Hungary - Overview of economy

Hungary has an advanced and diversified free-market economy. Economic growth is strong relative to other countries in Europe, and Hungary has its sights set clearly on accession to the European Union (EU) before 2010. It has been more than 10 years since the official end of state socialism and a semi-command economy, and over 85 percent of the economy has been privatized . Hungary has undergone significant economic reform since 1989 including privatization, reform of important state-supported sectors like health care, pensions, and social security, and

housing supports. It has also experienced significant regional development and the encouragement of both foreign and domestic investment.

Hungary's economic output has been steadily growing, yet it continues to lag behind typical western countries, including those of the European Union. Still, its growth rates have been impressive by the standards of developed countries, in recent years exceeding the EU average. Hungary's growth in the gross domestic product (GDP) was 5.5 percent in 2000, up from 4 percent in the previous year.

Hungary is regarded as a converging economy approaching the ranks of developed countries in general. Hungary is a member of the World Trade Organization (WTO), the International Monetary Fund (IMF), the World Bank, and the Organization for Economic Cooperation and Development (OECD). It is currently an associate member of the European Union and has been preparing for full membership since 1997.

The most significant event affecting Hungary's economy after 1950 was the experiment of state socialism. When the communists took over in 1948, the economy of Hungary was based primarily on agriculture. That emphasis shifted under communist rule toward industrialization, especially heavy industry and manufacturing. In the late 1950s and 1960s the government retreated on this stance somewhat, emphasizing more consumer-oriented goods. As a consequence the Hungarian standard of living rose relative to that of other Eastern European countries under communist rule, but by the 1980s the Hungarian economy began to stagnate. As a consequence, Hungary became increasingly indebted to international lenders. At the same time, its ties with foreign governments, businesses, and organizations were gradually increasing. The combination of these financial and commercial trends contributed to the shift to a multiparty system in 1989.

The introduction of multiparty competition in 1990 was quickly followed by significant free market reforms, especially in the area of privatization. The new government was also particularly aggressive at attracting foreign investment, accounting for more than half of all direct foreign investment in Eastern Europe by 1993. Since 1989 more than US$20 billion in working capital has been invested by foreign companies. About 40 of the world's top 50 multinational companies are represented in Hungary. Hungary also has the most highly capitalized stock exchange in eastern Central Europe.

The growth potential of the Hungarian economy remains strong relative to both its neighbors and to the advanced economies of the European Union. Hungarian sovereign debt now rates as investment grade (debt low enough for investors to seriously consider putting money into the country). Hungary's economic growth in 2000 exceeded 5 percent, placing it above the EU average. Inflation , while high at just above 10 percent, is expected to drop to single digit levels in 2001 or 2002.

Organized crime has been a problem in Hungary since its political and economic transition in 1989, especially as a consequence of its geographic location and relative economic openness. Organized crime groups have used Hungary as a transit country for smuggling drugs, people, and weapons. Hungary has passed tough laws against such activities, however, and is rated much more highly as an attractive locale for foreign investment than many other post-communist countries. As it seeks to gain accession to the European Union, Hungary is actively seeking to eradicate the further influence of organized crime.