Economy of Hungary

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The Hungarian economy prior to World War II was primarily oriented toward agriculture and small-scale manufacturing. Hungary's strategic position in Europe and its relative high lack of natural resources also have dictated a traditional reliance on foreign trade. In the early 1950s, the communist government forced rapid industrialization after the standard Stalinist pattern in an effort to encourage a more self-sufficient economy. Most economic activity was conducted by state-owned enterprises or cooperatives and state farms. In 1968, Stalinist self-sufficiency was replaced by the "New Economic Mechanism," which reopened Hungary to foreign trade, gave limited freedom to the workings of the market, and allowed a limited number of small businesses to operate in the services sector.

Although Hungary enjoyed one of the most liberal and economically advanced economies of the former Eastern bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s, and Hungary's net foreign debt rose significantly—from $1 billion in 1973 to $15 billion in 1993—due largely to consumer subsidies and unprofitable state enterprises. In the face of economic stagnation, Hungary opted to try further liberalization by passing a joint venture law, instating an income tax, and joining the International Monetary Fund (IMF) and the World Bank. By 1988, Hungary had developed a two-tier banking system and had enacted significant corporate legislation which paved the way for the ambitious market-oriented reforms of the post-communist years.

The per capita GDP (PPP) of Hungary between the years 1990 and 2006

The Antall government of 1990–94 began market reforms with price and trade liberation measures, a revamped tax system, and a nascent market-based banking system. By 1994, however, the costs of government overspending and hesitant privatization had become clearly visible. Cuts in consumer subsidies led to increases in the price of food, medicine, transportation services, and energy. Reduced exports to the former Soviet bloc and shrinking industrial output contributed to a sharp decline in GDP. Unemployment rose rapidly—to about 12% in 1993. The external debt burden, one of the highest in Europe, reached 250% of annual export earnings, while the budget and current account deficits approached 10% of GDP. In March 1995, the government of Prime Minister Gyula Horn implemented an austerity program, coupled with aggressive privatization of state-owned enterprises and an export-promoting exchange raw regime, to reduce indebtedness, cut the current account deficit, and shrink public spending. By the end of 1997 the consolidated public sector deficit decreased to 4.6% of GDP—with public sector spending falling from 62% of GDP to below 50%—the current account deficit was reduced to 2% of GDP, and government debt was paid down to 94% of annual export earnings.

The Government of Hungary no longer requires IMF financial assistance and has repaid all of its debt to the fund. Consequently, Hungary enjoys favorable borrowing terms. Hungary's sovereign foreign currency debt issuance carries investment-grade ratings from all major credit-rating agencies, although recently the country was downgraded by Moody's, S&P and remains on negative outlook at Fitch. In 1995 Hungary's currency, the Forint (HUF), became convertible for all current account transactions, and subsequent to OECD membership in 1996, for almost all capital account transactions as well. Since 1995, Hungary has pegged the forint against a basket of currencies (in which the U.S. dollar is 30%), and the central rate against the basket is devalued at a preannounced rate, currently set at 0.8% per month. The government privatization program will end on schedule in 1998: 80% of GDP is now produced by the private sector, and foreign owners control 70% of financial institutions, 66% of industry, 90% of telecommunications, and 50% of the trading sector.

After Hungary's GDP declined about 18% from 1990 to 1993 and grew only 1%–1.5% up to 1996, strong export performance has propelled GDP growth to 4.4% in 1997, with other macroeconomic indicators similarly improving. These successes allowed the government to concentrate in 1996 and 1997 on major structural reforms such as the implementation of a fully funded pension system, reform of higher education, and the creation of a national treasury. Remaining economic challenges include reducing fiscal deficits and inflation (expected to fall to 13% by the end of 1998), maintaining stable external balances, and completing structural reforms of the tax system, health care, and local government financing. Recently, the overriding goal of Hungarian economic policy has been to prepare the country for entry into the European Union, which it joined in late 2004.

Prior to the change of regime in 1989, 65% of Hungary's trade was with Comecon countries. By the end of 1997, Hungary had shifted much of its trade to the West. Trade with EU countries and the OECD now comprises over 70% and 80% of the total, respectively. Germany is Hungary's single most important trading partner. The U.S. has become Hungary's sixth-largest export market, while Hungary is ranked as the 72d largest export market for the U.S. Bilateral trade between the two countries increased 46% in 1997 to more than $1 billion. The U.S. has extended to Hungary most-favored-nation status, the Generalized System of Preferences, Overseas Private Investment Corporation insurance, and access to the Export-Import Bank.

With about $18 billion in foreign direct investment (FDI) since 1989, Hungary has attracted over one-third of all FDI in central and eastern Europe, including the former Soviet Union. Of this, about $6 billion came from American companies. Foreign capital is attracted by skilled and relatively inexpensive labor, tax incentives, modern infrastructure, and a good telecommunications system.

[edit] Statistics

GDP (PPP) $172.7 billion (2006)

GDP - real growth rate: 3.8% (2006)

GDP - per capita: purchasing power parity - $17,300 (2006)

GDP - composition by sector:
agriculture: 3,1%
industry: 32,1%
services: 64,8% (2006 est.)

Population below poverty line: 8,6% (2006)

Household income or consumption by percentage share:
lowest 10%: 4,1%
highest 10%: 21,2% (2006)

Distribution of family income - Gini index: 26.9 (2006)

Inflation rate (consumer prices): 3.7% (2006 March)

Labor force: 4.2 million (2006)

Labor force - by occupation: services 61.2%, industry 33.3%, agriculture 5.5% (2006)

Unemployment rate: 7.4% (2006)

Industrial production growth rate: 9.5% (2006)

Electricity - production: 31.83 GWh (2004)

Electricity - production by source:
fossil fuel: 59%
hydro: 1%
nuclear: 40%
other: 0% (2000 est.)

Electricity - consumption: 37.1 GWh (2004)

Electricity - exports: 6.3 GWh (2004)

Electricity - imports: 13.80 GWh (2006)

Agriculture - products: wheat, corn, sunflower seed, potatoes, sugar beets; pigs, cattle, poultry, dairy products

Exports: $67.99 billion (2004)

Exports - commodities: machinery and equipment 57.6%, other manufactures 31.0%, food products 7.5%, raw materials 1.9%, fuels and electricity 1.9% (2001)

Exports - partners: Germany 34.1%, Austria 8%, Italy 5.8%, France 5,7%, UK 4.5%, Netherlands 4,1% (2003)

Imports: $69.75 billion (2006)

Imports - commodities: machinery and equipment 51.6%, other manufactures 35.3%, fuels and electricity 8.2%, food products 2.9%, raw materials 2.0% (2001)

Imports - partners: Germany 24.5%, Russia 7.4%, China 7.1%, Austria 6.6%, France 4.9%, Italy 4.9%, Netherlands 4.3% (2005)

Debt - external: $107.3 billion (2006 est.)

Economic aid - recipient: $3.4 billion in available EU structural adjustment and cohesion funds (2004-06)

Currency: 1 forint (HUF)

Exchange rates: forints per U.S. dollar - 215.105 (2006), 199.58 (2005), 202.75 (2004), 224.307 (2003), 257.887 (2002), 286.490 (2001), 282.179 (2000), 237.146 (1999), 214.402 (1998), 186.789 (1997)

Fiscal year: calendar year