HungaryFINAL

HungaryFINAL - The Transition Experience of Hungary March...

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Unformatted text preview: 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 GDP growth % 0 5 10 15 -5 -15 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -10 Hungary Real GDP Growth Rate FDI % of GDP (annual %) 8 7 6 5 4 3 2 1 0 1985 1987 1991 1993 1995 1997 1999 2001 1989 2003 FDI % of GDP Poland Hungary Poland Year CPI Inflation (annual %) 600 500 % Inflation 400 300 200 100 0 1984 1987 1990 1993 Year 1996 1999 2002 Hungary Poland 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 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 New Economic Mechanism, Phase II 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 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 80000000000 70000000000 Extern Debt (US$10billion) 60000000000 50000000000 40000000000 30000000000 Hungary Poland 20000000000 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 $1,000 US$ $1,500 $2,000 $2,500 Budget Balance 50 0 -50 Billions of Forints (HUM) -100 -150 -200 -250 -300 Series1 1988 0.6 1989 -22.5 1990 9.7 1991 -53.5 Year / Value 1992 -158.3 1993 -235.2 1994 -275.5 Politics Impede Reform Total Social Expenditures (share of GDP) 30 25 20 % of GDP 15 10 5 0 Hungary EU Country OECD USA 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 non-aged 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 FDI % of GDP (annual %) 8 7 6 5 4 3 2 1 0 1985 1987 1991 1993 1995 1999 2001 1989 1997 2003 FDI % of GDP Poland Hungary Poland Year 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.) ...
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This note was uploaded on 07/17/2008 for the course ECON 508 taught by Professor Fleisher during the Winter '06 term at Ohio State.

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