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Hungary – an Economic Overview

by György Barcza, Economist, K&H Bank

Hungary was a frontrunner in the transition process as the country was among the first to open up for foreign investments and new technologies. Per capita foreign direct investment is high, and foreign companies flooded the country in the 1990s to benefit from a rapidly improving infrastructure and highly-skilled labour at a relatively low cost. Export and investments were the primary drivers of growth and manufacturing; manufacture of car parts and electronic devices became the key drivers of the economy. Exports now account for almost three-quarters of the national income and most of these goods are sold in the EU countries with Germany playing the leading role among export destinations.

The privatisation process started immediately after the fall of the Communist regime in 1989 and most of the financial, energy and telecoms sectors are now owned by foreign companies. Hungary plays a key role in transportation due to its location at the centre of Central and Eastern Europe. The largest companies are often subsidiaries of large Western European manufacturers and recently Daimler, Audi and GM’s Opel announced expansion of production.

Rapid convergence process, but not without problems

Early privatisation and openness to foreign capital allowed for convergence from the start, but this catch-up process was not without problems. Repeated fiscal overspending at election times, low levels of employment and high inflation remained a challenge. Excessive loosening of the budget policy took place basically around all elections in the last 20 years. This first became clear in 1995, when the Socialist government had to carry out a large-scale austerity programme, the so-called Bokros package, which was one of the deepest fiscal consolidation programmes ever in emerging markets. Despite this, the budget deficit rose again to unsustainable levels in the 1998 election and similarly every four years.

The export and investment driven growth was replaced by domestic demand, followed by deteriorating external balance.