist period – or in fact one of the highest even among the
centrally planned economies – see the next table.
Table 3: Government Incomes and Expenditures in % of GDP in 1989
Country Incomes Expenditure
Czechoslovakia 62.1 64.5
Hungary 61.3 63.7
Poland 46.8 48.7
Rumania 45.7 40.7
Bulgaria 57.7 60.1
Soviet Union 43.8 50.7
USA 34.3 36.5
Germany 45.7 45.9
Canada 40.3 43.9
France 46.2 47.8
Source: Jonáš, Ekonomická transformace v České republice, 1997
Table 4: Structure of Employment in 1990 (Shares in %)
ČSSR Hungary Poland (1989)
Agriculture 11.8 17.5 26.7
Industry 45.4 36.1 36.6
Services 42.8 46.4 36.7
Source: Berend, From the Soviet Bloc to the European Union, 2009
The structure of the economy was troublesome, too. In the following table we can notice
a relatively high percentage of people still working in agriculture. On the other hand,
Hungary had a relatively low share of industry, which was assumed to be the most
problematic part of the economy in the transformation process. And it meant relatively
REVIEW OF ECONOMIC PERSPECTIVES
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lover ecological burden, too. At the same time, Hungary had the highest proportion of
people working in services in Central Europe.
How the reforms and changes during the communist reign reflected in the economy? As
we can see in the following figure, the overall trend in Hungary was similar to other
countries of the Eastern Block after the Second World War, but the growth was affected
by more significant fluctuations than in Czechoslovakia. The economy was able to
achieve strong growth during the 1950s but this ability declined in the following
decades to very low growth during the 1980s (the average was only 0.7% per a year –
Maddison, 2010). The general trend is clearly visible in the following figure. Economic
reforms generally did not lead to improvement in the trend of economic growth. On the
contrary, economic results were worsening.
Figure 1: Economic Growth During the Communist Regime (1948-1989) and its
Trend Estimated with HP Filter
Source: Maddison, Historical Statistics - http://www.ggdc.net/MADDISON/oriindex.htm
(11.10.2010)
In the 1980s inflation was relatively high as well (see Figure 9) – on average it achieved
9% (IMF, 9. 10. 2010), which was much higher in comparison to Czechoslovakia, but a
good result when compared to Poland. Hungary had a high level of debts and deficit of
trade balance. And there was even a small number (12 000) of unemployed people in
1989 – 0.5% of the labor force (EBRD, 26. 11. 2007).
Summing up the previous information, we could say that Hungary was relatively well
prepared for the transformation at the level of formal institutions and at the
microeconomic level. However, it faced problems at the macroeconomic level: a
relative openness of the society resulted in a relatively higher proportion of
people/economists with knowledge about functioning of the market economy. Some
Hungarians even suffered a kind of “hubris” at the end of the 1980s that was caused by
-6
-4
-2
0
2
4
6
8
10
1950 1955 1960 1965 1970 1975 1980 1985 1990
economic growth
HP filter
Volume 14, Issue 1, 2014
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the progress of the reforms. They thought that the transformation process will be smooth
because of the steps that had been already taken in the decade. This attitude led to a
belief that radical steps were not necessary and it lasted well into the 1990s when people
finally realized that unpopular steps were necessary to take (Srholec, 2001).
General comparison of the situation at the beginning of the 1990s can be seen in the
following table.
Table 5: Basic Economic Indicators at the Beginning of the 1990s*
CR HUN POL
Inhabitants in millions 10.36 10.36 38.11
Economic activity in % 51.6 52 42.7
Employment in industry % of total 37.9 29.7 28.4
Investment in % 37.9 29.7 28.4
GDP in billions $ PPP 98.97 59.6 160.86
GDP/person $ PPP 9,550 5,750 4,221
EX per person in $ 873 922 376
IM per person in $ 945 832 250
Gross external debt per person 686 2,077 1,270
In % of GDP 21.9 65.1 82.2
*- 1990 or the closest year
Source: Chvojka, Zeman, Tendence dosavadního vývoje zemí střední a východní Evropy, 2000
We described political and economic situation in Hungary at the end of the 1980s. It
creates a starting point for our analyses of the whole transformation process. Before we
turn our attention towards the economy, we shortly describe political development
during the period, which creates a framework for the development of the economy.
Political Development
We have already mentioned that the first free elections took place in March/April of
1990. The first post-communist government was created by Jozsef Antall (1932-1993).
The government was central-right and based on Christian and national parties. It had a
strong majority of 60% in the parliament, which gave the government a stable position.
One of its achievements was that Soviet troops left Hungary in the middle of 1991. In
the same year, the association agreement with the European Community was signed as
well.
There was a great discussion about the role of the previous communist elites after the
political changes in all of the post-communist countries. In Hungary, the Communist
Party transformed itself into the Hungarian Socialist party (MSZP) – a standard left
wing (social democratic) party after 1989. But there is an interesting question of the
specific role of the nomenclature after the political change. A survey was executed
among these previous elites in 1993 and its result can be seen in the following table. We
REVIEW OF ECONOMIC PERSPECTIVES
62
should notice that only a fraction of the previous nomenclature members occupied high
political positions. At the same time, only a very small percentage of them became
entrepreneurs, which is true about all Central European countries.
Table 6: Occupational Destinations in 1993 of People Who Were in the
Nomenclature Positions in 1988 by Country
Occupation in 1993 Czech Republic Hungary Poland
All in position of authority 51.7 43.1 51.2
High political office 3.0 6.4 9.0
High manager-public 16.2 11.2 13.4
High manager-private 12.8 2.4 9.1
High cultural office 1.1 4.4 7.1
Low-level managers 12.6 13.0 8.6
Entrepreneurs 6.0 5.7 4.0
Professionals 12.2 19.9 13.9
Workers 12.6 5.5 9.5
Retired early (younger than 65) 15.4 19.1 17.2
Other retired and unemployed 8.1 12.6 8.2
All respondents
(number)
100%
(468)
100%
(803)
100%
(849)
Source: Eyal, Szelényi, Townsley: Making Capitalism Without Capitalist: Class Formation and
Elite Struggles in Post-Communist Central Europe, London Verso, 1998
The MSZP post-communist left wing party won the next elections in 1994 by landslide.
Due to the economic situation they were forced to introduce tough economic measures
(of which more later). A right wing coalition government (Fidesz was the main party)
was created after the elections in 1998. Hungary joined NATO during its regime. Fidesz
won the next elections in 2002 as well but was not able to assemble a government that
was formed by left wing parties instead.
Generally, the country adhered to democratic principles for the whole period and
became a member of the European Union in 2004. But there has been a lasting
dissatisfaction with the transformation process and life in general in Hungary. The
results of one of the surveys (2006) are depicted in the following table.4
Personally, I do
not have any reasonable explanation for this attitude. We can consider high expectations
of the Hungarians at the end of the 1980s and a possibility that they were generally
content with the semi-capitalist system of the goulash communism.
4
There are other (older) surveys that detect the same attitude among Hungarians. The conclusion
is that their view was not affected by the financial crisis.
Volume 14, Issue 1, 2014
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Table 7: Results of the Survey – A Comparison of Economic Situation in 2008 and
1991 (Q: Thinking back to 1989/1991, do you approve of your country moving
from having a state controlled economy to having a market economy?)
Strongly
approve
Approve
Disapprove
Strongly
disapprove
DK/Refused
Total
Poland Fall 2009 26 45 11 4 13 100
Spring 1991 25 55 7 4 9 100
Czech Rep. Fall 2009 28 51 12 3 5 100
Spring 1991 42 45 4 3 6 100
Hungary Fall 2009 9 37 27 15 13 100
Spring 1991 22 58 9 1 10 100
Source: The PEW: Global Attitudes project, www.pewglobal.org, published 2. 11. 2009, 15. 5.
2013
After this short summary of the political development we can turn our attention towards
economic aspects of the transition process. First of all, we will briefly sum up a
discussion about the pace of reforms.
Basis of economic transformation
The sequence of the reforms in Hungary was under similar discussion as in other
countries at the beginning of the transformation period. Hungary was specific in the fact
that its communist party had started reforms before the fall of the regime already.
Hungarians therefore naturally believed that it was not necessary (or it was de facto
impossible) to follow radical reforms. There was a general belief that slower reforms
can bring the same results with lower costs. On the other hand, proponents of a shock
therapy did not trust government ability to establish market economy. As a consequence,
the first period of Hungarian transformation is often described as gradualist but there are
always troubles with the definition of gradualism. Some of the Hungarian measures –
especially bankruptcy law – can be seen as extremely radical. The second subchapter
deals with reforms which took place in the middle of the 1990s, and the last, third
subchapter concentrates on the period after the turn of the century.
Gradualist period
Most authors (for example Holman, 2000, or Lavigne, 1999) regard the development in
the first half of the 1990s in Hungary as gradualism. There is a good basis for this view
– as we wrote above – since many of the important and necessary steps in the direction
towards the market had been already taken or at least prepared. We have already
mentioned liberalization of prices – in 1991, when 90% of all prices had already been
liberalized (Vintrová, 1992). The economy was partly deregulated as well; Hungary did
not have a huge surplus of money in circulation and their exchange rate was relatively
sound (Vintrová, 1992). We should keep in mind the progress in institutional
REVIEW OF ECONOMIC PERSPECTIVES
64
development as well.5
Under these circumstances it is hardly imaginable to carry out a
real radical economic transformation, let alone the shock therapy. At the same time, we
should mention that there was no demand for a fast or radical change.6
We have already mentioned that Hungarian economy had suffered from macroeconomic
imbalances. Laki (1993) wrote that the Antall government had had three main tasks – to
keep creditworthiness of the country, reduce inflation and the growing public deficit.
The last of these tasks was the most demanding one because after the communist regime
had collapsed, problems with public finance worsened. With the fall of the regime the
state income declined but the cabinet was not able to simultaneously decrease its
expenditures. On the contrary, the government quite often took on responsibilities for
late state companies that had provided social services to the public and it led to another
increase in spending (Allen, Hass, 2001).
Borish and Noël (1996) wrote that state owned companies had been losing money and
their gross loss had reached 2.6% of GDP in 1990, 8.4% in 1991, 14.2% in 1993, 10.1%
in 1993, and 7.5% in 1994. The IMF recommended that Hungarian government
decrease deficits but the cabinet was not capable of meeting these expectations. A part
of this deficit was even monetized, as we can see in the following table.
Table 8: Overall Government Balances and Central-bank Financing of
Governments, 1992-1997 (As a Percent of GDP)
Country Overall government balances Central-bank financing
1992
1993
1994
1995
1996
1997
1992
1993
1994
1995
1996
1997
Czech R. … ... -1.2 -1.8 -1.2 -2.1 ... -2.1 -2.4 -1.0 -0.8 0.7
Hungary -6.9 -8.5 -8.3 -7.1 -3.1 -4.6 16.5 13.2 11.2 7.5 7.3 1.7
Poland -7.5 -4.0 -2.0 -2.7 -2.5 -2.3 5.2 1.5 1.5 0.1 0.1 0.5
Source: Dabrowski, Disinflation Strategies and their Effectiveness in Transition Economies, 2003
The government was unwilling to execute unpopular steps – like decline in real wages
or devaluation (on the contrary to Czechoslovakia and Poland) – either.7
Holman (2000)
writes that real wages in all countries declined at least by 20% (for example in Bulgaria
by 50%), but Hungary was an exception – see the following table. It means at the same
time that wage costs remained relatively high in comparison to other Central European
countries, which resulted in growing imbalances. The IMF criticized the government for
5
Overall Hungarian progress has been supported by foreign funds in the form of Poland and
Hungary Aid for Economic Restructuring (PHARE) since the autumn of 1989.
6
In Hungary, a new constitution (unlike in all neighbouring countries) was not ratified until 2011,
there were only amendments.
7
In order to keep the real exchange rate roughly stable, Hungary has followed a path of irregular
devaluations of the exchange rate since 1990. The currency was devaluated three times in 1990
but together only by 5%; twice in 1991 (together 21%); three times in 1992 (together 6%); five
times during 1993 (together 15%) and seven times during 1994 (together 17%) (Magyar Nemzeti
Bank, http://english.mnb.hu/Root/ENMNB/Statisztika, 20. 10. 2010).
Volume 14, Issue 1, 2014
65
not keeping fiscal promises in 1992 when the country significantly exceeded the agreed
ceiling, mainly due to social requirements.
Table 9: Real Wages: Annually in Percentage Change
1988 1989 1990 1991
Czechoslovakia 2.1 0.8 -5.8 -23.5*
Hungary -4.3 -3.8 -7.5**
Poland 15.9 -4.4 -29.7 2.0**
* - Jan – Sept 1991; ** - preliminary
Source: Winiecki; Regional Survey, 1993
However, Hungarian government proceeded with reforms of the business and the
financial sectors at the same time. Steps were taken to improve the legal system, to
privatize, to improve antitrust policy, and foremost in the field of bankruptcy.
Hungarian gradualism is highly questionable if we take into account the bankruptcy
legislation. A very tough new code was in effect from the beginning of 1992. If a
company was not capable of paying its debts within 90 days, it had to call to start
bankruptcy proceeding itself. The law was in force for 18 months, and 5,000 subjects
went bankrupt (Holman, 2000). These subjects together had created 10% of Hungarian
GDP (Nestor, Thomas, 1995). This bankruptcy proceeding was in fact a privatization
method at the same time because around 500 large companies that had gone bankrupt
were transferred into private ownership (Nestor, Thomas, 1995). The process had a
negative impact on the banks that were affected by the growing number of classified
credits. We should recall that in comparison to that, bankruptcy legislation was very
weak in the Czech Republic – in the same period considered, the very first law was
approved in 1993 only and it could not been applied against companies waiting to be
privatized. Politicians in Hungary realized that their code was probably too tough and it
was amended in 1993. This amendment meant relaxing and resulted in less than 100
companies going bankrupt in 1995 (Srholec, 2001). The same author thinks that the
process cleaned the economic environment and improved the position of Hungarian
banks in the long run.
To sum up, we can see progress on the microeconomic level and unsolved problems on
the macroeconomic level as a consequence. Czechoslovak reformers, on the other hand,
kept the macroeconomic values relatively stable in the first years of transformation but
bankruptcies were for example limited.
The economic results in Hungary in this period were not positive. If the country
represents a case of a gradual reform, then gradualism turned out incapable of avoiding
transformation recession. Hungary suffered similar (or deeper) decline as other
countries in Central Europe. Unemployment rate was relatively high. Inflation
development did not embrace the typical jump after the price liberalization (that took
place in other countries) but there was a continuously higher inflation rate. On the
positive side, a relatively high level of foreign capital was flowing into the country. It
had again its roots in the previous liberalization because foreign investors were familiar
with situation in Hungary. At the same time, deficit of the current account appeared.
REVIEW OF ECONOMIC PERSPECTIVES
66
The Bokros Package
In 1994, Hungarian economy faced a difficult situation with many imbalances, as we
can see in the following table. Government deficit reached 8.4% of GDP, public debt
was 88% of GDP, the deficit of the current account stood at 9.5% GDP, inflation was
18.8% and the unemployment rate nearly 11%. The level of imbalances was critical –
Holman (2000) writes that the IMF placed Hungary among three most vulnerable
economies in the world after the Mexico crisis. As a consequence, the spread on
external debt to Libor rate reached 500 basilar points (Stojanov, 2004).
Table 10: Selected Economic Indicators for Hungary, 1993–1998
1993 1994 1995 1996 1997 1998
Real sector: % change
Real GDP -0.6 2.9 1.5 1.3 4.6 5.1
Exports of goods/services (real) -10.1 13.7 13.4 7.4 26.4 16.3
Imports of goods/services (real) 20.2 8.8 -0.7 5.7 25.5 22.5
Fixed investment (real) 2 12.5 -4.3 6.7 9.2 11.4
Private consumption (real) 1.9 -0.2 -7.1 -2.7 1.7 3.8
Average CPI 22.5 18.8 28.2 23.6 18.3 14.3
Gross wage growth (real) -0.5 5.1 -8.9 -2.6 3.4 4.4
Real effective exchange rate
(unit labor cost)
4.3 7.3 19.4 8.6 2.7 8.5
Unemployment rate (end period) 12.6 10.9 10.9 10.7 10.4 9.1
Real sector: % of GDP
Exports of goods and services 26.4 28.9 37.3 38.9 45.5 49.8
Imports of goods and services 34.6 35.4 38.5 39.9 46 52.3
Fixed investment 18.9 20.1 20 21.4 22.1 23.2
General government
Overall balance (excl.
privatization)
-6.6 -8.4 -6.4 -3 -4.8 -4.7
Overall balance (incl.
privatization)
-6 -7.5 -3.2 0.8 -1.8 -4.4
Primary balance (excl.
privatization)
-2.7 -2.2 2.2 3.7 2.7 1.6
Expenditures 60.8 60.4 54.3 49 49.2 47.1
Public debt 90.4 88.2 86.4 72.8 63.9 60.2
External accounts
Trade balance -8.4 -8.8 -5.5 -5.9 -3.8 -4.4
Current-account balance -9 -9.5 -5.3 -3.7 -2.1 -4.8
Foreign direct investment 6 2.8 10 4.4 3.6 3
Gross external debt 63.7 68.4 70.9 61 51.9 56.3
Net external debt 38.7 45.4 36.6 31.4 24.4 26
Source: Stojanov, Hungary and Bosnia and Herzegovina: A Success and a Failure of Transition,
2004
The elections took place in 1995. Social democrats, the winners, agreed to apply a
program that is often called the Bokros package according to the then ministry of
finance Lajos Bokros (1954-). The set of reforms had been developed in cooperation
with the IMF. The government promised to follow steps in the direction to austerity and
Volume 14, Issue 1, 2014
67
the IMF in exchange provided the country with a loan of USD 300 million and the
EBRD released its funds as well (Hanley, King, János, 2002).
The package involved many other remedies, too. The exchange rate was devaluated by
9% and the regime changed to crawling peg.8
At the same time, the government
introduced temporary import surcharge – 8% on all (non-investment) goods,9
and
applied many restrictive measures as well: It decreased the number of jobs in state
companies; university tuitions were introduced; rules for sick benefits were tightened
and child benefits were not blanket any more. Agreements on real wages reduction were
reached with most trade unions. At the same time, the government decided to quickly
privatize nearly all state companies bar railways and the post – mostly in the form of
foreign direct investment, as we can see in the following table.
Table 11: FDI Inflows in Hungary in USD mil (1972-2000)
In cash
Of which
privatization
income
as%
Investment in
kind
Total
1972-1989 387 - 783 1170
1990 311 20 6.4 589 900
1991 1459 435 29.8 155 1614
1992 1471 492 33.4 170 1641
1993 2,339 1,163 49.7 142 2,481
1994 1,147 103 9.0 173 1,320
1995 4,453 3,370 75.7 185 4,638
1996 1,983 618 31.2 57 2,040
1997 2,085 1,827 87.6 22 2,107
1998 1,935 485 25.1 11 1,946
1999 1,651 295 17.9 6 1,657
2000 1,600 0 0.0 0* 1,600
1990-2000 20,434 8,808 43.1 1510 21,876
*- in the fiscal year 2000, this figure was equal to USD 280.00 – which is 0 while rounded to
millions
Source: Csáki, From Transition to Integration, 2002, own calculations
Holman (2000) adds that these general restrictive measures were similar to
Czechoslovak steps at the beginning of the transformation process, and it seems that
they are unavoidable in the transformation process. We should remark that some of the
8
The crawling peg system is based on small devaluations of the currency on the regular (usually
monthly) basis. First of all, the central bank decided on devaluation of 1.9% per month as of
spring of 1995. The rate of devaluation declined in the following years to 0.6% per month from
January 1, 1999, 0.3% from January 1, 2000, and finally 0.2% from April 1, 2001 (Magyar
Nemzeti Bank, http://english.mnb.hu/Root/ENMNB/Statisztika, 20. 10. 2010).
9
Import surcharge was consequently gradually removed in accordance with the plan (Tomšík,
1998).
REVIEW OF ECONOMIC PERSPECTIVES
68
measures were revoked or weakened by the Parliament or the constitutional court in the
following years.
The goal of these steps was obvious. The government wanted to reduce deficits of the
public finance and the trade balance and increase competition in the economy. The
consequences of the measures were harsh – government expenditure declined by 10% of
GDP (Stojanov, 2004); real wages decreased by 12% in 1995 and 4% in 1996 (Holman,
2000), and economic growth slowed down to just 1% in both 1995 and 1996. At the
same time, the main imbalances in the economy narrowed – the trade deficit declined
between 1994 and 1996. The government deficit (without incomes from privatization)
diminished from 8.4% to 3% in the same period as well (see the previous table). Overall
development of public finance during the first decade can be seen in the following
figure. We can see that average deficit was relatively high – between 1990 and 2004 5.5%
of GDP (EBRD, 26. 11. 2007). These results were generally the worst from the CentralEuropean
countries.
Figure 2: Deficit in Public Finance in % GDP
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
We can offer another conclusion resulting from the crisis. We should notice that
Hungary dealt with the problems with outer balance by admitting devaluation and
inflation. In comparison to that, Czech exchange rate soon returned to the nearly precrisis
level after the Czech currency crisis had ceased, and inflation declined, too.
Foreign investors did not evaluate the development in Hungary as negative, and were
willing to invest capital in the country.
Volume 14, Issue 1, 2014
69
We should mention that changes in the banking sector were connected with the Bokros
package, too. Until the mid 1990s, foreign institutions had been banned from keeping
more than 25% in a Hungarian bank without a special permission. This rule was
abandoned after 1995 and all large Hungarians banks ended up privatized in hands of
European financial institutions by 1997 (Hanley, King, János, 2002). Holman (2000)
comments that it was necessary to clean the banking sector before privatization and that
it cost around USD 4 billion.
There were changes in the exchange rate policy as well. The overall positive
development of the economy and drift to the market economy was appreciated by a
membership in the OECD in May of 1996. Some of the authors (for example Gabrisch,
Hölscher, 2006) see the period after 1997 as the best of the whole transformation.
Currency Problems at the Beginning of the New Century
The economic development after applying of the Bokros package is generally deemed to
be positive. Unfortunately, this prosperous period lasted only for a few years. And
Hungary had to face growing problems at the beginning of the new century. Foremost,
Hungarian government created notorious problems in fiscal field, for which government
expenditures were to blame. Gabrisch and Hölscher (2006), for example, state that
wages in the public sector increased by 12-13% only in 2002. Growing deficit of the
public finance can be seen in the previous chart. Trade was another source of instability
because its deficit was getting larger. The trade deficit reached between 6-8% of GDP at
the beginning of the new century, being partly caused by slowing down of European
economies, but mostly by the decline of competitiveness that resulted from growth of
wages.
The central bank was worried about lasting inflation pressures and responded by a
monetary restriction, widening the fluctuation band from ±2.25 to ±15 in May 2001 as
well. In the summer, the system of inflation targeting was introduced, and the currency
became fully convertible. That year in October, crawling peg was abandoned and
central parity of the forint was fixed. Generally, the central bank shifted its emphasis
from controlling exchange rate to inflation targeting, but the central parity and the
fluctuation zone were still valid. It meant that the central bank tried to hit two targets
(inflation and exchange rate) by a single tool – interest rates. This task was made even
more complicated by free movement of capital. On the other hand, Hungarian
authorities decided to fix the currency when inflation was declining and pressures on the
nominal exchange rate were expected to be lower.
Shift to the fixed central parity meant a significant change in Hungarian economic
policy because the country had followed the strategy of stabilizing the real exchange
rate (contrary to the Czech case) during the first decade of the transformation, as we can
see in the following figure. In the meantime, Czech currency strongly appreciated in
real terms.
After these changes, fiscal policy remained loose and the central bank kept interest rates
high. There was appreciation pressure and the exchange rate was above the parity and
close to the appreciation side of the bend in the following months. Jonáš (2003) wrote
that there appreciation of the currency had been greatly expected, which was fully
reflected by speculative pressures in January 2003. A potential change of the central
REVIEW OF ECONOMIC PERSPECTIVES
70
parity would have meant possibility to earn money easily. The central bank was in
conflict with the government that did not accept the idea of
bank decided to try to keep the exchange rate in the zone and carried out a massive
intervention on the foreign exchange market
spent EUR 5 billion, or 8% of Hungarian GDP (Jonáš, 2003)
Figure 3: Nominal (left) and Real Exchange Rate (1991 = 100) in Hungary, Poland
and the Czech Republic 1991-2004
Source: IMF, International financial statistics, http://elibrary
These interventions led to increase in money in circulation, and monetary policy was
even more relaxed by declining of the interest rates by 2
central bank losing credibility. The government initiated a slight devaluation of the
central parity of the forint to euro in June 2003 by 2.26% to please exporters, but the
currency's ±15% intervention band remained unchanged. This unexpected shift in the
exchange rate band caused considerable confusion among investors and resulted in
decline of confidence in the currency. The forint took a sharp downward turn (Magyar
Nemzeti Bank, 2004). The exchange rate weakened from 245 HUF/euro in April to 266
HUF/euro in June. But the currency still remained within the stronger half of the
fluctuation band and returned to its previo
brought about yet another consequence: Inflation increased and overcame the inflation
target, which we can see in the following figure. The whole case seems to be a proof
that it is highly difficult to keep inflation and exchange rate targets at the same time.
REVIEW OF ECONOMIC PERSPECTIVES
parity would have meant possibility to earn money easily. The central bank was in
conflict with the government that did not accept the idea of revaluation. Eventually, the
bank decided to try to keep the exchange rate in the zone and carried out a massive
intervention on the foreign exchange market – the estimation is that the central bank
of Hungarian GDP (Jonáš, 2003).
and Real Exchange Rate (1991 = 100) in Hungary, Poland
Source: IMF, International financial statistics, http://elibrary-data.imf.org/
in money in circulation, and monetary policy was
even more relaxed by declining of the interest rates by 2%. These steps resulted in the
central bank losing credibility. The government initiated a slight devaluation of the
euro in June 2003 by 2.26% to please exporters, but the
currency's ±15% intervention band remained unchanged. This unexpected shift in the
exchange rate band caused considerable confusion among investors and resulted in
y. The forint took a sharp downward turn (Magyar
Nemzeti Bank, 2004). The exchange rate weakened from 245 HUF/euro in April to 266
HUF/euro in June. But the currency still remained within the stronger half of the
fluctuation band and returned to its previous values in 2004. However, the situation
brought about yet another consequence: Inflation increased and overcame the inflation
target, which we can see in the following figure. The whole case seems to be a proof
on and exchange rate targets at the same time.
Volume 14, Issue 1, 2014
71
Figure 4: Inflation, Its Projection and Inflation Target at the End of 2004
Source: Magyar Nemzeti Bank, Quarterly Report on Inflation, February 2005
These troubles were only minor obstacles on the Hungarian way into the EU. The EU
year to year analysis concluded in 2002 that Hungary had passed the Copenhagen
criteria – among other things, it meant that the economy was considered a well
functioning market economy. The country accessed the EU in 2004.
But the problem with higher inflation that we have mentioned previously caused a
negative trend of growing indebtedness in foreign currencies that continued in the
following years. This development was important especially for households that often
obtained mortgages in Swiss francs or euros. The share and growth of this kind of debt
can be seen in the following chart. This development was obviously caused mainly by
higher inflation and the fact that interest rates in Hungary were consequently higher
than in the developed countries. This dangerous borrowing trend was not creating
problems only if the exchange rate was stable or appreciating.
We should notice that high government deficits mentioned above (see Figure 2) were
not expressed in growing government debt (in our period) – see the following chart. But
both of these negative trends – indebtedness in foreign currencies and growing
government debt – caused serious problems to Hungarian economy in the second half of
the 2000s.
REVIEW OF ECONOMIC PERSPECTIVES
72
Figure 5: Household Indebtedness Over One Year Maturity. Share of Debt in
Forints (HUF) and Foreign Currency; and Overall Volume of Debt in Billions of
HUF (right scale)
Source: Magyar Nemzeti Bank, http://english.mnb.hu/Statisztika/data
information/mnben_statisztikai_idosorok, 15.
Figure 6: Government Debt as Percent of GDP
Source: Eurostat ec.europa.eu/eurostat 15.
26. 11. 2007
REVIEW OF ECONOMIC PERSPECTIVES
: Household Indebtedness Over One Year Maturity. Share of Debt in
Forints (HUF) and Foreign Currency; and Overall Volume of Debt in Billions of
Source: Magyar Nemzeti Bank, http://english.mnb.hu/Statisztika/data-andinformation/mnben_statisztikai_idosorok,
15. 4. 2013
: Government Debt as Percent of GDP
Source: Eurostat ec.europa.eu/eurostat 15. 4. 2013, EBRD Selected economic indicators data,
Volume 14, Issue 1, 2014
73
Privatization
We have mentioned differences among the central European countries at the beginning
of the transformation process. As far as ownership is concerned, the biggest difference
was in the role of managers of state companies. In Hungary, their role was much more
accepted than in Czechoslovakia, where they were deemed as foremost high-ranking
communists. As a consequence, the managers were allowed to gain control over
thousands of companies in Hungary already at the end of the 1980s. This process is
sometimes called a spontaneous privatization.
As we can see in the following survey, the attitude of the public towards privatization
was definitely not unambiguous. The numbers say that restitutions (re-privatization) had
low support in Hungary, and that there was relatively high resistance to privatization as
such – one of the highest numbers in the whole Eastern Europe. At the same time,
however, we can notice the highest support for selling companies for the highest price
offered. Laki (1993) wrote that in a survey from middle of 1991, 34% of the
respondents were against privatization as such, but as many as 55-60% were against
privatization of their own company. At the same time, there was strong sentiment
against foreign investment and return of the previous landowners.
Table 12: Public Survey – How Would you Solve The Problem of Ownership
November 1990/August 1991
Bulgaria
Czechoslovakia
Estonia
Hungary
Lithuania
Poland
Rumania
Slovenia
Ukraine
Return to the previous owner 21 34 34 12 14 17 7 20 5
Sell for the highest price offered 15 17 10 29 10 12 19 22 12
Self-management 35 27 39 28 57 47 31 40 53
Keep in state possession 30 22 18 31 19 24 44 18 31
Source: Kende, Rovnostářské a etatistické dědictví ve střední a východní Evropě in Politická a
ekonomická transformace v zemích střední a východní Evropy, 1993
In comparison to those in Czechoslovakia, some authors consider Hungarian (and Polish)
privatizations as decentralized. At the same time, Hungarian (and Polish) privatization
at the turn of the decade is often described as “spontaneous” or “wild”. The label means
that companies were “privatized” into the hands of the management in the first years. Or,
seen from a different angle, respective managers was able to gain control over their
companies. This development was a result of a high role that management of the
companies had played at the end of the communist era. Managements had been gaining
independence and autonomy from the 1960s, as we have mentioned. It was a straight
contrast to Czechoslovakia where the power had been fully in the hands of the centre
until the fall of the regime. Additionally, managements had to compete with other
REVIEW OF ECONOMIC PERSPECTIVES
74
potential buyers in Czechoslovak case later on. But we must say that there are probably
no estimates of the size of the spontaneous privatization and for example Soós (2011)
considers it relatively small.
We have already mentioned the act from 1988 that allowed transformation of the state
companies into joint-stock companies in Hungary. This was a turning point that enabled
managements to take control over the companies. Insiders kept playing a dominant role
in Hungarian privatization at the beginning of the following decade – Earle and Estrin
(1996) write that the government was not able to keep full ownership or sell a company
to outsiders without insiders consenting of it. The important role of management and
their abusing of the power was accompanied by scandals and embezzlement. The public
turned against this form of privatization, which resulted in a slowdown of the whole
privatization process (Srholec, 2001).
Institutional environment was developed and state Property Fund (SPA) was founded in
1990. This organization became a central agency responsible for privatization. In 1990,
SPA controlled 1,975 state companies (1,700 in industry and the rest in agriculture).
According to Earle and Estrin (1996) it probably prevented even worse abuse of the
situation because the Property Fund had the right to approve of all sales.
The government launched the process of small privatization in the meantime. The first
program was called pre-privatization and started in May 1990. It was targeted at retail,
and the goal was, among others to stop spontaneous privatization. Roughly 10,000 units
were sold or leased between 1991 and 1993. This way of privatization involved mostly
small shops and restaurants, which were mainly auctioned. An important factor was that
employees of the respective shops gained majority of the property. Changes in property
ownership can be seen in the following table.
Table 13: Change in the Affiliation of Units in the Retail and Catering Sector from
1988 to 1992
Year 1988 1990 1992
State enterprises 26,366 17,410 14,000
Incorporated companies* 671 6,240 30,000
Cooperatives 27,349 22,323 18,000
Private entrepreneurs 34,541 60,141 102,755
Total 88,927 106,114 164,755
*- including limited partnership, limited liability companies, and joint stock companies. They can
be private or state-owned
Source: Earle, Frydman, Rapaczynski, Turkewitz, Small privatization, 1994
The large privatization proceeded simultaneously, and its main methods were auctions
and tenders; an important role was played by foreign capital, as we can see in the
following table.
Volume 14, Issue 1, 2014
75
Table 14: Privatization Revenues of the State Privatization Companies, 1990-2000,
HUF billion
Sales and asset
management
Cash revenues
Of which hard
currency
Hard currency/
Cash (%)
1990 0,67 0,67 0,53 79
1991 30,43 30,35 24,61 81
1992 66,91 65,90 40,98 62
1993 164,50 133,63 110,67 83
1994 148,87 46,36 10,95 25
1995 471,93 437,80 411,48 94
1996 162,63 119,46 92,73 77
1997 340,61 317,70 208,60 66
1998 104,80 98,70 38,62 39
1999 114,95 99,23 70,00 71
2000 21,13 19,83 0,00 0
Total: 1628,2 1369,6 970,6 71
Source: Csáki, From Transition to Integration, 2002
7% of state assets were sold for compensation certificates distributed to victims of the
fascist and communist regimes Hungarian privatization did not avoid scandals. For
example, 8 out of 10 members of the privatization agency were forced to resign in 1994
after having been accused of corruption.
Until the mid 1995, SPA divested itself of 75% of the previous ownership, which
nevertheless represented only 35% of state property (Stojanov, 2004). The government
still kept possession in gas distribution, railways, airlines, telecommunication, banks
and chemical companies. This changed with the Bokros package, though. The
government urgently needed to decrease fiscal deficits, and intensification of the
privatization process was one of the ways to achieve this. It was decided that all stateowned
property with the exception of railways, post office and national parks would be
sold. The rest of the property for sale included The Savings Bank (OTP) and the main
telecommunication company, among others. The amount of property for privatization
reached HUF 1.3 trillion out of 1.6 trillion of the overall state ownership (Stojanov,
2004). A typical method was a direct sale to a foreign investor, which resulted in a huge
inflow of foreign direct investment in this period. A growing role of foreign ownership
can be seen in the following table. Until the end of 1997, the government sold property
worth HUF 790 billion and its debt decreased from 86% of GDP in 1995 to 60% in
1998 (Stojanov, 2004).
REVIEW OF ECONOMIC PERSPECTIVES
76
Table 15: Ownership of Manufacturing Firms, % of Registered Capital
Types of ownership 1992 1993 1994 1995 1996
State 55.2 39.2 29.3 19.9 14.4
Municipal 8.8 1.6 1.6 1.0 0.9
Individual private 8.8 9.4 10.1 9.5
Domestic corporate 0.1 15.0 17.9 18.2 19.4
Employee 20.5 1.0 1.5 1.4 1.2
Foreign 3.6 30.9 37.1 46.7 51.1
Cooperative 2.6 1.9 1.4 1.2
Other 0.9 1.3 1.3 2.3
Source: Stojanov, Hungary and Bosnia and Herzegovina: a success and a failure of transition,
2004
At the beginning of the transformation process, private sector quickly advanced in
Central Europe, which can be seen in the following table. Take notice of the fact that
Hungary achieved a 50% share of the private sector in GDP in 1993 already.
Table 16: Private Sector Share in GDP (in %)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001-2004
Czech
Republic
10 15 30 45 65 70 75 75 75 80 80 80
Hungary 25 30 40 50 55 60 70 75 80 80 80 80
Poland 30 40 45 50 55 60 60 65 65 65 70 75
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
Economic Results
We shall concentrate on the main economic indicators on the following pages,
analyzing development of GDP, inflation, unemployment and several indicators of
foreign relationships.
Economic Growth
Economic growth can be seen in the following figure. We can notice that similarly to
other countries in central Europe, Hungary too suffered from transformation recession.
The slower pace of the reforms (gradualism) did not help avoid the recession, and a
visible slowdown after 1995 occurred here, too. But the general trend is positive. We
should compare the results of HP filter during the communist regime with results after
1990. Hungarian economy was able to achieve growth around 3 or 4 percent after
having overcome the transformation recession.
Volume 14, Issue 1, 2014
77
Meanwhile, GDP per person followed a similar trajectory. The indicator declined at the
beginning of the transformation process regardless of the pace of the reforms. In 1995, it
reached the pre-recession level and steadily grew in the next years. It nearly doubled in
comparison to 1989 by the end of 2004.
Figure 7: Economic Growth After 1990 (in %) and Its Trend Estimated by HP
Filter
Source: Maddison, Historical Statistics - http://www.ggdc.net/MADDISON/oriindex.htm
(11.10.2010)
Figure 8: GDP per Person in USD Based on Purchasing Power Parity (1989-2004)
Source: IMF: World Economic Outlook Database,
http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx (9. 10. 2010)
4000
6000
8000
10000
12000
14000
16000
18000
20000
Czech Republic Hungary Poland
-12
-10
-8
-6
-4
-2
0
2
4
6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
economic growth
HP filter
REVIEW OF ECONOMIC PERSPECTIVES
78
Structure of the Economy
Important changes took place in the role of the government in the economy. We can see
a surprising development in Hungary, where the role of government (expenditure to
GDP) in fact increased (from an already high level) at the beginning of the 1990s. And
it declined only with the Bokros package. During the 1990s, the trend was generally
declining in Central European countries. This changed in the new millennium when the
share of the government increased in all countries.
Figure 9: Government Expenditure in Percent of GDP (1990-2004)
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
Simultaneously, changes in the structure of the economy took place, as we can see in
the following table. We should notice that the share of industry was very low in
Hungary at the beginning of the transformation and even slightly increased during the
period. Similarly to other countries of the region, the share of agriculture declined in
Hungary, too. And the share of the last sector – services – had always been high and
remained high level during the whole transformation period.
Inflation
Inflation was relatively low in Hungary during the first transformation decade. An
important part of the goods in consumers’ baskets had already been liberalized before
1990, and Hungarian politicians therefore did not have to carry out instant price
liberalization. But Hungarian inflation was comparatively high in the following years. It
was partly caused by the monetization mentioned above. Decline in inflation can be
seen only at the end of the 1990s. Even then consumer prices increased more than 5%
per a year. The arithmetic average for the period between 1990 and 2003 reached nearly
18% (IMF, 2010).
35
40
45
50
55
60
65
Hungary Poland Czech Republic
Volume 14, Issue 1, 2014
79
Table 17: Structure of Economy - Share of Industry (I), Agriculture (A) and
Services (S) in % of GDP
1989
1990
1991
1992
1995
1997
1999
2001
2003
2004
Czech
Republic
I 36.7 37.9 39.4 33.3 35.9 35.5 37.5 38.2 40.0
A 6.3 8.2 5.6 4.6 4.7 5.0 3.9 3.7 3.4 3.3
S 55.1 56.5 56.0 62.0 59.1 60.6 58.7 58.3 56.7
Hungary
I 21.0 20.4 23.1 25.0 26.7 26.6 26.7 26.5
A 7.8 6.5 5.9 5.8 5.3 5.0 4.2 6.1
S 71.2 73.1 71.0 69.2 68.0 68.4 69.1 67.4
Poland
I 44.1 44.9 40.2 34.0 32.1 30.7 29.7 29.5 29.6 30.8
A 11.8 7.4 6.8 6.7 5.6 4.5 3.2 3.2 2.6 2.5
S 44.1 47.7 53.0 59.3 62.3 64.8 67.1 67.3 67.8 66.7
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
Figure 10: Inflation, Average Consumer Prices (Percentage Change) 1980-2004
Source: IMF: World Economic Outlook Database,
http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx (9. 10. 2010)
In accordance with expectations and economic theory of Balassa-Samuelson effect,
prices went up more for non-tradable goods and services during the transformation
period. An estimation of the price development of tradable and non-tradable goods can
be seen in the following figure.
0
5
10
15
20
25
30
35
40
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
REVIEW OF ECONOMIC PERSPECTIVES
80
Figure 11: Non-tradable/Tradable Inflation in Hungary (1991=1)
Source: Halpern, Neményi, Fiscal Foundations of Convergence to the
Generally, economic rules are valid for transformation countries as well as for
established market economies. The following figure depicts a connection between
inflation and growth of money supply. We can see a nearly textbook relationship, in
which countries with a higher difference between growth of money and growth of GDP
have higher inflation. This development had an impact on the exchange rate regime and
interest rates.
Figure 12: Inflation (Average Percentage Change of CPI) a
Money Minus Growth of Real GDP (in
Source: EBRD: Selected economic indicators data, 26.
REVIEW OF ECONOMIC PERSPECTIVES
radable Inflation in Hungary (1991=1)
Source: Halpern, Neményi, Fiscal Foundations of Convergence to the European Union, 2001
Generally, economic rules are valid for transformation countries as well as for
established market economies. The following figure depicts a connection between
inflation and growth of money supply. We can see a nearly textbook relationship, in
ies with a higher difference between growth of money and growth of GDP
have higher inflation. This development had an impact on the exchange rate regime and
: Inflation (Average Percentage Change of CPI) and Growth of Broad
Money Minus Growth of Real GDP (in %) Between 1993 and 2004
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
Volume 14, Issue 1, 2014
81
Unemployment
Hungary was not spared growth in unemployment in the first years of transformation
even though the country was actually following a more gradual approach. Within
several years, unemployment achieved its maximum – around 12% of the labor force,
after which it gradually declined. It is in contrast with the development in the Czech
Republic, where unemployment rate was minimal until 1997 and grew only with the
currency and economic crises in 1997. At that time, however, unemployment rate in
Hungary had already been declining steadily. We should stress that in both of these
countries, unemployment rate was very low in comparison to other post-communist
countries – Poland being one of the examples, as we can see in the following figure. On
the other hand, there was deep decline in employment in Hungary and thus the numbers
are affected by it.
Figure 13: Unemployment Rate (% of Labor Force) 1989-2004
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
External Relationship
We will discuss several aspects of external relationships on the following pages,
concentrating on the development of international trade and foreign (direct) investment.
In the following table, we can see that Hungary was affected by disintegration of the
Council for Mutual Economic Assistance (CMEA) relatively mildly. Hungarian exports
declined by roughly one quarter, which was much less than in some of the other
countries. The country generally followed the path to liberalization of international trade
as other countries of the Eastern bloc. In 1990, tariffs declined and quotas on
consumption goods were abolished.
0
5
10
15
20
25
Czech Republic Hungary Poland
REVIEW OF ECONOMIC PERSPECTIVES
82
Table 18: Exports to CMEA Markets (mil. USD)
1989 1990 1991 1992 1993
% decline
between 1989
and 1993
Czech Republic* 5,103 3,422 2,045 1,103 1,009 80.2
Bulgaria 7,967 5,887 1,892 1,103 1,009 87.3
Hungary 4,009 2,933 2,710 2,981 3,122 22.1
Poland 4,395 4,000 1,799 1,476 1,461 66.8
Romania 3,890 2,083 1,089 702 720 81.5
Slovakia 1,827 1,169 1,376 1,200 1,130 38.1
* without inter Czechoslovak trade
Source: Jonáš, Ekonomická transformace v České republice, 1997; own calculation
Hungarian trade quickly re-orientated towards western markets. EU-15 had already had
a 34% share of Hungarian exports as early as in 1989. This number rapidly increased to
50% in 1991 and 70% in 1997. The role of goods in the exports into the EU had grown
as well – from 55% in 1989 to 85% 1997 (Stojanov, 2004). Germany became Hungary’s
main trading partner, just as it became for the other Central European countries (we can
see the state in 2003 in the subsequent table).
Table 19: The Share of the Main Trading Partners in 2003 (in %)
Imports % share Exports % share
Germany 24.5 Germany 33.9
Italy 7.1 Austria 8.1
China 6.9 Italy 5.8
Austria 6.3 France 5.8
Russia 6.2 United Kingdom 4.6
France 4.8 Netherlands 4.1
Japan 4.2 USA 3.1
USA 3.2 Poland 2.3
Poland 2.8 Czech Republic 2.1
United Kingdom 2.7 Slovakia 2
Czech Republic 2.4 Russia 1.5
Netherlands 2.2 Japan 0.7
Slovakia 1.9 China 0.4
Source: Hungarian Central Statistical Office,
http://statinfo.ksh.hu/Statinfo/themeSelector.jsp?page=2&szst=QKT (29.12.2010)
Overall, Hungarian economy deeply integrated itself into the world economy, as we can
see in the following figure. The share of exports and imports to GDP increased from
60% in the first half of the 1990s to more than 160% before the last economic crisis.
Volume 14, Issue 1, 2014
83
Figure 14: Exports and Imports as Percentage of GDP in Hungary and Poland
(in %)
Source: The World Bank, Doing Business, www.doingbusiness.org, 1.12.2010
Figure 15: Current Account to GDP (%) 1990 – 2004
Source: IMF: World Economic Outlook Database,
http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx (9. 10. 2010)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Czech Republic Hungary Poland
0
20
40
60
80
100
120
140
160
180
Hungary Poland
REVIEW OF ECONOMIC PERSPECTIVES
84
We have already mentioned problems with current account that Hungary experienced in
the middle of the decade. The Bokros package solved these problems but the imbalance
started to grow again in the new century. These problems were not deemed to be as
severe as in the middle of 1990s but contributed to currency problems during the world
economic crisis at the end of the first decade.
Inflow of foreign direct investment is the second aspect of international relations that
we would like to discuss. We have already mentioned that Hungary had already had a
good starting position in this field because of its advance during the 1980s. This led to a
relatively high inflow of FDI in the first years of the transformation already, and
Hungary was one of the leaders among the post-communist countries, which we can see
in the following figure.
Figure 16: Cumulative FDI Inflows per Capita 1990-2004 in USD
*- there are no data for the Czech Republic in 1990 and 1991, and for Poland in 1990
Source: EBRD: Selected economic indicators data, 26. 11. 2007.
Economic problems in the middle of the first decade resulted in increasing privatization
efforts and installing of investment stimulus. These measures facilitated even higher
inflow of the FDI in the second half of the 1990s. The comparison with the Czech
Republic can be seen in the following table.
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Czech Rep Hungary Poland
Volume 14, Issue 1, 2014
85
Table 20: FDI in the Czech Republic and Hungary 1990 – 2000 in $ per Person
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
HUN 30 141 142 227 112 435 223 214 201 196 196
C.R. 13 50 97 63 84 248 138 126 361 615 447
Source: Srholec, Vybrané aspekty makroekonomického vývoje v Maďarsku po roce 1995, 2001
Generally speaking, the role of foreign entities in Hungarian economy was growing.
The main investors came from Germany and the USA. Companies with foreign capital
had been already generating 47% of all sales, 29% of employment and 60% of exports
in 1996. The exports figure increased to 73% in 1997 (Berend, 2009). The importance
of the foreign companies in Hungary and other Central European countries can be seen
in the following table. Stock of FDI corresponded to one third of Hungarian GDP in
1998 (Stojanov, 2004).
Table 21: Share of Foreign Companies in Industrial Sector at the End of the 1990s
Employment Investment Sales Exports
Czech Republic 27 53 42 61
Hungary 47 82 73 89
Poland 29 63 49 59
Source: Berend, From the Soviet Bloc to the European Union, 2009
Conclusion
We have tried to provide the reader with a view of the main steps in the economic
development during the interesting period of economic transformation.
We argued that Hungary had achieved (in the view of the author) very good results in
this period. First of all, the overall framework of the economy obviously changed,
which was proven by the country accession to the EU in 2004. Simultaneously, GDP
per person nearly doubled during the period. The ability of the economy to grow
improved and the trend was positive (on the contrary to the previous period). As a
consequence, Hungarian economy was able to start closing the gap on the developed
countries. Most of other economic indicators developed positively as well. Moreover, it
should be mentioned, too, that Hungarian companies managed to stand up to
competitive pressures in the EU.
On the other hand, though, we have seen that the development in Hungary was not
straightforward. The country suffered from transformation recession just as the other
countries of the Eastern bloc even though its starting conditions were significantly better
in some aspects. The half-hearted economic reforms in the first years of the
transformation led to economic imbalances that were cured by tough economic
measures in the form of the Bokros package. This development could serve as a model
case for countries (like Greece today) which are postponing tough reforms.
Unfortunately, Hungarian economy was not able to avoid other problems. And some of
REVIEW OF ECONOMIC PERSPECTIVES
86
the crucial problems of the economy at the end of the 2000s had their roots in the
transformation period. Predominantly, it was the case of growing household
indebtedness in foreign currencies that later on, after the depreciation of the Hungarian
forint, contributed to solvency problems. A persisting and relatively high level of
government debt that again deepened in the subsequent period and brought the country
on the brink of bankruptcy during the world financial crisis was another cause of the
trouble. Today, nonetheless, it seems that Hungary managed to overcome these
problems – similarly as it did in the middle of the 1990s.
We would like to argue that the transformation process was complicated and difficult
but that the country was able to achieve the main goals of the transformation process.
Unfortunately, some of the mistakes partially spoilt the overall view.
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