Hungary - Economic development





During the first 20 years after World War II, Hungary had the following economic plans: the three-year plan (1947–49) for economic reconstruction; the first five-year plan (1950–54) which aimed at rapid and forced industrialization and which was slightly modified in 1951 and by the "new course" policy of 1953; the one-year plan of 1955; the second five-year plan (1956–60), designed to further industrialization but discarded as a result of the October, 1956 uprising; the three-year plan (1958–60), which also emphasized industrialization, although it allocated greater investment for housing and certain consumer goods; and the new second five-year plan (1961–65), which provided for a 50% increase in industrial production. These were followed by the third five-year plan (1966–70); the fourth five-year plan (1971–75), with greater emphasis on modernization of industrial plants producing for export and housing construction; the fifth five-year plan (1976–80), which called for amelioration of the gap in living standards between the peasantry and the working class; the sixth five-year plan (1981–85), emphasizing investment in export industries and energy conservation and seeking to curb domestic demand; and the seventh five-year plan (1986–90), which projected growth of 15–17% in NMP, 13– 16% in industrial production, and 12–14% in agriculture.

Far-reaching economic reforms, called the New Economic Mechanism (NEM), were introduced on 1 January 1968. In order to create a competitive consumers' market, some prices were no longer fixed administratively, but were to be determined by market forces. Central planning was restricted to essential materials, and managers of state enterprises were expected to plan and carry out all the tasks necessary to ensure profitable production. In the early years of the NEM, the growth rate of industrial output surpassed target figures; national income rose substantially, surpassing any previous planning periods; and productivity increased significantly in all sectors of the national economy. However, following the huge oil price increases of 1973–74, the government returned to more interventionist policies in an attempt to protect Hungary's economy from external forces. Beginning in 1979, the government introduced a program of price reform, aimed at aligning domestic with world prices; changes in wage setting, intended to encourage productivity; and decentralization of industry, including the breakup of certain large enterprises and the creation of small-scale private ones, especially in services. New measures introduced in 1985 and 1986 included the lifting of government subsidies for retail prices (which led to sharp price increases) and the imposition of management reform, including the election of managers in 80% of all enterprises. The 1991–95 economic program aimed to fully integrate Hungary into the world economy on a competitive basis. The program's main features were to accelerate privatization, control inflation, and institute measures to prepare the way for the convertibility of the forint.

Reforms slowed in 1993 and 1994, and the privatization of state firms stopped. However, privatization accelerated in 1995 as the result of new laws passed in May of that year, which made the process simpler and allowed for the rapid privatization of small firms. Some large utilities were privatized in 1995; the first wave of the electricity and gas company privatization totaled $3.2 billion, primarily from German, Italian, and French interests. Budapest Bank, one of the country's largest banks, was sold to GE Capital Services. Hungary is now one of the few countries in Eastern Europe to have privatized major portions of its telecommunications and energy sectors. In 1995, the government received $4.5 billion in privatization proceeds. From the mid-1990s, a massive amount of foreign investment flowed into the country. (It stood at just under $23.5 billion by the end of 2001, which was equivalent to about 46% of GDP.)

In 1994, the Development Assistance Committee of the OECD distributed $68.3 million in aid to Hungary. Net concession flows from multilateral institutions that year amounted to $132 million. With the adoption of an International Monetary Fund (IMF)-backed stabilization program in 1995, Hungary exhibited consistent GDP annual growth of 4% in the late 1990s. Moreover, Hungary has repaid its entire debt to the IMF, and was formally invited to join the EU in 2002, with accession planned for 2004.

The private sector now produces 80% of GDP. The economy was suffering from the effects of currency appreciation in 2003, and from rises in wages in 2001–02. Hungary's markets for in 2003 were weak, given the dismal state of the global economy. (Exports in 2001 reached the equivalent of some 60% of GDP, up from 30.6% in 1991.) The current account deficit was forecast at around 5.4% of GDP for 2003–04.

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