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COUNTRY PROFILE 2001

HungaryThis Country Profile is a reference tool, which providesanalysis of historical political, infrastructural and economictrends. It is revised and updated annually. The EIU’s CountryReports analyse current trends and provide a two-yearforecast

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EIU Country Profile 2001 © The Economist Intelligence Unit Limited 2001

Comparative economic indicators, 2000

1


Contents

3 Basic data

4 Political background4 Historical background6 Constitution and institutions7 Political forces

11 International relations and defence

13 Resources and infrastructure13 Population15 Education16 Health17 Natural resources and the environment18 Transport and communications21 Energy provision

23 The economy23 Economic structure25 Economic policy32 Economic performance34 Regional trends

35 Economic sectors35 Agriculture, forestry and fishing36 Mining and semi-processing36 Manufacturing38 Construction39 Financial services41 Other services

41 The external sector41 Trade in goods44 Invisibles and the current account45 Capital flows and foreign debt46 Foreign reserves and the exchange rate

48 Appendices48 Regional organisations50 Sources of information51 Reference tables51 Population52 Labour force52 Transport statistics52 Structure of energy sources (production plus imports)53 Central state budget53 Money supply54 Gross domestic product54 Gross domestic product by expenditure55 Gross domestic product by sector55 Prices56 Volume indices of sales of agricultural products

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56 Livestock numbers56 Output of energy, minerals and mineral products57 Industrial production by sector57 Construction57 Budapest Stock Exchange58 Retail sales58 Exports58 Imports59 Main trading partners60 Balance of payments, IMF series61 External debt, World Bank estimates61 Foreign reserves62 Exchange rates

Hungary 3

© The Economist Intelligence Unit Limited 2001 EIU Country Profile 2001

Hungary

Basic data

93,030 sq km, of which 70% agricultural, 18% forested

10,043,224 (January 1st 2000)

Population in ‘000, January 1st 2000

Budapest (capital) 1,812Debrecen 204Miskolc 172Szeged 158Pecs 157Gyor 127Szekesfehervar 105

Continental

Hottest month, July, 16-28°C (average daily minimum and maximum); coldestmonth, January, minus 1-4°C; driest month, September, 33 mm averagerainfall; wettest month, May, 72 mm average rainfall

Magyar (Hungarian)

Metric system. A cadastral yoke (1 acre=0.7033 cadastral yokes) is used formeasuring land

Forint (Ft)=100 filler. Fillers ceased to circulate in 1996. Average exchange ratefor 2000: Ft282:US$1. Exchange rate on June 15th 2001: Ft284.9:US$1;Ft245.6:€1

January 1st-December 31st

1 hour ahead of GMT

January 1st, March 15th, Easter Sunday and Monday, Pentecost Monday,May 1st, August 20th, October 23rd, November 1st, December 25th and 26th

Total area

Population

Main towns

Climate

Weather in Budapest(altitude 139 metres)

Language

Weights and measures

Currency

Fiscal year

Time

Public holidays

4 Hungary


Political background

The head of state is the president, currently Ferenc Madl, who was elected onJune 5th 2000 after Arpad Goncz’s term expired. A right-wing coalition govern-ment, consisting of the Federation of Young Democrats-Hungarian Civic Party(Fidesz-HCP), the Hungarian Democratic Forum (HDF) and the Smallholders’Party (SP), took office in June 1998, led by the prime minister, Viktor Orban.

Historical background

The Finno-Ugric roots of the Hungarian (Magyar) language suggest thatHungarian tribes from the region between the Volga, Kama and Belaia riversand the Ural mountains settled in the Carpathian Basin towards the end of theninth century. In 1996 Hungarians celebrated the 1,100th anniversary of theland settlement, and December 25th 2000 marked the 1,000th anniversary ofthe official founding of the Hungarian State by King Stephen. After defeat atthe 1526 battle of Mohacs, Transylvania became a vassal state of the Ottomans,but the Austrians drove the Turks from Hungarian territory at the second battleof Mohacs in 1687.

The 1699 Treaty of Karlowitz awarded all of Hungary to Austria, whichstripped the Hungarian nobility of its traditional rights and privileges. Nationaland social tensions led to a revolution in March 1848, when Louis Kossuthestablished a national government, but this was crushed in 1849 with Russianhelp. The Compromise (Ausgleich) of 1867 reorganised the Habsburg empire asthe Dual Monarchy of Austria and Hungary, allowing Magyar domination ofHungarian lands and German domination of Austrian lands. The ensuingeconomic boom saw many great buildings and bridges constructed in thenewly unified Budapest.

The military defeat of the Austro-Hungarian monarchy in 1918 led to adramatic reduction in the area and population of Hungary. The 1920 TrianonTreaty trimmed Hungary’s territory from about 325,000 sq km to 93,000 sqkm, and the population from 20.9m to 7.8m, leaving sizeable Hungarianminorities in neighbouring Slovakia and Romania. A communist-dominatedrevolutionary government in March-August 1919 gave way to a long period ofconservative rule under the regency of Admiral Miklos Horthy. In the 1930sHungary grew increasingly close to Germany, regaining lands from Slovakia,Romania and Yugoslavia. It took the German side in the second world war.Germany occupied Hungary from March 1944 until the Soviet Red Armypushed out its troops in early 1945.

A free election in November 1945 resulted in a majority for the Smallholders’Party (SP), but another election in 1947 gave the largest vote share to theCommunist Party, which nationalised property and eliminated other politicalparties. Stalinism dominated Hungary until 1953. A popular revolt broke out inBudapest on October 23rd 1956. The prime minister, Imre Nagy, declaredHungary’s neutrality and withdrawal from the Warsaw Pact, prompting a Soviet

Early history

Austro-Hungary

The communist takeover

Hungary 5


Red Army invasion on November 4th. By mid-December all resistance had beencrushed and Janos Kadar, the general secretary of the restyled HungarianSocialist Workers’ Party (HSWP), began the task of political consolidation.

Some moderation by the regime began in the 1960s, and a final amnesty forthe revolutionaries was declared in March 1963. In 1968 Hungary introducedthe New Economic Mechanism, an economic reform package designed toincrease enterprise autonomy and the role of markets in economic decision-making. The experiment with the market was rare in eastern Europe and is oneof the reasons that Hungary has been one of the fastest growing transitioneconomies and was able to reorientate trade so quickly to EU markets (see Theeconomy). This resulted in a boom in agricultural and consumer goodsproduction, but income inequality increased and global recessions followingthe 1973 and 1979 oil-price shocks undermined the reform efforts. Worseningterms of trade, combined with excessive imports of Western technology andconsumption goods, increased the country’s foreign debt to more thanUS$11bn by the early 1980s.

When the 13th Congress of the HSWP in 1985 failed to bring substantialchanges in policy, unrest among reformers within the party and state apparatusbegan to increase. Karoly Grosz replaced Mr Kadar as general secretary of theHSWP in May 1988, and reformists (led by Imre Pozsgay and the architect of the1968 economic reform, Rezso Nyers) gained control of the party in 1989. Theprime minister, Miklos Nemeth, also enacted political liberalisation. In adramatic break with the past, Mr Nagy, who had been secretly executedfollowing the 1956 revolution, was given a public funeral and reburial in June1989. The HSWP joined with opposition groups in national roundtablenegotiations about forming new political institutions and, in October 1989,transformed itself into the Hungarian Socialist Party (HSP).

In the March 1990 parliamentary election, the opposition HDF emerged as themost popular party and formed a coalition government with two other conser-vative parties, the SP and the Christian Democratic People’s Party (CDPP). Theliberal parties, the Alliance of Free Democrats (AFD) and the Federation ofYoung Democrats (Fidesz), joined the HSP in opposition. The HDF president,Jozsef Antall, became the prime minister and made a post-election deal withthe AFD that increased his powers, as well as eliminating the two-thirds major-ity requirement on most legislation. Mr Antall died in December 1993 and wassucceeded by the interior minister, Peter Boross. In 1993-94 the governmentpursued an undisciplined spending programme that left the budget in severedeficit and had a negative effect on the current-account deficit.

The May 1994 election returned the HSP to power. Despite having an absolutemajority, it formed a coalition government with the AFD. The governmentintroduced an austerity programme in March 1995 designed to curb thegovernment deficit and the external account imbalances. Economic growthdecelerated and real wages fell sharply as a result. By 1997 these policies beganto yield results and real GDP grew by 4.6%, but in the 1998 parliamentaryelection voters punished the HSP-led government for the effects of earlierausterity. Fidesz (which had added the Hungarian Civic Party—HCP—to its

Burying the past

Post-communist Hungary

6 Hungary


name) won 148 seats against 134 for the HSP, and formed a new coalitiongovernment with two other right-wing opposition parties, the HDF and the SP.

Important recent events

March-April 1990: After free elections, the Hungarian Democratic Forum(HDF) emerges to form a centre-right coalition government.

December 1991: Association agreement with the EU is signed.

March 1994: Hungary applies for full membership of the EU.

March 1995: Wide-ranging austerity measures, including fiscal cuts and wagecontrols, are introduced.

March 1996: Hungary is invited to join the OECD.

September 1996: Hungary and Romania sign a “basic treaty” recognisingexisting borders and ethnic minority rights.

July 1997: Hungary is invited to begin accession negotiations with the EUand NATO. EU accession negotiations begin in 1999.

May 1998: The coalition led by the Hungarian Socialist Party (HSP) loses itsparliamentary majority and the Federation of Young Democrats-HungarianCivic Party (Fidesz-HCP) forms a right-wing coalition government.

March 1999: Hungary, the Czech Republic and Poland join NATO.

January 2001: Industrial trade with EU becomes fully liberalised.

May 2001: Preparations begin for full convertibility of the forint, after thecurrency’s exchange-rate bands are widened.

Constitution and institutions

The constitution is a heavily amended version of the communist constitutionintroduced in 1949. A multiparty committee worked on a comprehensive newconstitution between 1994 and 1998, but divisions between parties and withinthe government prevented parliament from approving a new document.

Hungary is a parliamentary democracy with a single-chamber NationalAssembly. The electoral system is complex, combining elements of majorityand proportional voting. Of the 386 seats in the National Assembly, 176 areelected from individual electoral constituencies. An absolute majority isrequired for election to an individual district in the first round. Two or threetop candidates advance to the second round of voting. Candidates are notrequired to reside in the district in which they run. The remaining seats aredistributed proportionally according to the party-list vote at the national andregional levels. In 1990 there was a 4% minimum threshold for parties to enterparliament. The threshold was raised to 5% before the 1994 election.

The president, elected by parliament for a five-year term, has few formalpowers. The position is responsible for the nomination of certain posts, but islargely ceremonial. Mr Madl took office in August 2000. The constitutionpermits a maximum of two terms.

The president and judiciary

Hungary 7


Until recently the judiciary was a three-tier system, involving local, county andhigh courts. A 1997 constitutional amendment added an additional tier, acourt of appeal. However, the new government has failed to provide fundingfor implementation of the appeal courts, which are to hear appeals submittedfrom county court decisions and handle selected cases. There is also aconstitutional court, which is very active. It has the power to review andinvalidate parliamentary acts and has been quite forceful in doing so.

Reform of the legal system has generally been based on West European norms,with a view to preparing the judicial system for EU entry. However, there arestill several problem areas. In its 2000 progress report the EU Commissionnoted that although the judiciary functions satisfactorily and the training ofjudges in the acquis communautaire (the body of EU law) has progressed, thelarge backlog of cases before the Supreme Court needs to be addressed. The lowpay and status of members of the judiciary is also a problem (salaries of lowercourt judges are only about one-third of those of private lawyers).

Despite extensive decentralisation, the central government retains strongpowers. The prime minister can be replaced only by a so-called positive vote ofno confidence, which requires the naming of an alternative candidate at thetime of the vote. Individual ministers in the government are not subject tovotes of confidence, and ministries can use orders and decrees to implementpolicy. The finance ministry occupies a particularly important position amongministries, with responsibility for approving plans for spending and revenue,which the government submits to parliament for approval. The government ledby Fidesz-HCP has substantially increased the role of the prime minister’s officein the government, and created a new Ministry of Economic Affairs to co-ordinate economic policy and administration.

There are more than 3,000 local governments in Hungary, each with locallyelected officials. Although there is substantial decentralisation of power, a largepercentage of local budgets come from the central state budget. There is alsoself-government for ethnic minorities.

Political forces

A two-party system has emerged since 1990. Opposition parties contestgoverning coalition appointments and programmes, but have shown awillingness to co-operate over issues of bipartisan concern. One or more centreparties have remained strong enough to affect the balance of power betweenFidesz-HCP and the HSP. Having been one of the first former communistcountries to elect a reconstructed socialist party in 1994, Hungary in 1998became one of the first to elect an economically liberal party with policies andpersonalities entirely detached from the communist era.

The Federation of Young Democrats-Hungarian Civic Party (Fidesz-HCP), the senior government party, was formed in 1988 by students in the lawfaculty at Budapest’s Eotvos University. During the conservative government of1990-94, Fidesz espoused a liberal ideology and often co-operated with the AFD.However, its more centrist leaders left in 1994. When the HSP-AFD government

Central and localgovernment

Political polarisation

8 Hungary


coalition was formed in 1994, Fidesz remained in opposition and began tocourt conservative opinion. As part of its attempt to broaden its political appealbeyond the youth vote, the party dropped its upper age limit of 35 in 1993, andadded Hungarian Civic Party to its name in 1995. Fidesz-HCP becameincreasingly populist and conservative, and formed an electoral coalition withthe HDF before the May 1998 election. Mr Orban’s aloof style caused a declinein Fidesz-HCP popularity in 1999-2000, but it has since shown some recovery.The party’s re-election campaign for the 2002 parliamentary election will be run byMr Orban’s close ally, Laszlo Kover, who resigned as party chairman in 2001 toconcentrate on the campaign.

The Smallholders’ Party (SP) improved its electoral performance in 1998and became the key to the formation of the Fidesz-HCP-led coalition. The SP isa re-creation of the party of the same name that was popular in the immediatepost-war period. During the HDF-led government, the party focused predom-inantly on the reprivatisation of land. Its strong influence on this single issueresulted in a complicated land compensation programme that worked tomaintain small land-holdings. The party largely appealed to elderly peopleliving in villages. During 1991 the party became polarised between groupsloyal to Mr Antall and more radical members led by the chairman, JozsefTorgyan. Mr Torgyan gained control of the party in 1994, and his high-profilecriticism of the HSP-AFD government, along with continued support for limitson foreign ownership of farmland, helped to revive the SP vote in 1998.However, a series of corruption scandals, including allegations made againstMr Torgyan, have split the party. Mr Torgyan’s resignation as minister foragriculture and regional development in February 2001, and a divisiveleadership battle, have hit the SP’s support.

The Hungarian Socialist Party (HSP) came into being in October 1989when a congress of the ruling HSWP voted to change the party’s name andorientation. Reformers in the HSWP steered it in a new direction, and the HSPdeclared itself a West European-style socialist party. The party received only10.9% of the proportional vote in 1990 and went into opposition. After theelection the former foreign minister Gyula Horn became party chairman andbegan to bring together the various factions. The HSP unites diverse groups thatinclude liberal economists who sought radical reform of the state-centredeconomy, social democrats, trade unionists and middle- and lower-level officialsfrom the previous regime. At various times during his chairmanship, differentgroups expressed dissatisfaction with Mr Horn’s leadership, but no substantialchallenger emerged to lead the party into the 1998 election, which the HSPsubsequently lost. Mr Horn retired from the party leadership after the electiondefeat. His protégé, Laszlo Kovacs, who served as foreign minister in 1994-98,was elected to the top HSP post in September 1998, but failed to consolidatesupport, and stepped aside in June 2001. The party will be led into the 2002election by Peter Madgyessy, who is not a deputy and has no party affiliation.

The Alliance of Free Democrats (AFD) has its roots in the democraticopposition of the 1980s, which organised underground protests against thecommunist system and was prominent in the political transformation of1988-89. In 1990 the AFD finished a strong second to the HDF. In 1994 the

Hungary 9


party again finished second, but entered a coalition with the HSP. The party’ssupport dropped substantially in 1998. The AFD presents itself as a liberaldemocratic party and it has generally consolidated this ideology in itsleadership. Those founders with social democratic leanings have either left theparty or been marginalised. There was some division between leaders overparticipation in the HSP-led coalition government, and some former supporterspenalised the party for its role in the government. The party draws its mainsupport from urban voters. Gabor Demszky, the long-serving mayor ofBudapest, resigned as party chairman on June 2001, having taken over fromBalint Magyar only in December 2000.

Once the leading force in government, but now a minor partner of Fidesz-HCP,the Hungarian Democratic Forum (HDF) was formed in 1988 by a groupof populist-oriented intellectuals and cultural figures allied with Mr Pozsgay. Asprime minister, its leader Mr Antall consolidated control over the party andmoved it away from its more populist roots and towards a more conservativeand Christian Democratic profile. This change angered many radicals withinthe HDF, which had difficulty regaining unity after the expulsion of one of itsfounders, Istvan Csurka, for attacking the leadership, and the subsequent deathof Mr Antall. After a heavy defeat in the 1994 election, in February 1996 manyHDF moderates left to form their own party, the Hungarian Democratic People’sParty (HDPP). The HDF gained 17 parliamentary seats in 1998 on the strengthof its alliance with Fidesz-HCP, having failed to gain representation based on theproportional party list vote. The HDPP won no parliamentary representation.

The Hungarian Justice and Life Party (HJLP) was formed in 1993 whenthe radical populist Mr Csurka and his supporters were expelled from the HDF.Mr Csurka is a controversial figure who receives a great deal of media attention.His statements often include thinly veiled anti-Semitic remarks. The party wasone of the few political forces opposing Hungarian membership of NATO. In1994 the HJLP failed to gain parliamentary representation. However, despite thedistancing of other conservative parties, the HJLP re-entered parliament in 1998.

Parliamentary election results 1994 1998

% vote Individual Seats in % vote Individual Seats infor party districts parlia- % of for party districts parlia- % of

list won ment seats list won ment seats

Alliance of Free Democrats (AFD) 19.7 16 69 17.9 7.6 2 24 6.2

Christian Democratic People’s Party (CDPP) 7.0 3 22 5.7 2.3 0 0 0.0

Federation of Young Democrats (Fidesz) 7.0 0 20 5.2 29.4 90 148 38.3

Hungarian Democratic Forum (HDF) 11.7 5 38 9.8 2.8 17 17 4.4

Hungarian Justice and Life Party (HJLP) 1.6 0 0 0.0 5.5 0 14 3.6

Hungarian Socialist Party (HSP) 33.0 149 209 54.1 32.9 54 134 34.7

Smallholders’ Party (SP) 8.8 1 26 6.7 13.2 12 48 12.4

Other parties 11.2 2 2 0.6 6.3 0 0 0.0

Independent candidates – 0 0 0.0 – 1 1 0.3

Total 100.0 176 386 100.0 100.0 176 386 100.0

Memorandum itemTotal votes cast 5,400,194 4,526,860Source: Press reports.

10 Hungary


Main political figures

Viktor Orban: Leading figure of the Federation of Young Democrats-Hungarian Civic Party (Fidesz-HCP) and prime minister. From the fiery speechat the reburial of Imre Nagy in 1989 demanding the withdrawal of Soviettroops with which he first made his mark, Mr Orban has often courted controv-ersy with outspoken rhetoric. Under his leadership, Fidesz-HCP has shed itsliberal political identity and moved steadily to the right over the past few years.Despite internal criticism of his leadership and a number of defections to theAlliance of Free Democrats (AFD), Mr Orban managed to keep a grip on theparty and led it to election victory in 1998. He has been an energetic primeminister, but his imperious style has made him unpopular with many.

Peter Medgyessy: finance minister in 1996-98, presiding over the improve-ments in growth, inflation and external accounts that followed theimplementation of his predecessor’s Bokros Plan. He has since taken seniorposts in the private financial sector, and is not currently a member of parlia-ment. His business links helped him to emerge in 2001 as a consensusHungarian Socialist Party (HSP) candidate for prime minister in the 2002election, especially with the party’s narrowing poll lead forcing it to look moreclosely at coalition ties with more moderate political forces such as the AFD.

Laszlo Kovacs: Foreign minister in 1994-98 and close protégé of the formerprime minister Gyula Horn, Mr Kovacs was elected in June 1998 asparliamentary leader of the HSP. Despite succeeding Mr Horn as chairman ofthe HSP in September 1998, Mr Kovacs has been criticised for his leadershipstyle, and ruled himself out of consideration as prime minister designate aheadof the party’s June 2001 congress. He is expected to take a senior post—perhaps returning to the foreign ministry—in any future HSP administration.

Jozsef Torgyan: Chairman of the Smallholders’ Party (SP), Mr Torgyan was alawyer before entering politics in 1989. He survived several political attacksunder the government led by Jozsef Antall before staging a comeback in the1994 election. His efforts to project a more moderate image in the approach tothe 1998 election paid off with his party’s inclusion in the new government, inwhich he served as agriculture and regional development minister. Corruptionallegations and his inability to shield farmers against severe production andincome falls in 2000-01 alienated core SP support, and in February 2001 he wasforced to resign from the cabinet. The SP has since split into pro- and anti-Torgyan groupings and SP support has fallen below the level needed forparliamentary representation.

Istvan Csurka: Controversial founder and leader of the far-right HungarianJustice and Life Party (HJLP), following his expulsion from the HDF in 1993.Mr Csurka’s strident nationalism has led to his proposals for parliamentary co-operation with other parties being repeatedly rejected, but strong poll ratingssuggest that the next election could leave him holding the balance of power.

Zsigmond Jarai: Appointed governor of the National Bank of Hungary(NBH, the central bank) in March 2001, after serving as finance minister in theruling coalition since June 1998. Like that of his predecessor (Gyorgy Suranyi,given office by the HSP in 1995), Mr Jarai’s six-year term is likely to outlast the

Hungary 11


government that appointed him. His political experience should help to avoidsharp conflicts between monetary and fiscal policy. Although there are doubtsover his commitment to tightening monetary policy in the face of risinginflation and loose fiscal policy, he has presided over a cut in the monthlycrawling-peg exchange rate and the surprise widening of the forint’s tradingband in May 2001.

Ferenc Madl: Mr Madl began his five-year presidential term in August 2000,having previously run for the post in 1995 after a career as an academic lawyer.Although he was a compromise candidate chosen to heal a rift in the presentcoalition, Mr Madl may play an important role in shaping the nextgovernment if there is a close election result in 2002.

International relations and defence

The presence of large Hungarian minorities in neighbouring countries has beena source of problems for Hungary since the 1920 Treaty of Trianon, whichreallocated more than two-thirds of the country’s pre-war territory (mostly toRomania, Czechoslovakia and Yugoslavia). During the 1980s the difficulty facedby Hungarian minorities, particularly in Romania, was an important mobilisingelement for the opposition parties. A small but vocal irredentist tendency, notconfined to the HJLP, continues to feed off concerns about Hungarian minoritiesabroad. The government led by Fidesz-HCP has gone some way towardsreflecting this concern, notably by supporting a Status Law that opensHungary’s labour market and basic public services to ethnic Hungarians livingabroad.

However, the government has also continued its predecessor’s efforts to norm-alise relations with Slovakia and Romania, the two neighbours with the largestHungarian minorities. Basic treaties were signed with Slovakia in 1995 and withRomania in 1996. Relations with Romania improved following the election inNovember 1996 of a centre-right coalition that included the Hungarian Demo-cratic Union in Romania (HDUR). Hungary’s first two-way labour exchangeagreement, for 8,000 seasonal workers per year, was signed with Romania inMay 2000. Although the leftist Party of Social Democracy in Romania (PSDR)won the Romanian election in November 2000, it made early pledges to respectnew legislation defending ethnic minority rights and signed a co-operationagreement with the HDUR. Relations between the two countries remain cordial.

Slovak-Hungarian relations have also improved significantly since theNovember 1998 election brought the ethnic Hungarian party into the Slovakgovernment. Historical resentments over Hungary’s pre-1918 control ofSlovakia are no longer strong, but smaller frictions persist. The most sensitivein recent years concerns the Nagymaros/Gabcikovo Danube dam project,agreed between the communist governments in 1977, which Slovakia chose tocontinue after Hungary withdrew on cost and environmental grounds. Thetwo countries have also exchanged strong diplomatic remarks over the ethnicHungarians’ demand for a Hungarian-dominated region in southern Slovakia.

Minorities and neighbours

12 Hungary


Mindful of the dangers of a backlash against the Hungarian minority in theSerbian province of Vojvodina (where it makes up 20% of the population),Hungary was careful to limit its participation to logistical support when NATOtook military action against Yugoslavia (Serbia-Montenegro) over Kosovo in1999. Fears that Vojvodina might become another target for Serbiannationalists subsided when Slobodan Milosevic and his Socialist governmentwere removed from office in 2000. Yugoslavia’s president, Vojislav Kostunica,and government, headed by Zoran Djindjic, have made credible commitmentsto respect ethnic minority rights within Serbia and Montenegro. However,regional instabilities related to the Kosovo conflict are not entirely resolved asthe ethnic Albanian fighters that led resistance to Serbian control stepped uptheir actions on behalf of Macedonia’s ethnic Albanians in early 2000. NATOand the EU have signalled a willingness to back up their diplomatic support forthe Macedonian government with military action against the ethnic Albanianrebels if necessary, and Hungary is likely again to be called on for logisticalsupport if further NATO-led intervention becomes necessary.

Hungary was developing links with international bodies well before thedissolution of the Warsaw Pact (established in 1955) and the Council forMutual Economic Assistance (CMEA, or Comecon; 1949). It joined the UN in1955, and the IMF and World Bank in 1982. Entry into the General Agreementon Tariffs and Trade (GATT) in 1973 allowed it to become a founding memberof the World Trade Organisation (WTO). It was a founding member of theEuropean Bank for Reconstruction and Development (EBRD) in 1991. In 1991Hungary, Poland and Czechoslovakia formed the Central European Free-TradeAgreement (CEFTA). Hungary was invited to join the OECD in 1996, andjoined the International Energy Agency in 1997.

In July 1997 the European Commission’s Agenda 2000 report recommendedbeginning accession negotiations with Hungary, alongside the Czech Republic,Poland, Slovenia, Estonia and Cyprus. The Commission noted that Hungaryhad a developed democracy with stable institutions, a functioning marketeconomy, and a productive base and legislative framework already compatiblewith single-market membership in many areas. Annual “progress reports” havesubsequently commended Hungary’s move towards monetary convergenceand structural complementarity with the EU, although they have stopped shortof putting any firm timescale on Hungary’s readiness for accession. The EUcontinues to call for more progress in other areas: notably the avoidance ofunsustainable budgetary and external deficits; a better resourced judiciary;elimination of corruption; and improvements in consumer protection, customscontrol, environment and energy.

Accession talks began in 1998. Hungary formally expects to qualify for EUmembership in 2003, despite the EU’s ongoing reluctance to set a clearenlargement timetable. The government has emphasised its commitment todefending the national interest, and Mr Orban has periodically attacked the EUfor its negotiating demands and delays. Problem areas include agriculture,labour flows, immigration policy and environmental standards. Hungary wantsto retain the right to subsidise agricultural investments, even though EU

Growing internationalintegration

Westward reorientation

Hungary 13


regulations limit investments in areas where there is chronic overproduction.In June 2001 Hungary closed the free movement of people and free movementof capital chapters of the acquis communautaire (the body of EU law). In doingso it agreed to restrictions on labour mobility of up to seven years. In return,the EU agreed on transition periods for the sale of arable land to companiesand joint ventures of seven years and to self-employed EU farmers of threeyears. Non-arable land sales are restricted for five years.

Admission talks with NATO commenced in September 1997, and in aNovember 1997 referendum 85% of Hungarian voters approved entry to thealliance. The admission protocol was signed in December 1997, and the formalsigning ceremony for membership occurred on March 12th 1999. Hungary hasbenefited from providing a forward base for the NATO-led Stabilisation Force(SFOR) and the earlier Implementation Force (IFOR) in Bosnia and Hercegovina(BiH). A 300-member Hungarian technical contingent also served in bothforces. These activities led to close co-operation between NATO and theHungarian armed forces. In March-June 1999 Hungary gave reluctant but fullsupport to NATO’s bombing of Yugoslavia (Serbia-Montenegro).

Military forces, 2000

Active forcesArmya 23,790Air force 11,500UN & peacekeeping 800Total 36,090 of which: conscripts 22,900

ReservesArmy 74,900Air force 15,400

a Includes 290 personnel in Army Maritime Wing.

Source: International Institute for Strategic Studies, The Military Balance, 2000-2001.

The government has promised a virtual doubling of defence spending, raisingthe defence budget by 0.1% of GDP over four years, in order to carry out thesubstantial modernisation, especially of communications and aircraft, requiredfor military compatibility with NATO. Major military reforms have still to becarried out, including substantial technology upgrades. The military continuesto reduce the number of active troops, and has discussed ending conscription,but the pay increases needed to effect this have proved difficult to fund.

Resources and infrastructure

Population

Hungary is one of the smaller European countries, with a population of10.04m at end-1999. The capital city, Budapest, is home to 1.8m or 18.1% ofthe population, and 45.3% lived in other urban areas in 1999. The age

Defence

14 Hungary


structure of the population is typical for Europe, with 17% of the populationbelow the age of 14 and 20% aged 60 or above in 1999.

The population is relatively homogeneous, with small minorities of Roma(142,700), Germans (30,800), Croatians (13,600), Romanians (10,700) andSlovaks (10,500) reported in the 1990 census. Unofficial estimates suggest thatthe minority populations are higher; the European Roma Rights Centre claimsthere are more than half a million Roma, 5.7% of the population. Hungarianminorities in neighbouring countries are much larger, and thus have a higherpolitical profile than domestic minorities. Although reliable counts are hard toobtain, there are between 1.8m and 2m ethnic Hungarians in Romania, morethan 500,000 in Slovakia, around 300,000 in Serbia and up to 200,000 inUkraine, with smaller numbers in Croatia and Austria. (See Reference table 1for population statistics.)

Population by age, 2000(‘000)

Age bracket Males Females Total

0-14 880.0 837.3 1,717.2

15-19 334.2 320.1 654.3

20-39 1,471.0 1,421.7 2,892.8

40-59 1,346.5 1,458.2 2,804.8

60-74 573.5 832.5 1,406.0

75+ 186.6 381.6 568.2

Total 4,791.8 5,520.8 10,043.2

Source: Central Statistical Office (CSO), Statistical Yearbook.

Hungary’s population has been falling since the early 1980s, when the deathrate began to exceed the birth rate. It dropped from 10.36m in 1990 to 10.04mat end-2000. According to preliminary reports of the result of a census taken inFebruary 2001, the size of the population may be 200,000 higher than hadbeen estimated. If these results are confirmed, the population series will haveto undergo substantial revision. In 1999 the birth rate stood at 9.4 per 1,000 (asignificant decline from the rate of 11.8 per 1,000 recorded in 1992), and deathrates increased to 14.2 per 1,000, from 13.9 per 1,000 in 1998 (14.4 per 1,000in 1992). The ageing population, with those over 65 rising to 21.4% of thepopulation aged 15-64 in 2000, from 17% in 1970, has placed a rising strain onthe traditionally generous system of pensions and early retirement. Successivegovernments have worked to tighten eligibility for pensions and let themerode against inflation, but the growing voting power of older people makes ithard to continue this. Although the previous government, led by theHungarian Socialist Party (HSP), significantly reduced maternity and familybenefits, the present government, a coalition led by the Federation of YoungDemocrats-Hungarian Civic Party (Fidesz-HCP), increased support for familiesin the 1999 and 2000 budgets.

Unemployment rose sharply during the economic downturn of the early1990s, and the subsequent return to strong growth was slow to bring it downbecause of rapidly rising labour productivity, especially in foreign-invested

Ethnic homogeneity

Labour force

An ageing population

Hungary 15


manufacturing. Employment has also contracted, reflecting a demographicdecline in the population of working age, and a fall in the participation rate asolder or less skilled workers are sidelined from the labour market. According tolabour force surveys by the Central Statistical Office (CSO), the economicallyactive population fell from 5.28m persons in 1989 to a low of 4m in 1997.However, it has since started to rise, recording 4.11m in 2000. Between 1990and 2000 the percentage of the working age population that was not econ-omically active grew from 15.9% to more than 33.9%. Whereas virtually all ofthe economically active population was employed in 1989, at the end of 2000some 248,400 persons were unemployed, or 6% of the economically activepopulation. However, registered unemployment at labour offices was higher, at372,409 at end-2000 (for more on unemployment, see The economy).

The nature of employment has also changed. There has been a marked shiftaway from employment in agriculture towards services occupations. Accordingto CSO surveys, 15.8% of the labour force was employed in agriculture andforestry in 1991. By 2000 the percentage had fallen to 6.5%. The share ofindustry in employment declined from 29.5% to a low of 26.7% in 1995.Although industrial employment rebounded in the late 1990s, reaching 27.3%in 1999, faster growth of service-sector job creation in 2000 saw it fall as aproportion of total employment to 26.8%. Between 1992 and 2000 employ-ment in agriculture dropped by 221,900 (a fall of 47.5%). Althoughmanufacturing employment is rising, in 2000 it was still 85,900 (8.3%) belowits 1992 level. (See Reference table 2 for data on the labour force.)

Education

Educational attainments are comparable to those of Western Europe. A highstandard of general and vocational education has been important in attractingforeign employers to Hungary, especially in new-technology sectors. In 1999carmaker Opel reported that the workforce at its Szentgotthard componentplant was significantly better educated than its counterpart in Germany, withmore than half holding a degree or equivalent qualification. Among centralEuropean countries, Hungary is consistently at the top of the educationspending league table. However, state spending on education as a percentage ofGDP declined from about 7% in the early 1990s to about 4.2% in 1999, as thegovernment was forced to curtail expenditure. The present government hasattempted to reverse this trend, but remains dependent on increased private-sector input, especially via payment of fees and maintenance by post-compulsory students. Primary and secondary education has been decentralisedsince the transition. Church and private schools educate about 4% of students,the rest attending state schools run by local authorities.

Schooling is compulsory for children between the ages of six and 16. Under thecommunist regime, education in a general elementary school was usuallyfollowed by four types of outcomes: exit from school; apprentice school forskilled workers’ training; vocational secondary school; and gymnasium orgeneral secondary school. The gymnasium was the primary feed for universityeducation, although other higher education institutions were fed from

16 Hungary


vocational secondary schools. This system has persisted since 1989, andcompletion rates for general elementary school remain quite high.

Apprentice schools have declined as a destination among secondary students.In 1990, 42% of those completing elementary school continued to apprenticeschools; in 1998 only 23% did so. The percentage continuing to vocationalsecondary schools increased from 31% in 1990 to 41% in 1999, and the percen-tage continuing to gymnasium rose from 21.1% to 31.6%. These changesreflect a move away from an emphasis on industrial production towards a morediversified market economy, where higher education is valuable. Another trendthat reflects the growing importance of preparation for higher education is there-emergence of gymnasium schooling in grades five to eight.

In 1990/91 only 8.5% of the population aged 18-22 was attending university orcollege, applicants’ success rate being 36%. By 1999/2000 enrolment had morethan doubled, to 17.5%, with 52.1% of applicants gaining admission. Expan-sion has been helped by the Fidesz-HCP government’s elimination of thetuition fees for first-degree programmes introduced by its predecessor.University education lasts for five years, and college-level programmes canrange from three to four. The 89 universities, colleges and other institutions ofhigher education retain their traditional subject specialisms. In 1998 thegovernment began plans to consolidate the number of state higher educationinstitutions in connection with a US$150m World Bank loan, which will alsofinance renovation and construction of buildings, training for managers inhigher education, reforms of information systems, and implementation of astudent loan programme.

Health

Despite a relatively high share of healthcare spending in GDP, Hungarians havethe lowest life expectancy among OECD member countries. The health of theHungarian population has been poor by international standards for severaldecades, and a 1999 World Bank study warns of a “public health crisis” withoutexpansion and better allocation of resources. In 1999 life expectancy at birthwas 66.3 years for men and 75.1 years for women. The figure for men hasrebounded after falling to 64.5 in 1993 from a high of 66.7 years in 1965. Lifeexpectancy for women was slowly increasing until 1999. Since 1970 the lifeexpectancy for men at the age of 30 has declined by more than three years.The suicide rate is one of the highest in the world, at more than 30 per 100,000inhabitants, although the rate is gradually declining. On a more positive note,infant mortality has continued to decline, from 47.6 per 1,000 live births in1960 to 9.7 per 1,000 in 2000.

Before 1989 the state system was characterised by ageing hospital facilities,equipment in disrepair, shortages of basic medicines and inadequate trainingof many medical personnel. Improvements have been slow, and there remainsan oversupply of doctors and specialists and a low ratio of nurses to patients.Earnings in the healthcare sector relative to the total economy ranked among

Higher education

Healthcare facilities havedeteriorated

Hungary 17


the lowest in the OECD in 1996, and the continued erosion of pay againstprivate-sector counterparts makes competent staff hard to retain.

Basic health services are available through the National Health Insurance Fund(NHIF), part of the social security system. The Fund receives a combination ofemployer and employee contributions, with people outside the labour forcecovered by state contributions. Local governments are largely responsible forservice provision, providing most primary healthcare and operating a majorityof hospitals. Primary care is reimbursed by flat fees per patient, which areadjusted according to the age profile of the patients and the qualifications ofthe doctors treating them. Outpatient treatment is paid on the basis of a pointssystem, and hospital care is reimbursed according to diagnostic group.Medicines are heavily subsidised, although price caps on prescribed drugs since1999 have helped to reduce the resultant NHIF deficit.

The NHIF is an extra-budgetary organisation, which acts as purchaser ofservices of doctors, hospitals, and other providers. It has substantial autonomy,but was brought under closer finance ministry supervision in 1998 after aballooning of the deficit. In the formal state health system, local district doctorsprovide basic healthcare services and make referrals to specialists; all services,including hospital care, are provided free of charge. Tipping of doctors in thestate system is common, particularly for advanced services like surgery. Inaddition, doctors receive private patients in their free time, both in separateprivate practices and occasionally at their official practice. This informal systemsupplements the low salaries received by medical professionals and encourages ade facto fee-for-service system.

Responsibility for healthcare planning is divided between the NHIF and theministries of health and finance, with the economy ministry and the primeminister’s office also involved. Turf wars between bureaucracies, the stronglobbying efforts of doctors, and the government’s refusal to co-operate withopposition committee members have resulted in indecision on reform. A firststep was taken in February 2000, with passage of a law giving 7,000 generalpractitioners, paediatricians and dentists the right to practise free of charge.Currently these practitioners are contractors with the NHIF and have beenselected through tenders offered by local councils. A component of thelegislation is a Ft70bn (US$245m) loan guarantee programme for doctors toallow them to purchase doctors’ offices and equipment from local councils. Asimilar programme for hospital doctors is now being prepared.

Natural resources and the environment

Hungary has a land area of 93,030 sq km and a population (at end-1999) of10.04m, which gives the country a population density of about 108 per sq km,similar to that of France and Poland. The country is a low-lying plain dividedroughly into thirds by two rivers, the Danube and its tributary, the Tisza. Theland is generally fertile, with about 70% suitable for agriculture. Hungary lacksextensive domestic energy resources and raw materials, except for bauxite.

Health reforms delayed

18 Hungary


There are three primary geographic regions. Transdanubia, the area lying westof the Danube, is a hilly region extending to the foothills of the Austrian Alps.It is primarily an agricultural area with crops, livestock and viticulture. TheGreat Plain (Nagy Alfold), lying east of the Danube and including the Tiszariver basin, contains about half of the country and includes regions of fertilesoil, sandy areas and wetlands. Drainage projects in the late 19th centurycurbed the traditional floods and opened the land for cultivation. Thenorthern hills run from north of Budapest to the north-east along the Slovakborder. The country’s limited mineral deposits (and Tokay wine region) arelargely located in this area, and it was the location for most of the heavyindustries of the socialist era.

There are a few moderately high ranges of mountains, but only 2% of thecountry reaches heights of 300 metres or more. The highest peak is Kekes at1,014 metres. Lake Balaton in Transdanubia is the largest lake in centralEurope, measuring 78 km in length and between 3 km and 14 km in width.The hills surrounding the lake are an important site of viticulture. Budapestand much of the remainder of the country have numerous thermal spas. Theclimate is subject to dramatic changes. Average daytime temperatures inBudapest range from minus 1-4°C in January to 16-28°C in July. There is aslight variation in the climate across the country, with the south slightlywarmer and the north and east slightly cooler.

Transport and communications

Decades of underinvestment during the socialist period left rail, road andtelephone systems dilapidated. The trend has been reversed since 1989 assignificant inflows of international capital have been directed towardsinfrastructure. However, public financial constraints have led to the scaling-down or cancellation of some long-awaited projects, notably the Ft160bn(US$100m) Budapest metro expansion scrapped in 1998.

Upgrading of the motorway network has been one of the infrastructurepriorities. In 1993 the European Bank for Reconstruction and Development(EBRD) headed a consortium providing US$200m of financing for the com-pletion of the motorway linking Budapest and Vienna. The project wascompleted in 1995. The Ministry of Transport has prepared a Ft600bn ten-yearprogramme for main road construction, Ft27bn of which was budgeted formotorway construction in 2000. Preference is being given to routes that formpart of European transport corridors. About 30-35 km of new motorways are tobe built per year. It was initially hoped that much of the construction could beprivately financed, with builders recovering their outlay through tolls, butprotests at the level of these forced the government to renegotiate, and to stepup the public contribution. With support from the EBRD and the EU’sinstrument for structural policies for pre-accession (Ispa), the M3 motorway(running north-eastwards from Budapest) is due to reach the border by 2004,and construction of a motorway towards Szeged in the south-east is alsomaking progress. A new Danube road bridge is intended to link these. To reduceroadbuilding costs, the government has pressed for dual carriageways in place

Three main regions

Motorway construction

Hungary 19


of the four-lane motorways originally proposed—an economy that may causecongestion problems in the longer term, as transit traffic continues to grow.

Road transport has replaced railways as the primary form of freight haulage,reflecting both the improvements in main road provision and past lack ofinvestment in the state-owned railway, MAV. Waterway shipping began torecover in 1996 after the lifting of sanctions against Yugoslavia (Serbia-Montenegro), but growth slowed in 1997-98 and another reversal was inflictedby damage to bridges over the Danube at Novi Sad in Vojvodina duringNATO’s air strikes against Serbia in 1999. Although most of the debris had beencleared by mid-2000, temporary pontoon bridges continued to disrupt rivertraffic. Air cargo plays a minor role in the freight system, although smallvolumes of higher value-added products are imported and exported this way.

Although the dominant form of long-distance passenger traffic is still bus travel,the private car plays an important role in Hungarian life. Car ownershipincreased from 187 per 1,000 of the population in 1990 to 230 per 1,000 in1999. Air passenger traffic has grown rapidly in the past five years, but it stillmakes only a small contribution to total long-distance passenger traffic.Capacity at Budapest Ferihegy, the international airport, rose to 5.5m passengersper year after a recent expansion. (See Reference table 3 for transport statistics.)

Early telecommunications privatisation initially brought an advantageouscombination of faster improvement in the fixed-line network run by Matav andgrowing competition as the network began to open to rival companies.Developments in mobile and cable telephone technology also helped toimprove competition ready for the strong growth in demand for Internet andother forms of data transmission. The number of telephone lines has risen from1.8m in 1989 to 2.9m by mid-2000 (close to 39% penetration), helped by morethan US$3bn of foreign direct investment (FDI) into the sector since 1989. Thedensity of the cable telephone network has increased significantly, and themobile telephone network has expanded at an exceptional pace. Matav’smonopolies have been progressively removed; the last, on long-distance andinternational fixed-line calls, will end on January 1st 2002, a year earlier thanoriginally scheduled. Majority owned by Deutsche Telekom since this boughtout consortium partner Ameritech (US) in 2000, Matav embarked on anambitious upgrading of capacity and expansion of mobile services, and plannedto invest US$1.68bn between 1999 and 2001, largely in Internet technologies.

Matav’s hold over the country’s main telecoms networks has been difficult tobreak, and this is partly responsible for a loss of momentum in recent yearsthat has left Hungary with some of the region’s highest call and Internet accesscharges. In 2000 Matav persuaded the State Procurement Committee toprevent the Post Office from switching its information technology account toPanTel, the alternative national network established by KPN (Netherlands) andthe railway company MAV. Moreover, in 1999 Matav acquired cable networksin the regions where its fixed-line monopoly had been broken, and spun off itscable subsidiary to insurance company Hungaria to side-step monopolyrestrictions. Matav still controlled more than 75% of access lines in mid-2000,

Freight haulage

Passenger transport

Telecommunications:progress has slowed

20 Hungary


despite a sale of local telephone operators (most acquired by France’s Vivendi)in 2000. Although Matav’s long-distance and international voice callmonopoly expires at the end of 2001, local services will not be fullycompetitive in all areas until November 1st 2002—a target date that could, asin many EU countries, be missed because of difficulties in inducing othercompanies to compete for the “local loop”. Number portability, important tothe easy switching of customer accounts, is not envisaged until 2004.

Matav’s acquisition (from its own parent company, Deutsche Telekom) of theWestel operations in October 1999 also restored it to a leading role in themobile market. The original analogue provider, Westel has consistentlyachieved better profitability for its global system for mobile communications(GSM) digital service than rival Pannon (co-owned by Norway’s Telenor,Finland’s Sonera and KPN). Westel also remains ahead on numbers, with940,000 subscribers (55% of the market) by mid-2000. Primatel, backed byVodafone (UK) and RWE (Germany), won the third GSM licence in 1999. Theseand a fourth operator are expected to compete for universal mobiletelecommunications system (UMTS) mobile licences, due to be issued in 2002.

Matav has also been accused of exploiting its network ownership advantage inassignment of capacity for high-speed (ADSL) Internet connections, helping itto defend a 45% share of the dial-up access market. Matav and KPN are alsobattling in the Internet service provider (ISP) market. The future of Matav’smain rival, Euroweb (with a 35% share), was thrown into doubt when KPN, astrategic partner in its 51% owner Euroweb International, announced theabandonment of its central European operations in April 2001.

State control of the press and broadcast media has been slow to relax since thefall of communism, and remains a source of criticism from the public and theEU. A compromise on the opening of radio and television to privatecompetition was reached only in December 1995, under the government ledby the Hungarian Socialist Party (HSP). The National Radio and TelevisionBoard (ORTT), composed of representatives of both government andopposition parties, was established to supervise public service broadcasting andthe privatisation process. However, the present government has broken withthis bipartisan procedure by packing the supervisory committees with its ownallies. Controversy over opposition membership of the ORTT continued into2000, when the board was constituted without opposition members. Thegovernment has also been accused of favouring political allies in the allocationof new broadcasting frequencies, authorising surveillance of hostile journalists,and discriminating against these when deciding on job cuts at state television.

The print media market is more competitive. There are a number of nationaldaily newspapers, most with some form of foreign ownership. The largest daily,Nepszabadsag, was formerly the newspaper of the Hungarian Socialist Workers’Party (HSWP) and remains close to the HSP. It is owned by the Bertelsmanngroup (Germany). Magyar Hirlap is considered to be close to the Alliance of FreeDemocrats (AFD) and is owned by Marquard of Switzerland. Postabank, whichhas majority state ownership, owns both a conservative daily, Magyar Nemzet,and a tabloid, Kurir. The absence of a national daily newspaper explicitly

Expanding media

Hungary 21


sympathetic to Fidesz-HCP has prompted several government attempts tocreate one, despite charges of political interference. It has taken control ofseveral newspapers that were under the portfolio of financially troubledPostabank, and hopes to strengthen them by merging at least one with one ofthe stronger dailies. The government has also directed official advertising,including that of state-owned companies, towards its favoured publications.

Energy provision

Hungary is poorly endowed with natural resources, and has to importmore than 50% of its energy needs. Indigenous oil reserves, estimated at58m tonnes, enabled domestic primary production of 1.5m tonnes in 1999,19% of refining input. Oil production declined steadily through the 1990s,after averaging around 2m tonnes/year before 1989. No new major oil discov-eries are expected. Estimated gas reserves are around 113bn cu metres, withdomestic production now meeting around one-fifth of consumption, downfrom almost two-thirds in 1980. This reflects rising domestic consumption,especially as a substitute for the more pollutive coal, and a steady decline inproduction from the 6.2bn cu metres recorded in 1989. There are natural gasdeposits near Szeged, Miskolc and in eastern Hungary, and smaller crude oildeposits near Szeged, Zala county (western Hungary) and in other areas.Although there are small uranium deposits, the mining company based nearPecs has closed after unsuccessful attempts to sell it, leaving the Paks nuclearpower plant (in central Hungary) dependent on imports. (See Reference table 4for a breakdown of energy sources.) Although consumption is forecast to rise asthe economy expands, its growth has so far been held down by sharpimprovements in industrial energy efficiency. Under communism, energy useper unit of GDP was around 2.5 times the OECD average. The 1989 level ofindustrial production was regained during 1999 with around 25% less fuel use.Savings were achieved mainly through the closure of inefficient enterprises,motivated by a rise in industrial fuel prices as subsidies were withdrawn.

As elsewhere in Europe, oil and natural gas had replaced coal as the primarysource of energy by the end of the 1970s. Gas accounted for more than 40% ofnational energy consumption by 2000. Hungary’s dependence on natural gasfrom the former Soviet Union was broken in 1996, when a pipeline betweenGyor and Baumgarten linked it to Austria’s gas grid for the first time. Oil supplyhas also started to diversify, with the opening of a pipeline to the Adriatic.

The National Oil and Gas Trust (MOL) was privatised in 1994, and the sixregional gas supply companies in 1995. A subsequent share offering in 1997reduced the state stake in MOL from 59% to 25% plus one golden share, withforeign investors holding more than 30%. However, this did not mean an endto political influence on the company’s activities. MOL is the sole domesticproducer, dominates imports, owns a network of high-pressure gas transportand collection pipelines, and is the sole distributor to the regional gassuppliers. The company’s distribution network must be open to competition ifHungary is to conform to the EU gas directive (which took effect in 2000), butprogress towards this and a liberalised price regime has been slow. Gas

Domestic resources arelimited

The growth of gas

22 Hungary


liberalisation raises the politically sensitive problem that prices to industry andhouseholds will rise owing to the withdrawal of subsidy before greatercompetition and efficiency leads to a fall. The date for full market opening hasnow been set at January 1st 2003. Fearing the impact on inflation, and onpoorer households’ welfare, of a sharp rise in residential gas prices, thegovernment restricted these to a below-inflation 6% in 2000 and 2001. Thepersistent losses inflicted by these price controls prompted MOL to put itswholesale gas business up for sale in 2000.

Energy balance, 2000(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Production 1.7 2.4 3.0 3.2a 0.3 10.6

Imports 7.4 7.2 0.3 1.4a 0.0 16.3

Exports –2.0 0.0 –0.1 –0.7a 0.0 –2.8

Primary supply 7.1 9.6 3.2 3.9a 0.3 24.1

Net transformationb –1.5 –2.1 –2.2 –1.4 0.0 –7.2

Final consumption 5.6 7.5 1.0 2.5c 0.3 16.9

a Expressed as input equivalents, on an assumed generating efficiency of 33%. b Comprisestransformation input and output, plus energy industry fuel and losses. c Output basis.

Source: Energy Data Associates.

After choosing to refocus on upstream production and downstream fuelretailing, MOL has undertaken a number of projects to diversify its supplybases, joining consortia seeking to produce oil and natural gas in Russia,Greece, Syria and other locations in the Middle East. Aware that the domesticmarket is too small, MOL is expanding its processing operations regionally. Thestrategic stake acquired in Slovak refiner Slovnaft in 2001 is due to expand to amajority holding in 2002. A consortium bid for Poland’s Gdansk Refinery waslaunched in March 2001, as MOL awaited regulatory opinion on its proposedalliance with Polish petrochemical giant PKN Orlen; and a merger withCroatia’s INA has long been under discussion. However, MOL and INA are alsoopen to acquisition by a larger multinational, with Austria’s OMV a possiblebidder. Downstream, MOL operates a network of more than 325 retail petroloutlets and plans to expand to 400 in the coming years. It also has retailoperations in neighbouring Romania and has recently announced a regionalexpansion plan. Anglo-Dutch conglomerate Shell established its central andeast European retail headquarters in Budapest and maintains a national retailnetwork. OMV is also active in the Hungarian retail petroleum market.

Nuclear power, supplied by four 440-mw Soviet-designed pressurised-waternuclear reactors at Paks, accounts for about 25% of total domestic electricityproduction capacity. However, future development has in effect been halted byenvironmental concerns and problems with nuclear waste, which Russia hasrefused to re-import under a previously agreed contract. The EuropeanCommission’s 1997 Opinion on Hungary, citing Paks as the source of almost40% of the country’s electricity, links accession to meeting internationallyrecognised safety standards and solving the waste problem, a demand that has

Electricity: conventionalmakes a comeback

Hungary 23


been regularly repeated. Expansion plans for power production are nowfocused on non-nuclear options. Improving energy efficiency is likely toprevent immediate capacity constraints, but only 300 mw of new plant werecommissioned at the last purchase tender in 1999.

Six major conventional generating plants were privatised in 1995, in tandemwith the six regional power distributors. Newly arrived international firms,which included Powergen (UK), AES (US), RWE and EVS (Germany), Tractebel(Belgium), and Tomen (Japan), quickly presented plans to build newgeneration capacity, which is needed to replace older fossil-fuel plants that willnot meet future EU emissions standards, as well as to cater for rising demand.However, implementation has been slowed by arguments with thegovernment, which has tried to promote gas as an alternative to coal. Tractebeland AES have suspended coal-fired investment plans after failing to win long-term contracts. Supply companies also warned of risks to investment after retailprice rises were capped at 6% in 2001, compared with a wholesale rise of 13%;an 8% minimum return on capital was promised at the time of privatisation.

The Hungarian Electricity Works (MVM) operates the electricity grid and is thedominant exporter, importer and wholesaler of electricity. Vertical separationbetween these functions must be achieved to satisfy EU directives. MVM’sprivatisation has also been promised, but is unlikely before 2002. Deregulation,to allow regional distributors to buy from (and generators to sell to) companiesother than MVM, and users to choose their distributor, is still in its early stages.In view of the right of large (100-gwh) commercial consumers from 2001 toshop around for supply, around 15% of the market is currently open. Thegovernment expects this to be little more than 30% by the time of EUaccession, even though its target date for this (January 1st 2003) is the same asthat set for full electricity liberalisation. MVM, like MOL, will need to have itsnetwork opened to upstream and downstream competition before EU energydirectives are satisfied. In principle, deregulation could reduce power prices,because of the surplus capacity that would be forced into greater competition.However, the government fears that this could render MVM’s present purchaseagreements with domestic generators uneconomic (especially the Paks plant).The risk of new electricity market arrangements making peak-time suppliesunavailable, or prohibitively expensive, has also induced some heavy users toinstall their own reserve generating plant.

The economy

Economic structure

Hungary’s domestic market is relatively small, although it is still the thirdlargest economy in east-central Europe in US dollar terms. It has also becomeone of the region’s most open economies. Exports have grown strongly evenduring phases of slow growth in the EU (which accounts for around 75% ofexports) and real appreciation of the exchange rate. Imports have risen equallyrapidly, reflecting Hungary’s emerging role as an industrial processing

24 Hungary


economy. Exports of goods reached the equivalent of 62.5% of GDP in 2000,and imports 66.7%, up from 32.8% for exports and 33.7% for imports in 1991.

The contribution of industry to GDP declined sharply in the first eight yearsafter communism, from 41.9% in 1988 to 31.7% in 1996. Like the EU memberstates it is working to join, Hungary has rapidly become a service-basedeconomy. The share of the previously neglected services sector has increased toover 60% of GDP, compared with about 40% in the late 1980s. However, recenteconomic growth has been mainly fuelled by a revival in manufacturingindustry as a component production base and low-cost assembly area for EU-based supply chains. Industrial production rose by 10.5% in 1999 and by18.3% in 2000. As a result, industry’s GDP share is now rising again, reachingan estimated 34.3% in 2000. Owing to rapid productivity growth, industry’sshare of employment (excluding construction) has continued to decline, toaround 27% in 2000 from 31% in 1985. The share in employment ofagriculture has also fallen, to around 6.5% of the workforce in 2000 from 20%in 1985, and it now contributes less than 5% of GDP. Despite this decline,almost 40% of the population still live in rural areas and agriculture thuscontinues to be an important sector with disproportionate political influence.

Main economic indicators, 2000

Real GDP growth (%) 5.2

Unemployment rate (year-end; %) 6.0

Consumer price inflation (av; %) 9.8

Central government balance (% of GDP) –2.9

Current-account balance (% of GDP) –3.3

Exchange rate (av; Ft:US$) 282.2

Source: National statistics.

An aggressive privatisation policy has been pursued since 1995, raising morethan US$6bn. Major stakes of the telecommunications, banking, utilities andtelevision sectors are now in private hands, and the private sector accounts forabout 80% of GDP, one of the highest shares in the region. Foreign directinvestment (FDI) has played a significant role in modernising production, andredirecting trade from east to west. The stock of inward FDI had reached justunder US$21bn by end-2000, equivalent to about 46% of GDP.

Comparative economic indicators, 2000

CzechHungary Slovenia Slovakia Republic Poland

GDP (US$ bn) 45.6 18.1 19.2 49.5 157.7

GDP per head (US$) 4,549 9,105 3,557 4,820 4,082

GDP per head (US$ at PPP) 8,972 14,223 8,606 10,803 7,725

Consumer price inflation (av; %) 9.8 8.9 12.0 3.9 10.1

Current-account balance (US$ bn) –1.5 –0.6 –0.7 –2.5 –10.0 % of GDP –3.3 –3.3 –3.5 –5.0 –6.3

Exports of goods fob (US$ bn) 25.3 8.8 11.8 29.0 28.3

Imports of goods fob (US$ bn) 27.5 9.9 12.7 32.4 41.4

Manufacturing powers therecovery

Hungary 25


External debt (US$ bn) 29.1 6.2 8.1 20.4 58.8

Source: EIU, CountryData.

Economic policy

Building on its head start in market reform, Hungary has consistently beenranked among the leading “transition” economies in EU, OECD and othermultilateral progress reports. The mid-1990s external payments difficultiesultimately accelerated the pace of privatisation, and the 1998-99 Russianrecession spurred exporters’ efforts to diversify into higher-income EU andnorth American markets.

The three democratic parliamentary elections since 1990 have each broughtsharp changes in political direction, but the formation of governments thatserved their full term reflects the stability of the Hungarian institutionalstructure. Party politics also stabilised quickly, with five of the current sixparliamentary parties represented in each of the three parliaments. Despiteoften bitter conflict between government and opposition, democraticprocedures have become accepted. Given its location, and the large number ofethnic Hungarians living as minorities in neighbouring countries, Hungary isexposed to higher regional risk than, for example, Poland or the CzechRepublic, but regional relations continue to improve (see Political background).

Political stability has been reinforced by negotiations for full EU membershipsince 1998, and accession to NATO in March 1999. These achievements wererecognised in the European Commission’s 1997 Opinion, and the threesubsequent annual progress reports on the country’s EU membershipapplication. Hungary is set to be one of the first candidates in the region toachieve membership of the EU, although the EIU does not expect the “firstwave” of enlargement before 2005. Having operated a quasi-market economysince the late 1960s, the country was able to draw on previous experimentswith reform, which ensured greater familiarity with commercial practices andcontact with the West than was available to other transition economies.

In 1988-89 the Hungarian Socialist Workers’ Party (HSWP) government createdan opening for privatisation and foreign investment by passing new legislationon joint ventures, foreign investment and the transformation of stateenterprises into shareholding companies. Small private co-operative ventureswere legalised in 1982. The Hungarian Democratic Forum (HDF) governmentelected in 1990 set out an economic programme in March 1991 that includedliberalising foreign trade, freeing prices, reducing subsidies and improving theposition of the private sector. Important steps in the privatisation process weretaken, with the goal of reducing state ownership to below 50% by 1994.

However, in the wake of the reforms and the collapse of the Council for MutualEconomic Assistance (CMEA, or Comecon) trade system, real GDP andindustrial output contracted and unemployment increased. Fixed investmentalso declined, despite large inflows of foreign investment. The country soonfaced structural problems resulting from the government’s failure to reduce its

A stable politicalenvironment

Early liberalisation

26 Hungary


expenditure. Central government deficits between 1991 and 1995 were 5.5-7%of GDP. There was a dramatic increase in the trade deficit. Even when thecurrent account went into a large deficit in 1993, the HDF-led governmentfailed to adjust its policies.

After initially denying any need for serious policy change, the HungarianSocialist Party-Alliance of Free Democrats (HSP-AFD) government elected in1994 implemented a tough stabilisation programme in 1995-97. The “BokrosPlan”, named after the finance minister who devised it, included socialspending cuts to reduce the fiscal deficit, devaluation of the forint and a strictincomes policy. Structural changes were closely linked to the macroeconomicaspects of the package, including a medium-term reduction in the size of thepublic sector and an ambitious programme of privatisation of state enterprisesand state-owned commercial banks. The programme also included an 8%import surcharge, a 9% devaluation of the forint and the introduction of a pre-announced monthly crawling-peg devaluation rate.

Announced in March 1995, the Bokros Plan led to major improvements ininternal and external balances. In March 1996 Hungary reinforced itsstabilisation programme by signing an agreement with the IMF. Thegovernment agreed to set 1996 targets of 20% inflation, a 4% of GDP deficit ingeneral state spending, a US$2bn deficit in the current account and a socialsecurity deficit of Ft17.8bn (US$115m). Hungarian officials did not call on theSDR264m (approximately US$400m) loan before it expired in 1998, but ratheremphasised its importance in shoring up confidence in the Hungarianeconomy on the foreign money markets.

As a result of the 1995 measures, the consolidated state budget deficit for 1995declined to 6.7% of GDP, from 8.2% in 1994, and the current-account deficitwas reduced from US$4bn to US$2.5bn over the same period. The fiscal successcontinued in 1996, as the consolidated budget deficit fell to 3.2% of GDP, and itwas still within reasonable limits at 4.6% of GDP in 1997, despite thegovernment’s softening of policy in the run-up to the May 1998 election. In1997 the current-account deficit was cut to US$1bn or 2.1% of GDP. A sustainedprivatisation programme substantially reduced the burden of public debt.However, the social hardships imposed by the Bokros Plan contributed to theHSP’s election defeat in 1998. Subsequent finance ministers have been reluctantto respond to budget or external-deficit overruns with fiscal tightening, evenwhen adverse domestic or external events could justify such action.

The Federation of Young Democrats-Hungarian Civic Party (Fidesz-HCP) wonthe May 1998 election on promises of faster growth, lower taxes, increasedfamily and welfare benefits, and greater spending on health and highereducation. Despite its expansive rhetoric, the Fidesz-HCP-led coalition haserred on the side of caution in fiscal and monetary matters. The economicaffairs minister since December 1999, Gyorgy Matolcsy, wrote Fidesz-HCP’seconomic programme for the 1998 election, including a promise of a 7%annual growth rate. The administration’s first finance minister, Zsigmond Jarai,based the first three budgets on more modest growth forecasts, but setcomparatively unambitious targets for cutting the central and general

The austerity programme

Fidesz-HCP goes for growth

Hungary 27


government deficits, and allowed cabinet colleagues to raise spending up tothese ceilings in 2000 even when strong revenue flows made it possible to cutthe overall deficit. Mihaly Varga, who replaced Mr Jarai as finance minister inMarch 2001, inherits a two-year budget plan for 2001-02 that again seeksmodest deficit reduction, given the cyclical strength of the economy. In itspre-election year the government is again expected to spend up to its deficitlimit, and Mr Varga has not so far signalled any major fiscal reforms that couldsubstantially reduce the deficit in later years.

Following his appointment to head the National Bank of Hungary (NBH, thecentral bank) from March 2001, Mr Jarai cut the forint’s monthly devaluationrate from 0.3% to 0.2% as of April 1st. This move had been postponed fromOctober 2000, following a rebound in inflation that raised concerns overexport competitiveness. The NBH’s ability to cut interest rates, following two25-basis-point cuts in early 2001, increased with the widening of the forint’sexchange-rate band in May 2001, despite official admissions that the expecteddecline in inflation would be delayed until the second half of the year. Band-widening, and the associated early move towards full convertibility, was also areversal of previous NBH policy. The move will help to restrain inflation inthe short term, but was originally envisaged only when inflation slowed to5-6%, because of possible damage to trade performance from a stronger realexchange rate.

Mr Jaria’s move to the NBH has reduced tensions between the government andthe central bank over the direction of fiscal and monetary policy. However,there remains a risk that monetary policy will not be tightened sufficiently ifinflation and the external deficits overshoot official targets in the run-up to thenext election. The party political consensus in favour of accession to the EUwill act as a strong incentive to preserve macroeconomic stability bycontaining fiscal imbalances and tightening policy if the current-accountdeficit widens. This has provided an important insurance against the threat ofFidesz-HCP trying to accelerate economic growth by stimulating domesticdemand, especially as the next general election approaches. It will place similardiscipline on any future government tempted in the same direction.

Dual economy

As elsewhere in the region, Hungary’s transition has been accompanied byincreasing poverty levels and income inequality. Many households haveexperienced a significant fall in their standard of living, as reflected bynutrition trends and demographic indicators. Inequality between regions haswidened, with the north-central area around Budapest achieving near-fullemployment and comparatively high incomes on the strength of aconcentration of inward investment, whereas the eastern and southern areasmake slower progress as their older industries and agriculture prove harder toupgrade. Data from the Central Statistical Office (CSO) showed the north-western regions exporting more than 60% of production in 1998, almost twicethe proportion of other regions, and the Budapest region enjoying twice theGDP per head of the north-east.

28 Hungary


A “dual economy” in business structure has also become discernible, withforeign-invested companies achieving superior productivity growth (so thatthey account for more than 40% of industrial production with 20% ofemployment), and generating more than two-thirds of exports, whereas locallyowned enterprises becomes increasingly dependent on sales to these multi-national companies. The economic divide between public- and private-sectoremployees has sharpened, and the difficulty in recruiting and retaining high-calibre public servants partly underlies the bureaucratic inefficienciesrepeatedly criticised in EU reports. Age-related income disparities have alsogrown, as younger workers find it easier to acquire the skills needed to enterhigher-paid employment, whereas pensioners find their savings eroded againstinflation and retirement incomes grow less rapidly than average wages.

Early in 2000 the government unveiled a long-term National DevelopmentPlan—called the Szechenyi Plan after an entrepreneurial nineteenth-centuryaristocrat—designed to speed up structural improvement in six main areas.

Small business support: Reduced regulation, tax concessions, subsidisedloans and technical assistance are among the measures promised to help thecountry’s estimated 700,000 small and medium-sized enterprises (SMEs) toexpand their economic contribution. Endorsing an EU recommendation, thegovernment wants domestically owned SMEs to expand, to at least 50%, theirshare of inputs purchased by multinationally owned companies. Special help ison offer to SMEs upgrading information technology. SMEs employing fewerthan 50 people have also received tax exemption on the first Ft10m ofreinvested profit, to offset the impact of the 57% minimum wage rise in 2001.

Roadbuilding: Public input, mostly via EU funding and compulsory landpurchase, to private-sector-led roadbuilding plans (see Resources and infrastruc-ture), is aimed at completing 600km of new motorway in the next five years.

Housebuilding: A plan to raise annual house completions (19,300 in 1999)by at least 5,000 was unveiled in March 2000. Mortgage subsidies and moreflexible planning rules are at the centre of the plan, which aims both to addressthe acute social need for new houses (officially assessed at 40,000 per year) andto create more jobs.

Research and development (R&D): Special encouragement is to be givento initiatives in information technology, biotechnology, life sciences,environmental improvement and national heritage preservation.

Regional development: Traditional efforts to spread employment andinvestment to less advantaged areas will be redirected towards the seeding ofnew-technology “clusters”, especially through infrastructure clusters and thecreation of industrial parks to house SMEs.

Tourism: Assistance is to be offered to private-sector initiatives, especially forconference centres, theme parks and health tourism.

The Szechenyi Plan is designed to bring greater coherence to existing physicaland social infrastructure initiatives, rather than inject substantial new funds.The Ft626.7bn assigned for 2001-02 appears to be more aspiration than target,

The Szechenyi Plan

Hungary 29


since much of the investment is intended to come from private sources, withthe government providing only seed capital or non-financial incentives.Moreover, additional government spending on the plan is only Ft50bn-60bn,with the rest already allocated in ministerial budgets. Most of the publicmoney will come from EU (Phare, Ispa and Sapard) programmes. Althoughofficial projections of how much private investment these funds can attract areambitious, Hungary’s business environment is especially favourable for theattraction of SME finance. The country captured almost one-quarter of venturecapital inflows to the main 12 eastern European economies in 2000, accordingto data from Venture Economics.

National development plan

2001 2002 Ft bn % of total Ft bn % of total

Small business promotion 31.4 10.6 37.3 11.3

R&D 17.5 5.9 37.0 11.2

Information technology 15.0 5.1 28.9 8.7

Tourism 25.0 8.4 28.1 8.5

Regional development 5.0 1.7 6.0 1.8

Motorways 132.1 44.6 120.9 36.5

Housing 69.9 23.6 72.6 21.9

Total 295.9 100.0 330.8 100.0

Source: Ministry of Economic Affairs.

Hungary’s underlying fiscal position is improving, but still weak. The primarybudget has recorded a small surplus for several years, but the central statebudget remains in deficit because of substantial payments on public debt.Although primary surpluses in 1999 and 2000 were large enough to continueretiring public debt, NBH calculations show the primary budget returning to anexpansionary stance in 2001, sharply reversing the tightening trend since1997. (See Reference table 5 for historical data on the central state budget.)

The public-sector deficit is widened further by a number of other expenses:notably persistent shortfalls in the state social funds (for healthcare and pen-sions), in the budgets of some local governments, and in public infrastructureprojects (especially roadbuilding) for which private financing has been difficultto raise. The 1999 deficit was also adversely affected, by almost 2 percentagepoints of GDP, following the bailing-out of failed savings bank Postabank.

During the 1998 election campaign Fidesz-HCP promised a radical overhaul ofpublic finances, including a comprehensive spending review intended toidentify up to Ft20bn (US$90m) of annual savings. This would underwrite taxcuts aimed at moving the burden down towards average EU levels. However,subsequent action has been limited, despite the discovery that 30% of the1,000 state institutions surveyed have no precisely stated function. Tax changeshave been focused on employers’ social fund contributions. These were cut by2 percentage points, to 31%, at the beginning of 2001, with a further cut to29% planned for 2002. Value-added tax (VAT), at 25%, is among the highest inthe OECD.

Fiscal policy: clinging togradualism

30 Hungary


The only major structural budget change carried out by the present governmenthas been a pension reform put in motion by its predecessor. This makes a privatesecond pension compulsory for all people entering the workforce after July1998, and optional for older workers. By allowing the state to cut its payouts tothese workers, the reform is designed to reduce a budget obligation that wouldotherwise have grown as the ratio of retired to employed citizens rises owing todemographic factors. However, by attracting twice the expected number ofsubscribers (1.35m by the end of 1998), and allowing opted-out workers todivert some of their national insurance contributions into private funds, thereform initially widened the state pension fund deficit. This has forced thegovernment to consider a range of modifications, including the possibleremoval of the compulsion for new workers to enrol in a private fund, and thecreation of a centrally managed private pension fund to reduce the system’sadministrative complexity. Following the experience of pension reform, thegovernment retreated from plans for a similar reform of healthcare, limitingitself to smaller cost-saving schemes, such as prescribing cheaper generic drugs.

Government budget assumptions, 2000-01(% growth unless otherwise stated)

2000 2001 20002

Real GDP 5-5.5 5-6 5-6

Consumer prices 8-9 5-7 4-6

Average earnings 13-13.5 11-12 10-11

General budget deficit (% of GDP) –3.5 –3.4 –3.2

Source: Ministry of Finance.

The 2000 budget contained no significant tax or spending changes and aimedfor only a modest reduction in the public-sector deficit, to 3.5% of GDP from3.8% in 1999. Owing to additional transfers to the social funds, agriculture andother spending departments, the 2000 outturn ran right up to this ceiling,despite the opportunity to stay below it because revenue moved above target(mainly because inflation had been underestimated). Because radical tax andbudget changes have been shelved, the continued strengthening of publicfinances under the Fidesz-HCP government has owed more to a favourableeconomic cycle than to underlying structural improvement. The 2001 budgetagain targets a relatively modest public-sector deficit reduction, to 3.2% of GDP.

The two main social security funds, covering retirement pensions and health,moved into deficit in the 1990s, and annual top-ups from general taxationwere a main cause of the gap between the central deficit and the wider public-sector deficit. A major pension reform, effective from January 1st 1998, initiallyexacerbated the problem, but has more recently helped to rein in the pensionfund overshoot. Since mid-1998 workers new entrants to the workforce (andothers up to age 47 who opt to go private) have been allowed to pay only 1%of their gross salaries into the National Pension Fund, the remaining 6% beingchannelled into private pension funds.

A similar reform of the state healthcare fund was originally due to begin onJanuary 1st 2000. However, this timetable slipped after delays in passingproposals to, and through, the relevant parliamentary committees. The short-

Social security awaitsfurther reform

Hungary 31


term costs of substantive measures—such as the Ft23bn required by the healthministry to help doctors switch to running their own budgets—is a deterrent totheir implementation ahead of the election. The government has now ruled outany major changes in the current parliament and has relied on ad hoc methods,such as asset sales price caps on prescription drugs, to hold down the deficit onthe National Health Insurance Fund (see Resources and infrastructure).

Central state budget, 2000(Ft bn)

Revenue 3,679.3 Revenue from enterprises 468.3 Consumption taxes 1,659.7 Payments by households 755.2 Payments by central budget institutions 583.3 Payments by local governments 4.6 Revenue from extra-budgetary state funds 19.8 Revenue related to internal debt service 108.6 Payments related to state property 30.0 Profit tax & dividends from financial institutions 39.6 Other revenue 10.2

Expenditure 4,048.7 Subsidies to economic organisations 176.5 Consumer price subsidies 82.8 Benefits paid out through social security 431.1 Transfers to central government institutions 1,921.5a

Transfers to local governments 428.8 Expenditure on international financial transactions 2.3 Debt service & interest payments 796.9 Other expenditure 16.2 Extraordinary expenditure 186.1 Guarantees 6.5

Balance (net of privatisation revenue) –369.4

Privatisation revenue 9.3

a Includes capital formation expenditure.Source: National Bank of Hungary, Monthly Report.

A privatisation law was approved by parliament in May 1995, consolidatingthe existing state asset and management companies into the Privatisation andState Asset Company (APV). Under pressure to reduce public debt, the HSP-ledadministration speeded up privatisation: the forint value of privatised stateassets tripled from Ft156.7bn in 1994 to more than Ft480bn in 1995. Receiptsremained strong over the next three years as the focus shifted to largercompanies, including MOL (gas), electricity generators and distributors, Matav(telecommunications) and commercial banks.

With the budget deficit narrowing since 1998, the government led by Fidesz-HCP has been under less pressure to privatise. The sale of MVM is likely to beheld up by continued political disagreement over future structure and regul-ation of the power sector; that of broadcaster Antenna Hungaria (which haslong-term plans to derive half of its turnover from telecoms) has beenpostponed until investor interest in telecoms revives; and national airline Malevfailed to attract any buyers when offered in 2000. The state privatisation agency,

Privatisation

32 Hungary


APV, still has companies worth Ft600bn under its supervision, about one-half ofwhich represents equity in 109 companies designated to stay in long-termmajority state ownership. Parliament has also passed “golden share” legislationaimed at maintaining special veto rights for the state in another 50 companies.

Economic performance

Gross domestic product(% change; constant prices)

Annual average2000 1996-2000

Private consumption 3.3 2.2

Government consumption 1.6 0.9

Gross fixed investment 6.6 8.3

Exports of goods & services 21.8 17.1

Imports of goods & services 21.1 17.2

GDP 5.2 4.0

Source: EIU.

In the 1970s Hungary’s economy experienced relatively high annual growthrates (averaging about 4%) as the government borrowed internationally tofinance investment, hoping to generate sufficient exports to pay back the debt.Misallocation of funds and a hostile international climate prevented this, andexternal hard-currency debt had grown to more than 50% of GDP by the endof the 1980s, when real GDP growth declined significantly (to 1-2% per year)as access to foreign financing slowly closed.

The economic transition in Hungary was accompanied by a sharp contractionin real GDP and industrial output (of 18% and 25%, respectively) between1989 and 1993. The economy began to grow again in 1994, when it expandedby 2.9%. The return to growth was accompanied by an imbalance in the fiscalaccounts and a large current-account deficit. The stabilisation measuresintroduced in 1995 succeeded in reducing these deficits, but they also had theeffect of slowing growth. In 1995 and 1996 GDP growth was a more modest1.5% and 1.3%, respectively. However, the economy recovered strongly in1997-99, with growth averaging 4.7% per year. A peak in year-on-year growthrates was reached in the first quarter of 2000, at 6.5%, with a subsequentslowdown restricting growth to 5.2% for the year as a whole. Growth in thefirst quarter of 2001 was 4.4% year on year. (See Reference tables 7-9 forhistorical data on GDP.)

Gross investment declined sharply during the 1990-91 recession and againunder the austerity programme of 1995-96. Investment growth picked upstrongly during 1997-98 as the privatisation programme picked up speed, butfell back in 1999 and 2000. The slowdown in year-on-year investment growthto 5.3% in January-March 2001 highlights the continued constraints on firms’capital budgets, as import competition and regulation squeeze profit margins,and banks remain cautious in their commercial lending activity. As in theearly 1990s, the slowdown in investment points to an ongoing slowdown in

Unfavourable legacies

Investment

Hungary 33


production growth, and a danger of domestic demand shifting too fartowards consumption.

The stabilisation measures of 1995 had a negative impact on privateconsumption, which fell by 7.1% and 3.4% in 1995 and 1996, respectively.Private consumption gradually pulled out of recession in 1997, growing by1.7%. Strong growth of 4.9% in 1998 and 4.6% in 1999 was followed by aslowdown to 3.3% in 2000 as higher than expected inflation eroded wagegrowth. Real wages fell sharply as a result of the austere Bokros programme, buthave recorded around 3.5% growth in 1997-2000. (See Reference table 17 fordata on retail sales.)

Extensive industrial modernisation, financed mainly by inward investment,has substantially improved the quantity and quality of goods sold abroad.Export growth has been positive in real terms since 1992 and (except for 1996)in double digits since 1994. The external sector was the main economic driverin 2000, as export volume growth outpaced that of imports.

In common with other transition economies, unemployment rose steeply in1991-92. However, the rate has since fallen steadily, from 12.7% in 1992 to 6%in the first quarter of 2001. This is substantially lower than other centralEuropean countries, or the EU average. The official rate is now based on labourforce surveys conducted by the Central Statistical Office (CSO), in line with ILOstandards. These surveys show that unemployment has resulted largely fromlay-offs, which have especially affected older workers and resulted in highlevels of early retirement (creating a strain on the state pension system). Youthunemployment has also become a serious problem, with around one-quarter ofthe unemployed in 2000 being under 25. However, demographic factorsshould assuage this, and the problem could turn to one of youth labourshortages in the medium term. The prime minister, Viktor Orban, told businessleaders in May 2001 that Hungary would have to “use the labour market of theCarpathian Basin” to sustain growth at its target levels, a concern reflected inthe government’s preparation of a Status Law (see Political background).

Long-term unemployment (affecting those looking for work for more than oneyear) has increased steadily as a percentage of the total unemployed. From lessthan 35% of total unemployment in 1993, long-term unemployment had risento 51.5% of the total in 1999. Regional variations in unemployment aresignificant, with unemployment at its lowest in central Hungary, includingBudapest (5.2%) and north-western Transdanubia (3.9%), and highest innorthern Hungary (10.9%) and the northern regions of the Great Plain (9.4%).

Combating inflation has been a priority since 1995, when consumer subsidycuts lifted annual average consumer price inflation to 28.2%. However, thebenefits of the Bokros programme began to appear in 1996, when the year-endrate slowed to 19.8% year on year. Although inflation continued to trenddownwards during 1997-1999, to an annual average rate of 10% in 1999,successive governments missed their inflation target. Moreover, progress in2000 was limited, with inflation averaging 9.8%. This is largely ascribed to

Private consumption

Exports

Unemployment stays low

Inflation reduction provesdifficult

34 Hungary


supply side shocks from higher energy costs, owing to the jump in world oilprices, and higher food costs after another poor regional harvest, which,combined with state-administered price supports, sent farm price inflation toyear-end rates of more than 25%. As a result, year-on-year inflation reboundedin mid-2000 and rose back into double-digits by the last quarter of the year.During the first half of 2001 inflation continued to rise (to 10.8% in May).Inflation would be substantially higher without continued below-inflationincreases in household energy and pharmaceutical prices, owing togovernment controls, which still affected 18% of the consumer price indexbasket in 2000. (See Reference table 10 for data on prices.)

Wages and prices(% change)


Consumer prices (av) 9.8 15.1

Industrial producer prices 11.7 13.9

Gross nominal wages (av) 13.5 17.6

Sources: Central Statistical Office (CSO), Statistical Yearbook; Monthly Bulletin of Statistics.

Regional trends

Hungary is a small country with a highly centralised government. However,there are some important regional variations, particularly in economicdevelopment. Just under 20% of the population live in Budapest, with thesurrounding Pest county hosting another 10%. The highest levels of economicactivity in the 1990s have been concentrated in the region around Budapestand Transdanubia, particularly in the counties bordering Austria and aroundSzekesfehervar. Most of the economic growth, FDI and export activity has alsobeen in these areas. Northern Hungary, which was the focus of heavy industrydevelopment during the previous regime, has benefited far less from theeconomic transition.

Average development levels(Jan 1st 2000 unless otherwise indicated)

Pest Trans- Northern GreatBudapest county danubia Hungary Plain Total

Population (‘000) 1,812 1,033 3,066 1,269 2,867 10,043

Population density (persons/sq km) 3,450 162 84 95 79 108

Births, 1999 (per 1,000 persons) 7.8 10.1 8.9 10.3 10.1 9.4

Natural increase, 1999 (per 1,000 persons) –6.9 –3.3 –4.8 –4.5 –4.3 –4.8

Infant deaths (per 1,000 live births) 8.4 7.8 8.9 9.1 7.9 8.4

Per head GDP, 1998 (Ft ‘000) 1,858 773 950 678 718 997

Net monthly earnings, 1999 (Ft ‘000) 63.9 47.2 45.7 43.8 41.8 49.9

Per head investment, 1999 (Ft ‘000) 611.8 138.4 217.4 159.2 108.2 241.7

Foreign direct investment, 1998 (Ft bn) 1,450.6 244.1 465.3 176.5 237.0 2,573.5

Change in industrial production, 1999 (%) 1.0 4.5 20.8 –1.7 –0.5 10.7

Unemployment rate, 1999 (%) 5.3 5.0 6.1 11.5 8.0 7.0

Hungary 35


Source: Central Statistical Office.

Economic sectors

Agriculture, forestry and fishing

Agriculture and viticulture have traditionally played an important role in theeconomy. The country has a favourable climate and fertile soil conducive tocrop production. It is self-sufficient in almost all agricultural products andduring the communist era exported about one-third of all output. A widevariety of crops are produced, including wheat, maize, rice, fruit andvegetables, rye, barley, oats, sunflower seeds, and sugarbeet. Dairy and livestockproduction is also important. (See Reference table 11 for volume indices ofsales of agricultural products, and Reference table 12 for livestock numbers.)

However, agriculture has fared badly during the first transition decade. Seriousdroughts in 1992-93 compounded the damage to production from thereduction of subsidies and changes of ownership. Agricultural output (on avalue-added basis) declined in real terms by 16.5% in 1992 and 7.9% in 1993.By 1999 agriculture accounted for 5% of GDP. Weather conditions have beenhostile in most of the growing seasons since then, and competition fromcheaper EU and Central European Free-Trade Agreement (CEFTA) food importshas intensified. Floods are becoming increasingly common in the north-east ofthe country during the first quarter. This, combined with a drought inmid-2000, led to a 3.5% fall in agriculture real gross value added. Althoughoutput has held up comparatively well amid an accelerated exodus of labourfrom the land, average farm productivity remains well below EU levels. Stockbreeding, although still generating almost half of total output, is in long-termdecline, and the livestock numbers recorded at the start of 2000 were thelowest for a century. Depressed incomes and declining employment in thecountryside fuelled the recovery in support for the Smallholders’ Party (SP) inthe late 1990s.

A complicated land redistribution and voucher-based compensation systemwas adopted in 1992-93, to return farmland to private use after forced collectiv-isation in the 1960s. State and collective farms were required to set aside a totalof 2.1m ha of land for auction to voucher holders, with 90% coming fromcollective farms. By the end of 1994 nearly all the co-operative land had beenauctioned. In addition, the government pursued a policy of transforming thecollective farms into co-operatives. Many large collectives were split intoseveral smaller co-operatives. Despite the liquidation of 168 collective farms,the present number of co-operatives exceeds the 1,273 collective farms thatexisted before the transformation process. Privatisation of the 121 large statefarms has been much slower than the transformation of collective farms.

Some 60% of the 6.3m ha of arable land is cultivated by owners, and 80% ofplots are smaller than 1 ha. Limitations on the transformation of co-operatives

Near self-sufficiency

Land redistribution

A stable structure

36 Hungary


into joint-stock companies and constraints on land sale and leasing will workto maintain the existing agricultural structure. To restrict illegal leasing, theMinistry of Agriculture and Regional Development is enforcing registration ofall landowners and leaseholders cultivating plots larger than 1 ha.

The Hungarian Socialist Party-Alliance of Free Democrats (HSP-AFD)government had sought to revise the 1994 Land Act, which prohibitedorganisations and other legal individuals from owning farmland.

Parties in the present government oppose allowing the sale of land toforeigners. In June 2000, during EU accession negotiations, the governmentobtained a seven-year derogation from the EU from opening arable land salesto companies and joint ventures, and a three-year derogation on sales to self-employed EU farmers. The agreement allows a transition period of five yearsfor the sale of non-arable land. Integration into the EU’s common agriculturalpolicy (CAP) is relatively unproblematic because direct agricultural subsidiesand price supports from the government are small, despite SP efforts toincrease them. Export financing is the major source of agricultural support.

Mining and semi-processing

The mining industry in Hungary is limited. With the exception of bauxite, thecountry is not endowed with significant natural resources. Mining outputsuffered significant declines in the 1990s and did not show any positive growthuntil 1996. Bauxite production declined over 1989-94, before stabilising atabout 1m tonnes since 1995, 40% of the 1989 level.

Hungarian coal generally has a low energy content and rests in thin seams atgreat depths. Mining is therefore difficult and costly. Known economicallyrecoverable reserves of hard coal are about 100m tonnes, with proven reservestotalling 714m tonnes. Reserves of lower-quality coal are much larger, withabout 5.7bn tonnes of total proven reserves and 3.7bn tonnes of economicallyrecoverable reserves. Coal production fell during the early years of transition,but increased in 1996 and 1997, reaching 15.6m tonnes in 1997. Productionagain dropped in 1998-99, to 14.6m tonnes, about 72% of 1989 production.(See Reference table 13 for output of energy, minerals and mineral products.)

Manufacturing

Under communism, the manufacturing industry was characterised by large,heavy industrial plants, dependent on cheap energy imports and shelteredfrom competition. With few domestic mineral resources, the emphasis on iron,steel and engineering required large imports of iron ore and energy inputs.Industry suffered a major decline in output during the 1990s. Industrialproduction at the end of 1992 was 31% below its 1989 level, standing roughlyat its 1975 level. Manufacturing output declined even more severely, down by54% in 1989-92. The steepest declines were in those industries most orientedtowards trade with the former Council for Mutual Economic Assistance(CMEA, or Comecon) trading bloc, notably metallurgy and engineering.

Bauxite productionhas declined

A sharp contraction in theearly 1990s

Hungary 37


Subsectors less geared to Comecon, such as food-processing and electricity,experienced much more modest declines. Manufacturing output rose slightlyin 1992 and showed stronger growth from 1993. Output in electricity andother energy production turned positive in 1994. However, the stabilisationmeasures introduced in 1995 slowed the growth of manufacturing and energyoutput in that year and in 1996.

Manufacturing activity has recovered strongly since 1997, with engineeringoutgrowing other sectors. Investment by foreign companies modernising andrestructuring privatisation and commercial acquisitions have led to majorstructural and efficiency improvements in Hungarian manufacturing industry,and made a contribution to the rise in output in recent years. Machinerymanufacturing has remained a consistent growth sector, having benefited fromincreased exports, alongside chemicals and the food industry. Increases inoutput were led by subsidiaries of Western firms operating in Hungary.Company restructuring has allowed sharp rises in manufacturing productivity.(See Reference table 14 for statistics on industrial production by sector.)

Although commercial vehicle makers struggled to generate new business afterthe loss of their captive Comecon markets, car assembly and componentsproduction has grown rapidly with the assistance of inward investment. Suzuki(Japan) opened a car-assembly plant in October 1992 and has steadilyincreased the production of cars to more than 50,000 per year. Audi-Volkswagen (Germany) now produces more than 1m engines per year at itsfacility near Gyor. The plant’s ability to combine strong technical skills withlow wages has also made it the production site for the upmarket TT model, ofwhich around 60,000 were made in 2000. GM-Opel also has manufacturingand car-assembly plants, and Ford has made parts in Szekesfehervar since 1990.

Industrial output and sales(% change, year on year; constant prices)


Production 18.3 11.0

Total sales 17.7 11.2

Domestic 9.0 2.1

Exports 27.4 26.0Source: National Bank of Hungary, Monthly Report.

Although its pharmaceutical companies are too small to run researchprogrammes on a scale that can reliably generate new proprietary drugs,Hungary has become an important production base for patented compoundsmanufactured under licence, and high-quality branded generic substitutes forout-of-patent drugs. Europe is likely to become the world’s fastest-growinggeneric drugs market over the next five years, with double-digit sales growthwidely projected. Multinationals have also assigned contract research to localcompanies. The continued imposition of price controls on drugs bought by thepublic health service has not unduly affected leading manufacturers’profitability; producers agreed the 6.3% maximum rise for 2001 after ensuringthat their investment and product launch plans would not be disrupted. It may

Investment spurs industrialgrowth

The car industry

Chemicals andpharmaceuticals

38 Hungary


even have contributed to improved performance, by forcing companies toupgrade their products’ quality and clinical effectiveness in order to qualify forcontinued price subsidy, which in turn has made it easier to side-step thecontrols by expanding exports. Leading companies Richter Gedeon, Egis andChinoin suffered during 1998 through the continued importance of Russia(which was then in deep recession) as an export market, but their sales andprofit recovery in 1999-2000 reflects the resilience of sales in traditionalmarkets and companies’ growing ability to overcome regulatory hurdles to tapnew OECD markets.

Chemicals production has undergone rapid rationalisation since privatisation,with two companies—Borsodchem and TVK—emerging as principal rivals insome bulk chemicals markets, while still holding complementary buyer-sellerroles in others. In late 2000, a battle for strategic control of the industry brokeout between MOL, which had built up a controlling stake in TVK, and itsRussian counterpart, Gazprom, which acquired a similar hold on Borsodchemthrough associated company stakes. Gazprom and its Russian allies have theupper hand in being major suppliers of petrochemicals feedstock, and verticalsupply-chain links between Borsodchem and TVK will force them to keepworking together despite parent company rivalries.

The availability of comparatively cheap, technically skilled labour and nearbyEU markets has attracted a number of leading electronics and software firms toHungary, and encouraged a large number of domestic start-ups in this area.Mobile telephone maker Nokia (Finland) has chosen Budapest for its largestsoftware development centre outside Finland, encouraging similar moves byEricsson and Motorola. Microsoft’s efforts to enter the world computer-gamemarket will be centred on Hungary, through a deal with Singapore-basedFlextronics, which will add its production to Hungarian operations that alreadyemploy over 10,000. Among indigenous firms, specialists such as Graphisoft,which has become the world’s third largest supplier of architectural software,are generally perceived to have a more stable future than those competingdirectly with major multinationals. Systems integrator Synergon, the mostprominent of these, has had some success as an exporter within the region, butcame under strong pressure from EU- and US-based rivals, especially after thedownturn in contracts and investor confidence in 2000-01.

Construction

Residential and commercial construction were neglected under communism, atrend that continued through the early 1990s as neither public nor privatesectors could raise the necessary investment funds. As beneficiaries ofliberalisation began to sink their wealth into property, dwelling constructionrose by 18% in 1995 and 15% in 1996. However, austerity measures haltedthis progress, and house completions fell by 28%, (to 20,300) in 1998 and 5%(to 19,300) in 1999. A key part of the Szechenyi Plan announced in 2000 is toaccelerate completions from the 20,000 expected in that year to 40,000,which the government calculates is necessary to meet demand. This target isstill below the 43,800 units built in 1990 and the 72,500 built in 1985, but

Information andcommunication technology

Targeting residential housebuilding

Hungary 39


will require a significant improvement in availability and affordability ofmortgage loans, so that ordinary households can join the “new rich” asbuyers of new property. Some 60% of the 77,500 construction firms registeredat the end of 1998 were individual entrepreneurs. (See Reference table 15 forconstruction statistics.)

Financial services

After an early recapitalisation programme followed by comprehensiveprivatisation, bringing in foreign strategic partners, Hungary has one of theregion’s most advanced banking sectors. Competition is intense, with morethan 20 foreign-invested banks competing for new commercial and retailbusiness. This ensures an improving service for borrowers, with increasingnumbers of businesses able to turn to banks for additional capital. It also makesfurther consolidation inevitable, especially with rapidly-growing telephone andInternet banking raising the pressure to close under-used branches. ING’s saleof retail banking interests to Citigroup in 2000, and the merger of ABN-Amro’sand KBC’s Hungarian operations in 2001, are the latest steps in this direction.

Hungary began to transform its banking sector in 1987 when the monopoly ofthe National Bank of Hungary (NBH, the central bank) was abolished and atwo-tier system was created. The two main credit sections of the NBH weretransformed into two commercial banks, the Hungarian Credit Bank and theCommercial and Credit (K&H) Bank. A third major bank, Budapest Bank, wasalso created as a result of these reforms. From 1989 all banks were allowed tohandle all areas of banking including foreign exchange, which had until thenremained a monopoly of the NBH. An interbank foreign exchange market wasintroduced in 1992. Additional reforms of the banking sector introduced in1992 included the incorporation of Bank for International Settlements (BIS)guidelines and the requirement of an 8% capital-adequacy ratio. Furtherrestructuring of the banking system took place in 1994, as the governmentrecapitalised the banks through a combination of enlarged equity positionsand subordinated loans.

These successful consolidation attempts paved the way for the privatisation ofthe major banks. This was virtually complete by the end of 1996, although thestate still accounted for 22.4% of banking sector assets. The state still retains alarge minority share in OTP and is in the process of selling a number ofmedium-sized and smaller banks, as well as Postabank, which it had to bail out,at an eventual cost of Ft153bn (US$800m), after a run on its deposits in March1997. The trend of declining state shareholdings has been accompanied by acorresponding increase in foreign ownership, from 14.9% in 1994 to 67.6% bymid-2000.

Improved legal regulation and foreign banks’ presence has greatly improvedsector competitiveness. As of January 1st 1997 banks were allowed to trade ingovernment securities. Reserve requirements were reduced to an EU-comparable 7% (from 11%) in early 2001. Competition is becoming morefocused on the provision of services to retail customers, with developing credit

Slow but sure restructuring

Substantial foreignownership

40 Hungary


card and personal loan segments. The largest bank, the National Savings Bank(OTP), sold in stages to institutional investors between 1995 and 1999, has alsoemerged as the strongest financially. This mainly reflects its avoidance ofpolitically directed industrial lending before the reforms and its rapid adoptionof new techniques and technologies since. Having resisted political pressure totake over Postabank, OTP is now making international expansion plans.

Hungary has developed a competitive insurance sector with the participationof many large foreign companies. Allami (owned by Aegen) is the largestinsurer. Allianz (Germany) holds a dominant stake in Hungaria Insurance.Hermes Kreditversicherung, also of Germany, is in a consortium with Frenchand Austrian partners. Generali (Italy) also has a strong presence. The changein the pension system to allow private pension funds presents a number ofnew opportunities for insurance and other financial companies.

Hungarian public debt is issued and managed by the State Debt ManagementAgency. The central state budget and the social security funds finance theirdeficits through the agency. The domestic bond market continues to bedominated by government securities. Maturities were extended to two- andthree-year fixed-rate bonds in 1996, but Treasury bills of up to one year inmaturity predominate. Five-year fixed-rate bonds were first issued in January1997. In December 1998 the NBH issued DM500m (US$300m) in seven-yearbonds with an annual coupon of 4.625%. In January 1999 the Treasury issuedits first domestic fixed-rate, ten-year bonds, sold at an average yield of 9.82%.About 80% of the Ft12.5bn in bonds are thought to have been bought byforeign investors, although foreign ownership of all government securities hasgrown more slowly, to 15% at the end of 2000. Corporate bond issues remainscarce and mainly take the form of floating bonds issued by foreign-ownedcompanies backed by parent companies. Non-resident investors may purchasegovernment bills or bonds with a maturity at issue of one year or greater.

The Budapest Stock Exchange (BSE) was reopened on June 21st 1990, withshare trading for eight major companies. The stockmarket boomed in 1996 and1997, with some of the fastest growth rates among emerging markets. By end-1998 the shares of 55 companies were being traded. The benchmark BUX indexof 25 stocks increased in forint value by 170% in 1996 and by 94% in 1997. OnApril 23rd 1998 the index reached an all-time high of 9,016, up by 12.7% fromend-1997. After more than a year in the doldrums following the Russian crisis ofAugust 1998, which hit those central European markets regarded as having linkswith Russia, the BSE came back into favour among emerging market investors.Equity prices started reviving towards the end of 1999, but after a boom in early2000 (the BUX index closing at a record 10,493 on March 10th) the generaltrend was again downwards, as investors became more pessimistic about thetelecommunications, pharmaceutical and financial stocks that dominate theindex. The BUX was down to around 7,000 at mid-year. Low liquidity, com-pounded by loss of listings as older companies are acquired by multinationalsand new ones float internationally, has forced the BSE to discuss alliances withother exchanges, notably London. Foreigners account for the bulk of activetrading (more than 50%, compared with 30% in Warsaw), which accounts for

A competitiveinsurance sector

The bond market

The equity market

Hungary 41


the great volatility in the market in the wake of the Russian devaluation anddefault of August 1998. (See Reference table 16 for stockmarket data.)

Other services

Tourism generated around 5% of GDP in 2000, and added a positive balance of€2.5bn (US$2.1bn) to the current account. When unofficial dealings withtourists (such as private room rent) are taken into account, some calculationsput tourism’s contribution as high as 10% of GDP. Budapest and Lake Balatonare the leading destinations for foreign visitors. Modern hotels, a conferencecentre and attractive prices have helped the capital to become a major locationfor international conferences.

To maintain growth in the sector without creating visitor congestion,government and major travel operators are working together to shed Hungary’searlier image as a cheap and cheerful alternative to EU destinations, so as toattract higher-income visitors and extract more expenditure from them.However, foreign tourist numbers are still rising, with hotel nights up by 4.4%(to 10.3m) in 2000. The US$600m of tourism investment officially projectedfor 2000-01 reflects recognition of the quality improvements that must bemade if visitor value added is to continue rising.

The external sector

Trade in goods

Foreign trade by commodity group, 2000 Exports Imports Balance

US$ m % changea US$ m % changea (US$ m)

Food, tobacco & beverages 1,951.3 –2.2 879.7 3.6 1,071.5

Raw materials 663.8 7.3 705.7 12.1 –42.0

Fuels & electricity 497.8 22.3 2,685.1 57.4 –2,187.3

Processed goods 8,169.1 6.3 11,328.1 5.2 –3,159.0

Machinery & equipment 16,810.0 17.5 16,480.8 17.3 329.2

Total 28,091.7 12.3 32,079.5 14.5 –3,987.5

a Year on year.

Source: Central Statistical Office (CSO), Monthly Bulletin of Statistics.

Hungary is an open economy, with trade (exports and imports of goods andservices) accounting for around 130% of GDP. Rapid industrial transformationhas substantially altered the composition of exports, more than half of which(by value) are now of machinery and equipment, with electrical goods makingup around one-quarter. Import composition has adjusted to reflect this, withrising imports of raw and semi-processed materials. Exports outgrew importsfor the three years to September 2000, and were the main force behind thestrong economic recovery. Tourism has been the most dynamic service export,

Tourism seeks added value

An open economy

42 Hungary


but there has been success in domestic substitution of service imports,especially of financial and business services. (See Reference tables 18 and 19 fordata on exports and imports.) The government is now working to reduce thecomparatively large proportion of exports derived from regions and sectorsenjoying tax concessions, many of which must in any case be phased out tosatisfy EU entry requirements.

Up until 1992 the trade balance was largely neutral, but from 1993 the balanceon the trade and current accounts became negative: deficits of US$4bn andUS$4.3bn (10.4% and 11% of GDP), respectively, were recorded in that year.The dramatic deterioration in the trade balance in 1993-94 was a result of aprecipitate decline in exports at a time when imports continued to increaserapidly. The increase in the external deficit was instrumental in thegovernment’s decision to introduce the Bokros stabilisation package, whichincluded import controls, in 1995 (see The economy). This, combined withstrong export growth, resulted in a narrowing of the trade deficit to aboutUS$2.4bn in 1995 and a stabilisation thereafter, until the upturn caused byhigher imported fuel prices in 2000.

Main trading partners, 2000(% of total value, in forint terms)

Exports to: Imports from:

Germany 37.2 Germany 25.5

Austria 8.7 Russia 8.1

Italy 5.9 Italy 7.5

Netherlands 5.4 Austria 7.4

US 5.3 Japan 5.3

France 5.2 France 4.4

Britain 4.1 US 3.8

Source: CSO, Monthly Bulletin of Statistics.

Foreign trade has been substantially redirected towards Western markets since1991. EU partners accounted for 77% of exports and 58% of imports in 2000.Exports to EU countries increased by 10.7% in 2000 in US dollar value terms,compared with the previous year, and EU imports grew by 3.9%. Germany isthe country’s most important trading partner, accounting for 37.2% of exportsand 25.5% of imports in 2000. For several years Austria has been the secondmost important destination for exports. In 1997 it superseded Russia as thesecond largest import source. However, Russia regained second spot in 2000 ashigher oil prices drove up energy import costs in 2000. (See Reference table 20for historical statistics on Hungary’s main trading partners.)

Although food remains an important component of exports, the compositionof foreign trade has been transformed, and export concentration has declined.Apparel and clothing accessories, automobile parts, and machinery andequipment have become important exports, with the re-export of processedimports playing a particularly important part in these categories. Processedgoods are a major component of both exports and imports, reflecting theimportance of re-exporting to the economy. In 1999 engineered goods,

Trade with the EU hasgrown quickly

Hungary 43


particularly machinery and transportation vehicles, accounted for about one-half of exports and imports.

44 Hungary


Direction and composition of trade, 1999(US$ m)

Exports fob Germany Austria Italy Netherlands Total

Food 344 130 126 46 1,841 of which: meat & preparations 173 19 52 7 596 fruit, vegetables & preparations 121 70 7 16 468Beverages & tobacco 25 2 1 1 155Mineral fuels 48 215 7 2 407Chemicals 142 93 153 37 1,540Textile yarn, cloth & manufactures 100 31 83 3 371Non-metallic mineral manufactures 89 23 25 4 332Iron & steel 115 31 38 3 322Non-ferrous metals 107 34 32 19 398Metal manufactures 294 59 19 16 614Machinery & transport equipment 6,546 1,235 407 992 14,309 of which: road vehicles 1,437 76 139 32 2,251Furniture 428 40 10 7 556Clothing 448 167 233 89 1,318Footwear 193 39 80 3 352Total incl others 9,600 2,399 1,477 1,296 25,012

Imports cif Germany Austria Italy Russia Total

Food 68 33 32 3 748Mineral fuels 19 121 1 1,144 1,705Chemicals 637 202 221 50 2,677Leather & manufactures 109 17 89 0 295Paper etc & manufactures 122 109 27 5 590Textile yarn, cloth & manufactures 305 97 244 3 1,148Non-metallic mineral manufactures 111 42 76 5 424Iron & steel 193 67 50 8 612Non-ferrous metals 115 39 20 182 555Metal manufactures 427 86 96 6 944Machinery & transport equipment 5,075 1,355 867 117 14,098 of which: road vehicles 1,093 86 147 51 2,453Clothing 99 81 103 0 511Scientific instruments etc 184 20 30 0 554Total incl others 8,189 2,503 2,159 1,631 28,008

Source: OECD, International Trade by Commodities Statistics.

Hungary has taken a number of steps to promote exports. In accordance withan agreement with the OECD, there are officially supported export credits.Certain interest subsidies to small and medium-sized businesses may in effectresult in export subsidies. Import duties may be reclaimed by re-exporters,although agreements with the EU and the Central European Free-TradeAgreement (CEFTA) have limited this practice since July 1st 1997. There arepreferential tax treatments for exporters who invest more than Ft1bn(US$3.5m). The export of a number of agricultural products and food items isalso subsidised, and Hungary ended its 11-year membership of the Cairnsgroup of the World Trade Organisation (WTO) because of its opposition tofurther subsidy reduction. In October 1997 the WTO agreed to allow Hungaryto support agricultural exports directly until 2002, ending a two-year dispute.

Export subsidies remaincontroversial

Hungary 45


Hungary started early on trade liberalisation, but proceeded at a moremeasured pace than most other countries in the region. The 8% importsurcharge introduced in March 1995 was eliminated in July 1997. The EUtreaty of association and membership of the WTO limit the scope for adoptingprotectionist measures. The Customs Law and the Customs Tariff Act, whichboth came into force in April 1996, brought 70% of Hungarian customsregulations into line with those of the EU. Tariff harmonisation with the EU isnow complete, with industrial trade fully liberalised from January 1st 2001.

Invisibles and the current account

Current account, 2000(US$ m)

Merchandise exports fob 27,560

Merchandise imports fob –30,156

Trade balance –2,596

Net services 1,939

Net income –1,705

Net transfers 442

Current-account balance –1,921

Source: National Bank of Hungary, Monthly Report.

The current account was in deficit throughout the 1980s, with the exception of1983-84. The deficit reached crisis proportions in 1989, when interestpayments combined with a deterioration in the tourism account to produce adeficit of almost US$600m (2% of GDP), a small sum by the standards of todaybut an unmanageable burden at the time. In 1990-92 the current-accountbalance was positive, thanks to positive trade balances during 1990-91 andpositive services and incomes balances in 1992. By 1993 the trade deficitreached US$4bn, contributing to a current-account deficit of US$4.3bn. Adeficit of US$4.1bn in 1994 provided the context for the introduction of the1995 stabilisation programme.

As a result of reforms, the current-account deficit was reduced to US$2.5bn in1995 and US$1.7bn in 1996. A substantial improvement in 1997, to a deficit ofUS$982m, resulted from a reduction in the trade deficit, which fell toUS$1.7bn from US$2.7bn the previous year. The current-account deficitincreased substantially in 1998, to US$2.3bn, as a result of a US$400mworsening of the trade deficit component and an erosion of the services andincome component. (See Reference table 21 for balance-of-payments statistics.)There was an improvement in the current-account balance in 1999, when thedeficit shrank to US$2.1bn. This improvement continued in 2000, despite arise in the import bill of almost US$1bn, owing to higher oil prices. Animproved tourism surplus and a lower investment-income deficit helped tokeep the current-account deficit shrinking as a proportion of GDP, despite therenewed rise in the trade gap.

Trade liberalisation hasbeen gradual

Deficit crisis in the late1980s and early 1990s

Major improvements

46 Hungary


Capital flows and foreign debt

Hungary entered transition with the heaviest foreign debt burden in centralEurope. The external debt declined in the early 1990s, but rose again with thedramatic increase in current-account deficits in 1993-94, to reach US$31.6bn(70.7% of GDP) at the end of 1995. Unlike Poland, Hungary did not default sodid not secure a reduction and rescheduling from creditors. As a result, externalpublic debt was still more than 63% of GDP in 1998, compared with less than44% for Poland and less than 10% for the Czech Republic. Falling interest ratesand a growing domestic investor base has allowed extensive repayment offoreign-currency with forint-denominated debt, which comprised more than60% of public debt by mid-2000. Debt-servicing in 1999 was 26.6% of totalexports. This is still the highest in east-central Europe, although Poland hascaught up, with a debt-service ratio of 26%.

Since then gains from the stabilisation and privatisation programmes havebeen used to reduce the foreign debt. According to data from the NationalBank of Hungary (NBH, the central bank), at the end of March 2001 totalexternal debt stood at €30.4bn (US$26.1bn), up in absolute terms from anestimated US$24.5bn in 1990, but down in proportional terms to just over50% of GDP. More than 80% of medium- and long-term debt is owed tocommercial creditors. Although the major share of the debt is owed by theNBH and the government, the share of non-guaranteed private debt has beenincreasing rapidly. The share of short-term debt has fallen steadily since the1980s, and was estimated by the EIU at about 12% of the total external debtstock at end-1999. (See Reference table 22 for external debt figures.)

Positive developments in the external balance and external debt have led to asteady upgrading of Hungary’s credit ratings by international rating agencies.In 1996 Japan Credit Rating, Duff & Phelps, IBCA, Standard & Poor’s, andMoody’s all lifted the country’s credit ratings to investment grade. Re-ratingcontinued, with Moody’s upgrade to A3 from Baa1 in November 2000 raisingexpectations of A-grade status becoming generalised during 2001. Theseupgrades have enabled the country to raise funds more cheaply than in thepast. Our risk rating, which assesses a country’s political and economicstructure, economic policy and liquidity risk, has shown a gradually improvingtrend for Hungary. In June 2000 Hungary scored a “B” according to our riskassessment, indicating that there are no significant foreign-exchangeconstraints, but economic policies or political structure may still be a cause forconcern. Hungary is ranked alongside South Korea, Chile, China and Australia,and its score is comparable to that of other east-central European economies.

Hungary has been the most accommodating country in eastern Europe forforeign investors. No other country has been as prepared to sell majority stakesin sensitive sectors, such as banking or energy, to foreign investors. The freerepatriation of after-tax profits and capital is guaranteed. No industrial orservice sectors are entirely off-limits to foreign investment, but foreigners arebarred from buying farmland. Some areas, such as defence, transport,telecommunications, pipelines, electric power and gambling, can be entered

Containing the debt

A regional leader in FDI

Hungary 47


only under the terms of a specific concession. Major investments in banking,securities trading and insurance are also subject to government approval.

Many of the earlier incentives have been phased out. Those remaining apply todomestic and foreign companies. They include an investment tax preference of50% (100% in priority areas), subject to the value and value added of exportsproduced, and a reduction based on a percentage of future taxes to be paid,subject to the share capital invested, environmental factors and export poten-tial. There are also certain beneficial deduction and depreciation allowances forplant and machinery, as well as tax preferences for offshore companiesregistered in Hungary. Companies operating in free-trade zones are exemptfrom customs and indirect taxes. Tax holidays are available for investments inthe depressed east of the country. According to the IMF, Hungary grants themost tax and import duty allowances for greenfield projects in the region.

Hungary lost its regional lead to Poland in 1997 in terms of absolute inflows offoreign direct investment (FDI). However, Hungary remains far ahead on a perhead basis, with a stock of inward FDI of US$1,762 per head, compared withUS$632 for Poland. The exceptional US$4.5bn recorded in 1995 resulted fromlarge foreign investments in various utility privatisations. As the privatisationprogramme comes to an end FDI has fallen gradually, with inflows fallingbelow the US$2bn level in 2000, to US1.95bn, for the first time since 1994.Although FDI is expected to stay close to US$2bn in the medium term, it willincreasingly depend on greenfield and follow on investment.

Foreign reserves and the exchange rate

Largely as a result of foreign debt payments, Hungary’s foreign-exchangereserves (excluding gold) declined during the 1990s. However, the NBH hadrebuilt them to US$11.2bn at end-2000, largely as a result of foreign-currencypurchases needed to keep the forint within its narrow exchange-rate band priorto May 2001. Gold reserves decreased from a high of US$45m at end-1993 toUS$28m at end-2000. (See Reference table 23 for statistics on foreign reserves.)

An essential element of the 1995 stabilisation programme was a one-offdevaluation of the forint, followed by the introduction of a crawling-pegregime utilising narrow fluctuation bands. The policy was designed to stabilisethe currency and serve as a nominal anchor, protecting it against speculativeattack. Successive reductions in the crawling-peg devaluation rate, from itsinitial 1.8% per month to 0.2% on April 1st 2001, have maintained a gradualreal appreciation of the currency, helping to discipline inflation withoutendangering trade-sector competitiveness.

The narrow-band policy was relaxed in May 2001, when the forint’s permittedvariation around its central euro rate was widened to ±15% from ±2.25%. Themonthly devaluation rate was maintained. The ±15% band is the same as theEU’s exchange-rate mechanism (ERM) for countries preparing to adopt theeuro. The band widening can be viewed as a step towards eventual monetaryunion with the EU, since Hungary will fulfil one of the conditions for euro

Reserves have been falling

The crawling-peg regime

Exchange-rate fluctuationband is widened

48 Hungary


adoption if it can keep the forint within its wider bands for two years.However, adoption of wider bands was also brought forward for the shorter-term motive of fighting inflation, since it allows the NBH to stop sterilisingcapital inflows and allow faster real appreciation of the currency. (See Referencetable 24 for data on exchange rates.)

The forint has been convertible in current-account transactions since January1st 1996. Inbound long-term capital-account transactions are basicallyunrestricted. Hungary undertook to phase out remaining restrictions on capitalflows when it joined the OECD in March 1996. Further steps towards fullconvertibility were taken at the beginning of 1998, when trade in investment-grade securities from OECD countries, including participation in investmentfunds, was liberalised. Foreigners were allowed to invest without limit inHungarian open-ended funds. Hungarians were given the right to buy realestate abroad without restriction (barring a reporting requirement). Greaterrestrictions apply to outbound capital-account transactions and to short-terminflows. Widening of the currency bands is expected to prompt an early moveto full convertibility, which the NBH previously envisaged after entry to the EUand its monetary union. A decree removing the remaining capital controls wasin preparation in May 2001. Capital-account transactions with non-OECDcountries have also been liberalised.

Hungary 49


Appendices

Regional organisations

The Central European Free-Trade Agreement (CEFTA) was signed in December1992 by Hungary, Poland, the Czech Republic and Slovakia. They were joinedby Slovenia in 1996, Romania in 1997, and Bulgaria in 1998. The Baltic states,Croatia, Macedonia and even Russia and Ukraine have expressed interest inCEFTA membership. The initial impetus for setting up CEFTA was to counteractthe collapse in inter-regional trade after the Council for Mutual EconomicAssistance (Comecon) trading system was abolished. The signatoriescommitted themselves to the “gradual introduction of a free-trade area”.

Trade in industrial products among CEFTA members, now a market of almost90m people, was fully liberalised on January 1st 2000, with the exception ofthe export of cars to Poland, which is to be liberalised by January 1st 2002.However, trade in agricultural goods remains subject to barriers, which in somecases have been increased. Nonetheless, CEFTA has enabled its members torestore trade links severed in the early 1990s. CEFTA membership also hassignificant symbolic political features. As all the members are candidates for EUmembership, CEFTA membership has become a symbol of belonging to theadvance guard of the transition.

The Central European Initiative (CEI), originally known as the Quadragonale,was established in 1989 by Austria, Hungary, Italy and the Socialist FederalRepublic of Yugoslavia (SFRY). Membership has since risen to 16 and from1992 the organisation has been known under its present name. The currentmembers are: Austria (1989), Italy (1989), Hungary (1989), Poland (1991),Croatia (1992), Slovenia (1992), Bosnia and Herzegovina (1992), Macedonia(1992), Czech Republic (1993), Slovakia (1993), Albania (1996), Belarus (1996),Bulgaria (1996), Moldova (1996), Romania (1996) and Ukraine (1996). The CEI,which aims to promote pan-European integration and co-operation, providesits members with a flexible and not overly institutionalised forum to discussimportant regional issues.

CEI activities are agreed at annual meetings of prime ministers and foreignministers. The activities of the organisation have evolved over the last tenyears. Initial goals included improving regional co-operation between theformer communist bloc and western Europe, supporting the transition process,and assistance in preparing infrastructure and commercial developmentprojects. In recent years the CEI’s focus has shifted to assisting EU enlargement,in co-operation with the European Bank for Reconstruction and Development(EBRD) and the EU.

The EBRD was set up in 1991 to help finance the development of central andeastern Europe after the fall of communism. By contrast with most othermultilateral organisations involved in the region, the EBRD’s mandatecompelled it to focus on the private sector, as it was allowed to commit no more

Central European Free-Trade Agreement

Central European Initiative

European Bank forReconstruction and

Development

50 Hungary


than 40% of its funds to public-sector projects. It received an initial capital ofEcu10bn (US$12bn at 1991 average exchange rates), which was doubled in1997. The EBRD initially found it difficult to carve out a niche for itself, andwas in its early years beset by scandals and a leadership crisis. Although itrecovered from these, in 1998 the Russian financial crisis resulted in heavylosses for the Bank. Russia has been the EBRD’s largest client, accounting forone-fifth of all funding in 1991-2000.

Nevertheless, over the past decade the EBRD has invested substantial sums inthe region and has helped to encourage private-sector investors. By 2000 it hadrecovered from its 1998 losses, and by the end of 2000 had disbursed €12.1bn(US$11.5bn) of its €20bn capital. If co-financing from other lenders and theprivate sector is added, the EBRD has been involved in investment worthUS$50bn. Of this, some US$12bn came in the form of foreign direct invest-ment (FDI). The Bank’s clientele has grown from just a handful of transitioncountries in the early 1990s to 27 countries today, with Yugoslavia (Serbia-Montenegro) being the most recent addition to the Bank’s list of potentialbeneficiaries. The EBRD has funded hundreds of projects, ranging from bankprivatisation to road-building.

The US has long wanted the Bank to shift its focus further east from the moreadvanced countries of east-central Europe to the Commonwealth ofIndependent States (CIS) and the Balkans. The east-central European countriesare seen to have “graduated”, to be able to rely on private-sector finance and tono longer need the EBRD’s support. However, West European governmentswant the Bank to stay engaged in central Europe and help these countries toprepare for EU accession. The EBRD is to boost its annual lending from €2.7bnin 2000 to €3.5bn in 2001 and thereafter. Whereas funding of the advancedEU accession candidates is to remain constant, at around €1bn per year, mostnew business will be directed to the CIS and the Balkans, where the Bank hashad trouble in the past in finding viable investment projects.

Initially a non-institutionalised multilateral forum for Cold War East-Westdialogue, the Conference for Security and Co-operation in Europe (CSCE)gradually expanded in aim and strengthened its organisational structure in the1990s. Established in 1972, the CSCE served for almost twenty years as aconvenient and flexible arrangement for easing Cold War tensions. After theend of the Cold War the role of the CSCE started to change quickly, and inDecember 1994 the conference was officially renamed the Organisation forSecurity and Co-operation in Europe (OSCE). With 55 member states, theOSCE is the only inclusive pan-European security organisation. Canada andthe US are also members of the organisation.

The OSCE has played a key role in conflict prevention and resolution, as wellas post-conflict reconstruction in Europe. Its activities embrace threedimensions: security, economy, and human rights. The OSCE is engaged inpreventive diplomacy, arms control and confidence-building activities. Itundertakes fact-finding and conciliation missions and crisis management. TheOSCE is a component of the European security architecture. It is a “regionalarrangement” in the sense of Chapter VIII of the UN Charter, which gives it

Organisation for Securityand Co-operation in Europe

Hungary 51


authority to try to resolve a conflict in the region before referring it to the UNSecurity Council. In the course of the 1990s the OSCE has been heavilyinvolved in the Balkans and the Transcaucasus.

The activities of the OSCE are performed by a web of specialised agencies. TheHigh Commissioner on National Minorities, based in The Hague, is theprimary source of “early warning”, with responsibility for identifying ethnictensions that might endanger peace. The Office for Democratic Institutionsand Human Rights (ODIHR), based in Warsaw, focuses on promoting humanrights, democracy and the rule of law. It monitors elections, assists atdeveloping national electoral and legal institutions, promotes the developmentof non-governmental organisations (NGOs) and civil society, conductsmeetings, seminars and special projects. The Office of the Representative onFreedom of the Media, based in Vienna, assesses the implementation of themember states’ commitments concerning freedom of journalism, broadcastingand access to information.

Sources of information

The Hungarian Central Statistical Office (CSO) has a deserved reputation as aprofessional organisation producing quality statistics and data. It is the mainsource of non-monetary statistics on the Hungarian economy. The CSOproduces a number of quality products, including the Statistical Yearbook andthe Monthly Bulletin of Statistics. These are produced in Hungarian and English.The yearbook is a 600-page volume with detailed economic data on most areas;however, its timeliness could be improved.

The National Bank of Hungary (NBH, the central bank) publishes annual andmonthly reports that provide timely macroeconomic data and detailedfinancial statistics, as well as a commentary on domestic and external trends.

Budapest Business Journal is an English-language weekly providing businessnews and limited statistical data. A Hungarian-language newspaper, Figyelo,provides a comprehensive weekly review of economic activities. A daily,Vilaggazdasag, provides the best economics coverage.

The IMF, the World Bank and the OECD are the main international sources ofstatistics on the Hungarian economy.

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

IMF, International Financial Statistics (monthly)

OECD, Main Economic Indicators; Economic Survey of Hungary 1996-97

World Bank, World Development Indicators; Trends in Developing Economies;Global Development Finance (formerly World Debt Tables)

David L Bartlett, The Political Economy of Dual Transformation: Market Reform andDemocratisation in Hungary, University of Michigan Press, Ann Arbor, 1997. Adetailed account of the economic and political transition in Hungary

National statistical sources

International statisticalsources

Select bibliography

52 Hungary


Andras Gero, Modern Hungarian Society in the Making, Central EuropeanUniversity Press, Budapest and London, 1995. A historical insight into Hungaryin the 20th century

Nigel Swain, Hungary: the Rise and Fall of Feasible Socialism, Verso, London andNew York, 1992. An assessment of the failures of the socialist economic project,with a good historical overview of socialist economic policy

Rudolf Tokes, Hungary’s Negotiated Revolution: Economic Reform, Social Change,and Political Succession, 1957-1990, Cambridge University Press, Cambridge andNew York, 1996. An overview of the economic and political changes inHungary from the aftermath of the 1956 revolution to the end of communism

Andras Torok, Budapest: A Critical Guide, Corvin, Budapest, 1997. This second rev-ised edition of the best guidebook to the city is full of valuable cultural insights

The Hungarian government website provides information on governmentprocedures and responsibilities, and links to government ministries, depart-ments and agencies: http//www.meh.hu (available in Hungarian and English)

The Hungarian Central Statistical Office website provides latest monthly andquarterly data releases. Historical and annual data is available in a searchabledatabase on a subscription basis. There is little accompanying analysis and accessis sometimes slow: http//www.ksh.hu (available in Hungarian and English)

The National Bank of Hungary website has a range of up-to-date statisticaldata, publications and commentary, although it tends to be factual rather thananalytical in nature. Navigation is sometimes difficult: http//www.mnb.hu(available in Hungarian and English)

Reference tables

These reference tables provide the most up-to-date statistics available at the date ofpublication.

Reference table 1

Population(end-period)

1996 1997 1998 1999 2000

Population (m) 10.17 10.14 10.09 10.04 10.01

Annual growth (%) –0.4 –0.4 –0.4 –0.5 –0.4

Birth rate (per 1,000 population) 10.3 9.9 9.6 9.4 9.7

Death rate (per 1,000 population) 14.0 13.7 13.9 14.2 13.5

Rate of natural increase (per 1,000 population) –3.7 –3.8 –4.3 –4.8 –3.8

Source: Central Statistical Office (CSO), Monthly Bulletin of Statistics.

Hungary 53


Reference table 2

Labour force

1996 1997 1998 1999 2000% of % of % of % of % of

‘000 total ‘000 total ‘000 total ‘000 total ‘000 total

Agriculture & forestry 302 8.3 288 7.9 279 7.5 270 7.1 252 6.5

Industry 972 26.7 989 27.1 1,034 28.0 1,043 27.4 1,031 26.8

Construction 218 6.0 219 6.0 230 6.2 253 6.6 268 7.0

Transport & communications 321 8.8 310 8.5 302 8.2 308 8.1 312 8.1

Distributive trades 601 16.5 618 16.9 594 16.1 651 17.1 674 17.5

Finance, real estate & business services 212 5.8 230 6.3 245 6.6 265 6.9 288 7.5

Others 1,022 28.0 993 27.3 1,014 27.4 1,122 26.8 1,025 26.6

Total 3,648 100.0 3,646 100.0 3,698 100.0 3,844 100.0 3,849 100.0

Source: CSO, Statistical Yearbook.

Reference table 3

Transport statistics

1996 1997 1998 1999 2000

Freight (bn tonne-km)Rail 7.6 8.1 8.1 7.7 7.8Road 10.2 10.4 12.6 13.1 13.3Waterways 2.5 1.6 1.6 1.0 0.9Pipelines 4.5 4.5 4.8 4.5 4.0

Passengers (bn passenger-km; excl private cars)Rail 8.6 8.7 8.9 9.5 9.8Road 9.8 10.2 10.6 11.3 12.2Air 2.8 3.1 3.0 3.5 3.5

Sources: CSO, Statistical Yearbook, Monthly Bulletin of Statistics.

Reference table 4

Structure of energy sources (production plus imports)(% of total)

1995 1996 1997 1998 1999

Coal 14.9 15.2 15.0 13.9 14.3

Hydrocarbons 68.4 69.2 69.0 71.5 70.3 Crude oil & petroleum 34.9 30.9 33.1 34.9 33.2 Natural gas 33.5 38.3 35.9 36.6 37.1

Electricity from nuclear power 12.1 11.9 12.1 12.1 12.6

Imported electricity 2.1 1.9 1.9 0.6 0.9

Other energy (firewood, charcoal, hydroenergy, etc) 2.5 1.8 2.0 1.9 1.9

Total 100.0 100.0 100.0 100.0 100.0 of which: ratio of imports 52.4 54.8 54.7 57.4 57.9

Sources: CSO, Statistical Yearbook.

54 Hungary


Reference table 5

Central state budget(Ft bn)

1996 1997 1998 1999 2000

Total revenue 2,079.3 2,364.6 2,624.4 3,227.6 3,679.3 Revenue from enterprises 398.8 352.0 377.2 444.1 468.3 Consumption taxes 737.2 942.3 1,117.5 1,405.5 1,659.7 Payments by households 419.7 460.6 520.5 626.0 755.2 Revenue of central & local government & extra-budgetary funds 316.9 333.7 394.4 566.7 607.7 Revenue related to internal debt service 127.5 193.5 123.5a 88.2a 108.6a

Revenue from international financial relations 20.6 45.7 – – – Profit tax & dividends from financial institutions 21.2 19.8 67.1 44.3 39.6 Other revenue 37.4 17.0 24.2 52.8 40.2

Total expenditure 2,209.1 2,703.1 3,176.6 3,565.8 4,048.7 Subsidies to economic organisations 115.6 103.7 134.8 176.8 176.5 Consumer price subsidies 44.9 55.2 66.6 74.8 82.8 Capital formation expenditure 126.6 147.8 140.8 151.1 – Benefits paid out through social security 213.1 221.2 274.2 378.8 431.1 Transfers to central government institutions 720.3 908.4 1,111.5 1,426.1 1,921.5b

Transfers to local governments 326.8 348.7 405.7 449.0 428.8 Transfers to extra-budgetary funds 4.4 0.1 0.0 0.2 1.1 Expenditure on international financial transactions 25.8 36.4 2.3 1.9 2.3 Debt service & interest payments 606.1 835.0 787.5 850.3 796.9 Other expenditure 26.2 47.1 253.2 56.8 207.7

Balance –129.8 –338.5 –552.2 –338.2 –369.4

Sources: National Bank of Hungary (NBH), Annual Report; Monthly Bulletin.

Reference table 6

Money supply(Ft bn unless otherwise indicated; end-period)

1996 1997 1998 1999 2000

Currency in circulation 497.7 562.6 667.0 846.2 876.2

Demand deposits 739.5 965.7 1,122.2 1,280.3 1,502.4

Money (M1) incl others 1,237 1,528 1,789 2,127 2,379

M1 growth (%) 19.4 23.5 17.1 18.9 11.9

Quasi-money 2,081 2,447 2,804 3,184 3,586

Money (M2) 3,318 3,975 4,593 5,311 5,965

M2 growth (%) 22.2 19.8 15.5 15.6 12.3

Source: NBH, Monthly Bulletin.

Hungary 55


Reference table 7

Gross domestic product(market prices)

1996 1997 1998 1999 2000

Total (Ft bn)At current prices 6,894 8,541 10,087 11,393 12,877At constant (1998) prices 9,199 9,620 10,087 10,508 11,050Real change (%) 1.3 4.6 4.9 4.2 5.2

Per head (Ft ‘000)At current prices 677 841 997 1,132 1,284At constant (1998) prices 903 948 997 1,044 1,101Real change (%) 1.7 5.0 5.2 4.7 5.5

Source: EIU.

Reference table 8

Gross domestic product by expenditure(Ft bn; constant 1998 prices; % change year on year in brackets)

1996 1997 1998 1999 2000

Private consumption 5,890 5,990 6,283 6,574 6,793 (–3.4) (1.7) (4.9) (4.6) (3.3)

Government consumption 973 1,028 1,025 1,043 1,060 (–4.2) (5.7) (–0.3) (1.8) (1.6)

Gross fixed investment 1,928 2,105 2,385 2,525 2,693 (6.7) (9.2) (13.3) (5.9) (6.6)

Stockbuilding 423 453 608 567 704 (2.0)a (0.3)a (1.6)a (–0.4)a (1.3)a

Exports of goods & services 3,461 4,375 5,106 5,773 7,033 (8.4) (26.4) (16.7) (13.1) (21.8)

Imports of goods & services –3,476 –4,332 –5,318 –5,973 –7,232 (6.2) (24.6) (22.8) (12.3) (21.1)

GDP 9,199 9,620 10,087 10,508 11,050 (1.3) (4.6) (4.9) (4.2) (5.2)

a Change as a percentage of GDP in the previous year.

Sources: National sources; EIU.

56 Hungary


Reference table 9

Gross domestic product by sector(% of GDP)

1995 1996 1997 1998 1999

Agriculture and forestry 7.1 6.9 6.1 5.7 5.0

Industry 32.3 31.7 33.8 33.7 33.5 Mining & quarrying 0.5 0.4 0.5 0.3 0.3 Manufacturing 23.6 23.3 24.7 24.7 24.5 Electricity, gas % water supply 3.4 3.5 3.9 4.0 4.0 Construction 4.8 4.5 4.7 4.7 4.7

Services (incl others) 60.6 61.4 60.2 60.6 61.5 of which: Real estate, renting & business activities 15.0 16.5 15.1 15.3 16.0 Wholesale & retail trade, repair of motor vehicles & household goods 11.8 11.7 11.9 11.9 11.9 Transport, storage & communications 9.4 9.5 10.1 10.1 10.5 Public administration & defence; compulsory social security 7.4 7.1 7.2 7.4 7.4 Education 5.4 4.8 4.8 4.8 4.9 Health & social work 4.8 4.7 4.6 4.5 4.6

Total 100.0 100.0 100.0 100.0 100.0

Source: National sources.

Reference table 10

Prices

1996 1997 1998 1999 2000

Consumer prices (1991=100) 283.6 335.5 383.9 422.3 463.7 % change, year on year (23.6) (18.3) (14.3) (10.0) (9.8)

Producer prices: industry (1991=100) 217.4 261.8 291.4 306.6 342.5 % change, year on year (21.8) (20.4) (11.3) (5.2) (11.7)

Source: NBH, Monthly Report.

Hungary 57


Reference table 11

Volume indices of sales of agricultural products(% change, year on year)

1996 1997 1998 1999 2000

Plant cultivationa –5.1 –7.5 –6.0 19.0 –24.6

Vegetables –5.2 0.1 37.7 –21.4 –2.9

Fruit 73.7 –11.3 5.0 –19.3 34.3

Grapes & wine 0.6 31.9 –1.9 –6.4 20.7

Live animals & animal products 7.6 –3.3 –1.5 5.4 –1.3

Total 3.9 –4.2 –0.7 6.3 –7.5

a Includes cereals, legumes, industrial plants, potatoes, rough fodder and seeds.

Sources: CSO, Statistical Yearbook; Monthly Bulletin of Statistics.

Reference table 12

Livestock numbers

(‘000 head; year-end)a

1996 1997 1998 1999 2000

Cattle 909 871 873 857 805

Pigs 5,289 4,931 5,479 5,335 4,834

Sheep 872 858 909 934 1,129

Chickens 27,692 30,983 30,557 25,890 30,716

a Since 1996 data are from December 1st.


Reference table 13

Output of energy, minerals and mineral products(m tonnes unless otherwise indicated)

1996 1997 1998 1999 2000

Coal 15.0 15.6 14.6 14.6 n/a

Crude oil 1.5 1.4 1.3 1.2 1.2

Bauxite 1.1 0.7 0.9 0.9 n/a

Crude steel 2.1 1.8 1.9 2.0 2.1

Cement 2.7 2.8 3.0 3.0 3.4

Natural gas (m cu metres) 5.1 4.7 4.3 3.7 3.5

Electrical energy (m kwh) 35.0 35.3 37.0 37.0 34.3


58 Hungary


Reference table 14

Industrial production by sector(% change, year on year; volume indices)

1996 1997 1998 1999 2000

Food, beverages & tobacco –0.4 –7.2 0.8 2.6 5.9

Textiles & apparel –3.6 2.4 10.6 9.8 12.6

Wood, paper & printing –5.3 15.4 5.4 6.1 21.6

Chemicals –2.7 4.6 3.2 –10.2 10.7

Other non-metallic minerals 1.0 4.4 12.6 –3.1 9.6

Basic & fabricated metals –2.4 8.1 2.8 –0.5 21.0

Machinery & equipment 23.7 54.9 41.4 5.9 10.7

Other manufacturing –7.8 –0.7 24.1 2.1 28.4

Manufacturing total 3.4 14.8 16.2 12.4 20.7

Mining 2.4 –8.5 –18.2 0.5 –8.0

Energy supply 4.6 1.2 –0.4 –1.6 –1.8

Industry total 3.4 11.1 12.5 10.5 18.3


Reference table 15

Construction(% change year on year unless otherwise indicated; volume indices)

1996 1997 1998 1999 2000

Building installation – – – 17.9 8.2

Building completion – – – 20.6 8.6

Total commercial construction 2.7 8.1 15.3 9.0 5.8

Private dwellings built (‘000) 28.3 28.1 20.3 19.3 21.6

Sources: CSO, Statistical Yearbook.

Reference table 16

Budapest Stock Exchange(Ft bn unless otherwise indicated; end-period)

1996 1997 1998 1999 2000

Listed companies (no.) 45 49 55 66 60

Market capitalisation 852.5 3,058.4 3,020.1 4,145.0 3,393.9

Trading value 36.6 218.4 331.8 310.4 304.7

BUX indexa 1,4,134.3 7,999.1 6,307.7 8,819.5 7,849.8

% change 170.4 93.5 –21.1 39.8 –11.0

a The BUX index (January 2nd 1992=1,000) replaced the BSE index in January 1995.

Source: International Finance Corporation, Monthly Review of Emerging Stockmarkets.

Hungary 59


Reference table 17

Retail sales

% change Ft bn (current prices) (constant prices)

1998 1999 2000 1999 2000

Total 3,683 4,330 4,822 7.9 2.0 Food, beverages & tobacco in specialised & non-specialised stores 1,287 1,451 1,515 7.0 –7.6 Textiles, clothing, footwear & leather goods 194 237 226 11.1 –9.6 Furniture, electrical household appliances & hardware 657 695 887 –1.9 21.1 Motor vehicles & motor vehicle parts & accessories 494 624 703 17.3 10.2 Automotive fuel 427 549 698 7.5 –0.3 Books, newspapers, stationery & other specialised stores 372 452 434 12.2 –9.8 Other goods in non-specialised stores 122 166 186 25.3 5.7 Pharmaceutical & medical goods, cosmetics & toilet articles 108 132 150 –3.6 –5.3 Second hand goods in stores 12 16 12 16.5 –24.2 Mail order 9 9 10 –1.3 6.4


Reference table 18

Exports(% of total)

1996 1997 1998 1999 2000

Fuels & energy 3.4 2.7 1.9 1.6 1.8

Raw materials 4.4 3.8 2.9 2.5 2.4


Manufactures 40.7 35.5 32.7 30.6 29.1

Food, beverages & tobacco 15.3 12.9 10.5 8.0 6.9

Note. Totals may not sum to 100% owing to rounding.

Source: CSO, Monthly Bulletin.

Reference table 19

Imports(% of total)

1996 1997 1998 1999 2000

Fuels & energy 12.1 9.7 6.6 6.1 8.4

Raw materials 3.5 3.3 3.0 2.2 2.2


Manufactures 44.1 41.0 40.2 38.4 35.3

Food, beverages & tobacco 4.5 4.2 3.7 3.0 2.7

Note. Totals may not sum to 100% owing to rounding.

Source: CSO, Monthly Bulletin.

60 Hungary


Reference table 20

Main trading partners(US$ m; % of total in brackets)

1997 1998 1999 2000

Exports to:Germany 7,098 8,420 9,600 10,471

(37.2) (36.6) (38.4) (37.3)Austria 2,183 2,445 2,399 2,443

(11.4) (10.6) (9.6) (8.7)Italy 1,175 1,323 1,477 1,654

(6.2) (5.8) (5.9) (5.9)Netherlands 536 1,086 1,297 1,522

(2.8) (4.7) (5.2) (5.4)US 618 1,045 1,297 1,475

(3.2) (4.5) (5.2) (5.3)France 718 876 1,123 1,470

(3.8) (3.8) (4.5) (5.2)UK 639 819 1,120 1,156

(3.3) (3.6) (4.5) (4.1)Belgium 462 604 754 878

(2.4) (2.6) (3.0) (3.1)Poland 510 529 519 605

(2.7) (2.3) (2.1) (2.2)Romania 316 564 468 574

(1.7) (2.5) (1.9) (2.0)Total incl others 19,069 23,005 25,013 28,092

Imports from:Germany 5,641 7,249 8,189 8,213

(26.7) (28.2) (29.2) (25.6)Russia 2,020 1,666 1,631 2,589

(9.6) (6.5) (5.8) (8.1)Italy 1,553 1,941 2,159 2,407

(7.4) (7.6) (7.7) (7.5)Austria 2,226 2,469 2,503 2,366

(10.5) (9.6) (8.9) (7.4)Japan 689 988 1,148 1,701

(3.3) (3.8) (4.1) (5.3)France 922 1,248 1,313 1,401

(4.4) (4.9) (4.7) (4.4)US 787 993 968 1,224

(3.7) (3.9) (3.5) (3.8)UK 717 876 853 1,017

(3.4) (3.4) (3.0) (3.2)China 288 435 610 939

(1.4) (1.7) (2.2) (2.9)Belgium 498 637 728 721

(2.4) (2.5) (2.6) (2.2)Total (incl others) 21,106 25,706 28,008 32,080

Source: CSO, Statistical Yearbook; Monthly Bulletin.

Hungary 61


Reference table 21

Balance of payments, IMF series(US$ m)

1996 1997 1998 1999 2000

Goods: exports fob 14,184 19,640 20,747 21,846 25,347

Goods: imports fob –16,836 –21,602 –23,101 –24,037 –27,452

Trade balance –2,652 –1,962 –2,354 –2,191 –2,105

Services: credit 5,980 5,733 5,921 5,650 6,248

Services: debit –3,506 –3,465 –4,141 –4,266 –4,476

Income: credit 1,202 1,382 1,111 775 943

Income: debit –2,658 –2,808 –2,990 –2,417 –2,515

Net transfers –54 138 148 347 409

Current-account balance –1,688 –982 –2,305 –2,102 –1,496

Direct investment abroad 4 –433 –478 –250 –532

Direct investment in Hungary 2,274 2,167 2,037 1,951 1,698

Portfolio investment assets –35 –134 –93 –75 –316

Portfolio investment liabilities –396 –914 1,925 2,065 –204

Financial derivatives assets 17 12 185 852 750

Financial derivatives liabilities –1 –4 –38 –899 –659

Other investment assets –1,256 –584 –507 –1,151 –874

Other investment liabilities –1,294 549 –13 2,176 2,502

Financial-account balance –687 658 3,017 4,667 2,365

Capital account balance 156 117 189 29 266

Net errors & omissions 976 32 49 –261 –81

Overall balance –1,244 –175 951 2,335 1,054

Financing (– indicates inflow)

Movement of reserves 1,447 175 –790 –2,335 –1,054

Use of IMF credit & loans –203 0 –160 0 0

Exceptional financing 0 0 0 0 0

Note. Data for 2000 are from the National Bank of Hungary, Monthly Report. Monthly data areconverted from euros to US dollars using an average monthly exchange rate, then summed toobtain the annual figures.

Source: IMF, International Financial Statistics.

62 Hungary


Reference table 22

External debt, World Bank estimates(US$ m unless otherwise indicated; debt stocks as at year-end)

1995 1996 1997 1998 1999

Public medium- & long-term 23,914 18,673 15,064 15,741 16,064

Private medium- & long-term 4,088 5,005 5,915 7,788 9,436

Total medium- & long-term debt 28,003 23,678 20,979 23,530 25,499 Official creditors 4,457 3,503 3,123 2,291 2,241 Bilateral 947 736 661 787 685 Multilateral 3,510 2,767 2,461 1,504 1,555 Private creditors 23,545 20,176 17,856 21,239 23,259

Short-term debt 3,203 3,359 3,357 4,780 3,543 of which: interest arrears 0 0 0 0 0

Use of IMF credit 385 171 160 0 0

Total external debt 31,590 27,208 24,496 28,310 29,042

Principal repayments 4,938 6,573 6,024 5,811 6,081

Interest payments 2,109 1,815 1,685 1,494 1,446 of which: short-term debt 174 180 161 195 145

Total debt service paid 7,046 8,389 7,708 7,305 7,528

Ratios (%)Total external debt/GNP 73.7 62.2 55.3 62.7 62.1Debt-service ratio, paida 37.4 39.2 28.8 26.3 26.6Short-term debt/total external debt 10.1 12.3 13.7 16.9 12.2Concessional long-term debt/total long-term debt 1.3 1.7 1.8 1.9 1.7Variable interest long-term debt/total long-term debt 39.4 40.5 45.1 48.5 51.6

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Reference table 23

Foreign reserves(US$ m unless otherwise indicated; end-period)

1996 1997 1998 1999 2000

Foreign exchange 9,639 8,332 9,239 10,707 10,915

SDRs – – 1 4 12

Reserve position in the IMF 80.7 75.7 79.0 243.0 263.0

Total reserves excl gold 9,795 8,476 9,319 10,594 11,190

Golda 32.09 28.50 28.50 28.50 28.50

Memorandum itemsGoldb 43 37 29 29 29Gold (m fine troy oz) 0.111 0.101 0.101 0.101 0.101

a Valued at 75% of the fourth-quarter London price. b National valuation.

Source: IMF, International Financial Statistics.

Hungary 63


Reference table 24

Exchange rates(Ft per unit of currency unless otherwise indicated; annual averages)

1996 1997 1998 1999 2000

US$ 152.57 186.75 214.45 237.31 282.18

DM 101.40 107.68 122.15 129.25 132.98

FFr 29.83 31.99 17.36 18.37 39.65

£ 238.41 305.96 355.37 383.85 426.68

Ecua 191.15 210.93 240.98 252.80 260.1

¥ (100) 140.27 154.69 164.64 209.59 261.83

a Euro from January 1st 2000.

Source: NBH, Monthly Report.

Editors: Michael Wright (editor); Fiona Mullen (consulting editor)Editorial closing date: June 15th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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