Before World War II, industrial growth was slow because adequate capital was lacking. Since 1949, however, industry has expanded rapidly, and it now contributes a larger share than agriculture to the national income. The government has no capital investments abroad, but it participates in limited economic activities in developing countries. Substantial industrial growth continued through the 1960s and mid-1970s, but output in the socialized sector declined during 1979–80, and growth was sluggish in the 1980s.
After the fall of Communism in 1989, Hungary began a painful transition to a market economy. Between 1990 and 1992, GDP dropped by about 20%. Freed to reach their own level, consumer prices rose 162% between 1989 and 1993. The rate of unemployment was 12.2% at the end of 1992. By late 1998, private-sector output was over 85% of the GDP.
By 1994, Hungary was in an economic slump unknown since the reforms toward capitalism began. Export earnings were down, inflation was on the rise, and Hungary's gross debt rose to about $31.6 billion in mid-1995 (the highest per capita foreign debt in Europe). The IMF directed the government to curb social spending, but restricting social welfare during a period of high unemployment was unpopular with voters. The government began a stabilization plan in March 1995 designed to decrease the budget deficit by Ft170 billion (3–4% of the GDP) and to decrease the current account deficit to $2.5 billion from the record high of $4 billion in 1994. The government cut expenditures, increased its revenues, devalued the forint by 9%, introduced a crawling peg exchange rate policy, added an 8% surcharge on imports, and called for wage controls at state-owned companies. As a result of the program, inflation and GDP growth rose. In addition, the black market economy was estimated to be as much as 30% of GDP.
In the years since its implementation, the stabilization program has borne fruit. By 1999, the IMF assistance had been repaid. The Hungarian economy exhibited strong growth rates with GDP increases of 4.6% and 5.1% in 1997 and 1998, respectively. Although a hard winter and the Kosovo conflict appeared to hamper Hungarian efforts to match the prior years' growth rate levels, the economy performed well in 2000, led by an increase in foreign direct investment. Since then, manufacturing output and productivity increased, and export industries did well, although increases in wages and a rapid appreciation of the forint in 2002 moderated export growth. The global economic downturn that began in 2001 had an impact on the Hungarian economy, as GDP rose by 3.3% in the first half of 2002, down from 6.6% in the first half of 2000. Although this growth rate was higher than most European nations in 2002, it was below the rate needed for Hungary to reach the wealth levels of EU countries.
Due to government efforts at privatization, over 80% of the economy was privately owned by 2001, and Hungary stands as a model for countries undergoing market reforms. In December 2002, Hungary was formally invited to join the EU, with accession planned for May 2004. It was regarded as one of the most advanced of the 10 candidate countries slated for accession.