ECONOMY
The Hungarian economy prior to WWII was primarily oriented toward agriculture and small scale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources also have dictated a traditional reliance on foreign trade. In the early 1950s, the communist government forced rapid industrialization after the standard Stalinist pattern in an effort to encourage a more self-sufficient economy. Most economic activity was conducted by state-owned enterprises or cooperatives and state farms. In 1968, Stalinist self-sufficiency was replaced by the "New Economic Mechanism," which reopened Hungary to foreign trade, gave limited freedom to the workings of the market, and allowed a limited number of small businesses to operate in the services sector.
Although Hungary enjoyed one of the most liberal and economically advanced economies of the former Eastern bloc, both agriculture and industry began to suffer from a lack of investment in the 1970s, and Hungary's net foreign debt rose significantly--from $1 billion in 1973 to $15 billion in 1993--due largely to consumer subsidies and unprofitable state enterprises. In the face of economic stagnation, Hungary opted to try further liberalization by passing a joint venture law, adopting an income tax, and joining the International Monetary Fund (IMF) and the World Bank. By 1988, Hungary had developed a two-tier banking system and had enacted significant corporate legislation which paved the way for the ambitious market-oriented reforms of the post-communist years.
The Antall government of 1990-94 began market reforms with price and trade liberation measures, a revamped tax system, and a nascent market-based banking system. By 1994, however, the costs of government overspending and hesitant privatization had become clearly visible. Since that time, the government sector has been prone to high deficit spending, often preceding national elections. A series of reforms has helped bring this under control, and Hungary's early openness to foreign direct investment (FDI) led to a sustained period of high growth and made Hungary a magnet for FDI in the late 1990's and early parts of this century.
Hungary rapidly integrated into the European economy, with the value of exports and imports both growing to well over 70% of GDP. This close relationship with the economies of the European Union (EU) helped pave the way for Hungary's accession to the EU in 2004. An open economy with sophisticated financial markets, Hungary has progressed well beyond the early stages of privatization. In recent years, Hungary has been a leader in per capita FDI in the region, and the private sector is the dominant engine of growth in an economy saddled down with heavy government debt and a substantial fiscal deficit. Many analysts and international organizations note the marked success of export-oriented manufacturing companies, but see room for substantial structural reform to reduce government spending and increase efficiencies in areas such as taxation, health care, education, and social benefits.
As part of its EU membership agreement, Hungary agreed to meet the economic criteria necessary to join adopt the euro. In 2005 and 2006, it became clear that not only was a high budget deficit (at one point in danger of surpassing 10% of GDP in 2006) hurting the economy, but that Hungary would have to endure EU scrutiny and possible sanctions associated. Against this backdrop, Prime Minister Gyurcsany proposed and launched a sweeping austerity program to attack Hungary’s budget deficit, by raising taxes, decreasing subsidies, and streamlining the public sector. Businesses have complained that the increased taxes and greater enforcement costs have decreased Hungary's competitiveness, but the positive affects of the deficit are clear. With a goal of cutting the deficit from over 9% if GDP in 2006 to 6.8% of GDP in 2007, the government has exceeded its targets and attained a deficit of 5.7% of GDP for the year. With an official target approaching 3% in 2009, Hungary may yet attain success in controlling government spending. However, this has come at a cost, as Hungary has returned to relatively high inflation approaching 8% and its GDP growth in 2007 will be well below the EU and regional average, under 2%.
In 1995 Hungary's currency, the forint (HUF), became convertible for all current account transactions, and subsequent to OECD membership in 1996, for almost all capital account transactions as well. In 2001, the Orban government lifted remaining currency controls and broadened the band around the exchange rate, allowing the forint to appreciate by more than 12% in a year. Conflicting fiscal and monetary policy in the summer of 2002 caused confusion briefly in the market, with the forint surging against the euro for several months. Prior to the change of regime in 1989, 65% of Hungary's trade was with Comecon countries. By the end of 1997, Hungary had shifted much of its trade to the West. Trade with EU countries and the OECD now comprises over 75% and 85% of the total, respectively. Germany is Hungary's single-most important trading partner. The United States has become Hungary's sixth-largest export market, while Hungary is ranked as the 72nd largest export market for the United States. Bilateral trade between the two countries has increased to more than $1 billion per year. The United States has Normal Trade Relations with Hungary and has extended to it Overseas Private Investment Corporation insurance, and access to the Export/Import Bank.
Foreign investment was the key to Hungary's success. With more than $60 billion in FDI since 1989, Hungary has been a leading destination for FDI in central and eastern Europe--including the former Soviet Union. Of this, a little less than one-third has come from U.S. companies. The largest U.S. investors include GE, Alcoa, General Motors, Coca-Cola, Ford, IBM, and Pepsico. Foreign companies modernized Hungary's industrial sector and created thousands of new, high-skilled, high-paying jobs. As a result of extensive and continuing liberalization, the private sector produces about 80% of Hungary’s output. Currently, foreign firms control two-thirds of manufacturing, 90% of telecommunications, and 60% of the energy sector. Inflation declined from 14% in 1998 to 3.7% in 2005, and is expected to return to low levels by 2008. Policy challenges include cutting the public sector deficit and taking concrete measures on transparency and tax reform to retain its competitive position in attracting investment.
GDP (2007 est.): $118.4 billion.
Annual growth rate (2007 est.): 2.1%
Per capital GDP (PPP 2007 est.): $19,500.
Natural resources: bauxite, coal, natural gas, fertile soils, arable land.
Agriculture/forestry (2006 est., 3.4% of GDP): Products--meat, corn, wheat, sunflower seeds, potatoes, sugar beets, dairy products.
Industry and construction (2007 est., 32.415% of GDP): Types--machinery, vehicles, chemicals, precision and measuring equipment, computer products, medical instruments, pharmaceuticals, textiles.
Trade (2007 est.): Exports ($85.7373.51 billion)--machinery, vehicles, food, beverages, tobacco, crude materials, manufactured goods, fuels and electric energy. Imports ($85.9974.02 billion)--machinery, vehicles, manufactured goods, fuels and electric energy, food, beverages, and tobacco. Major markets--EU (Germany, Austria, Italy, France, UK, Romania, Poland). Major suppliers--EU (Germany, Austria, Italy, France, Netherlands, Poland), Russia, China.
