Transcript The Transition Experience of Hungary

The Transition Experience
of Hungary
March 9th
Matthew Gross
Background
 Hungary is located in
Eastern Europe, near
several other transition
countries.
Quick Facts
 The private sector now
accounts for over 80% of
Hungary’s GDP.
 Industries: mining,
metallurgy, construction
materials, processed
foods, textiles, chemicals
(especially
pharmaceuticals), motor
vehicles
 Population: 10,006,835
(July 2005 est.)
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
-5
-10
-15
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
GDP growth %
Hungary Real GDP Growth Rate
15
10
5
0
Poland
Hungary
Year
2003
2001
1999
1997
1995
1993
1991
1989
Poland
1987
8
7
6
5
4
3
2
1
0
1985
FDI % of GDP
FDI % of GDP (annual %)
CPI Inflation (annual %)
600
% Inflation
500
400
Hungary
300
Poland
200
100
0
1984
1987
1990
1993
Year
1996
1999
2002
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
Hungary’s economy
 Allowed a limited number of businesses to
operate in the service sector
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)
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
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
The Collapse of Communism
 Hungary already transitioning slowly
towards a market economy when
communism collapses in 1989-1990
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.
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
External Debt
100000000000
90000000000
Extern Debt (US$10billion)
80000000000
70000000000
60000000000
Poland
50000000000
40000000000
30000000000
20000000000
Hungary
10000000000
0
Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
External Debt per capita (1989)
Hungary
Bulgaria
Country
Czechoslovakia
Romania
$0
$500
$1,000
$1,500
US$
$2,000
$2,500
Budget Balance
50
0
Billions of Forints (HUM)
-50
-100
-150
-200
-250
-300
Series1
1988
1989
1990
1991
1992
1993
1994
0.6
-22.5
9.7
-53.5
-158.3
-235.2
-275.5
Year / Value
Politics Impede Reform
Total Social Expenditures (share of GDP)
30
25
% of GDP
20
15
10
5
0
Hungary
EU
OECD
USA
Country
 A large portion of Hungary’s population is dependent in some way
upon government social expenditures, making reform difficult.
Hungary spends, in particular, more on public health and nonaged related (unemployment, social assistance, disability, etc.)
programs than the OECD average.
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
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
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
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
Accumulated FDI (1989 - 1997)
$1,600
$1,400
$1,200
$1,000
Millions US$
$800
$600
$400
$200
$0
Bulgaria
Czech Rep
Hungary
Poland
Romania
Slovakia
Slovenia
Poland
Hungary
Year
2003
2001
1999
1997
1995
1993
1991
1989
Poland
1987
8
7
6
5
4
3
2
1
0
1985
FDI % of GDP
FDI % of GDP (annual %)
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
Changes in Trade Partners
 Prior to 1989, two-thirds of Hungary’s
trade was with CMEA countries
 By 1997, trade has shifted primarily to the
EU, with EU countries making up 70% of
Hungary’s trade.
 Hungary’s primary trading partner is now
Germany
 The U.S. has made Hungary a mostfavored-nation
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.)