- Introduction -

The first number of MONITORING, the quarterly issue of ECOSTAT presented the analysis of past year’s developments and projections for Hungary’s economy in 1998. The recent number includes the review of main economic processes in early 1998 and a wider survey of the development in Hungary in the respect of long term international tendencies. In order to illustrate the main tendencies and changes of rates we present projections up to 2002. In the case of certain special indicators we have not been able to give projections yet, we’ll come back to them in later numbers of the MONITORING serie.

The main international tendencies expected to determine the following years are presented in our survey. Our first topic includes thus globalization and its effects, the expected development of certain great economic regions with special respect to the European Union. We also mention Hungary’s duties deriving from the join.

The scopes of the overall economic development and structural changes, specialities and restricts of the certain areas are analysed for the next four years (up to 2002). We try to demonstrate the possibilities of the Hungarian economic policy. Tensions observed in the social and institutional sphere and the possible ways to solve them are also considered in our study besides the results of the change in the political regime, the requirements connected to the EU join and its effects on Hungary’s economy.

Problems and questions influencing Hungary’s further development and the adaptation to the European Union are presented in our study.

- Summary -

The economy of Hungary has changed to a market economy essentially. Private ownership turned to be dominant. The institution system of market economy has been developed by means of deregulation, liberalization and the changes of the financial system.

Changes in the macro structure characterizing economic development were accelerated by the change in the political regime. E.g. the contraction of agriculture and industry, and the progression of services within that financial and social services mainly. The drastic changes of the structure resulted in the contraction of economic performances and the deterioration of the external balance at the beginning.

By means of the loss of considerable Eastern markets, the liberalized imports superseding domestic production and other factors, the foreign trade deficit amounted USD 4 billion by 1994 having induced a similar deficit in the balance of payments. Following the stabilization measures of 1995, the balance of Hungary improved significantly. The rapid increase of exports of multinational companies activating in the customs area and the growing revenues of services (mainly in tourism) resulted in the decline of the foreign trade deficit. This decreased the deficit of the balance of payments amounting only USD 1 billion in 1997. The stabilization package of 1995 and the considerable devaluation having preceded its entering into force terminated speculations in connection to HUF. The rather high real interests of the initial period raised faith in HUF deposits inducing an intensive inflow of foreign capital. By means of this phenomenon sources forming no liability (e.g. direct capital investments, owners’ credits) came into prominence in the financing of the deficit of the balance of payments. The current deficit was financed abundantly, in fact over-financing occurred occasionally enabling thus the decline of the external depts. The external net foreign exchange depts of Hungary decreased thus to USD 7.8 billion by the end of the first quarter of 1998.

Burdens and results connected to the development of market economy were reflected in the economy of the state as well. The balance of the budget having been positive in 1990 turned to negative by 1994. By means of the stabilization measures of 1995 the balance positions of the budget stopped to deteriorate, the primary balance turned to be positive.

The monetary policy of the nineties has been determined by the requirement of the external balance and the curbing of inflation. The basic structural changes of real economy enabled only modest results for this policy in the first part of the nineties. By means of the consolidation of real economy however, monetary policy turned to be more effective. The most decisive item was the introduction of the scrawl peg system. The exchange rate mechanizm contributed successfully to the stabilization of the balance of Hungary in the past two years. The curbing of inflation is accompanied by the scrawl peg devaluation building in inflationary expectations however, impeding thus further decelerating.

Restructuring of industry lasted a whole decade. The production of the branch achieved the level of 1988 in 1997. Technical level and productivity were improving considerably. This was propelled by the support of manufacturing and within that mainly machinery, chemistry and food industry, by more than the half of the about USD 17 billion capital invested in Hungary. As regards the nearest medium term period the boom in industry is expected to continue, productive connections of domestic firms and multinational companies are supposed to develop strikingly and domestic sales of industry may also recover by means of the upswing of internal demand.

Agriculture suffered changes the most intensively. Production and the ability to keep population declined strikingly. Most of the external markets had been lost and no improvement (new markets or regaining positions) has taken place. Most of the new individual venturers did not dispose of sufficient own capital to start, maintain and develop the venture. They were compelled to external resources deteriorating the conditions of economy. 70 percent of agriculture produce for the domestic market. This means that development is also strictly connected to the upswing of domestic demand. At the same time the EU join may open a unique market of 500 million persons where the agricultural products of Hungary get into competitive positions again. However, the agriculture and the food industry of Hungary are only partly prepared for the free competition and the completion of products meeting EU standards.

The structural and property changes in trade resulted in 124 thousand retail trade shops in Hungary, 10 large shopping, service and entertainment centers in Budapest by the end of 1997. The development possibilities and reserves of ventures of indigenous property are rather modest since they bought the ownership by means of credits and their liabilities prescribe their resources for years. Apart from this factor, the situation of domestic trade is unfavorable any way in comparison to the foreign capital intensive shopping nets having modernized the purchased trade nets rapidly and having increased their market share to a decisive level by the exchange rate policy.

Also significant changes have taken place in transport and communications in connection to the modified demands of the productive sphere. Economic recession and the decline of transport demand caused considerable contraction in tons kilometer performances. Drop was the most striking in rail transportation accompanied by the recovery of road motor transportation. The reason for this was the structural change of goods transportation from mass transportation into the destination of products of higher value added (being thus economically transportable on roads as well).

The conditions of market economy caused positive changes in the area of telecommunications. The density of main public phone lines increased from the 9 figure of 1989 to 28 by the end of 1997 approaching thus the average of the EU. The technical level of the net is high accordingly.

The economic changes of the past years affected the society as well. There were about 1.5 million vacancies (one third of the total figure) liquidated by reason of the structural changes in economy. This is reflected not only in unemployment exceeding 10 percent by now, but in the contraction of activity rate to 40 percent, the level of the twenties namely. This means that the employment of the population in the active age declined to a level being critical even in international comparisons.

Private incomes dropped significantly and differenciated considerably at the same time. The ratio of population living below the minimum level amounted 10 percent in 1987 and 25-30 percent in 1997. On the lowest end of the income scale we find very old people, old people living alone and households with one parent or three or more children.

Deteriorating living standards are accompanied by significantly deteriorating demographic indicators. The number of population in Hungary has decreased by 2.3 percent since 1990. This has been mainly caused by the death rate being rather high in international comparisons and afflicting mainly middleaged men (death rate increased to the level of the twenties and thirties).

As a summary it can be stated that the change in the political regime exacted significant social offerings. These resulted however in a certain stability of economy and the conditions of economic recovery.

In the period of Hungary’s joining to the European Union of developed countries the EU itself and even the world’s economy is changing basically. By means of the liberalization and deregulation having been observed since the seventies the conditions of economy changed significantly. A worldwide globalization has been started. A characteristic feature of this is the increasing upswing of multinational firms. There are more than 40 thousand multinational small-, medium- and large-size companies activating in the world recently. They complete two third of the world trade and about a third of the turnover includes the turnover of multinational firms within the companies.

An other important feature of globalization is the integration of money markets and the circulation of capital in an amount never seen before. The turnover realized in the foreign exchange and international security trade has increased more than tenfold since 1985. The Bank of International Savings reports on foreign exchange portfolio changing proprietor in the value of USD 1500 billion daily. This figure approaches the annual performance of the German economy. Money markets turned to be rather sensible by means of their deregulation and liberalization. The extraordinary mobility of capital reacts immediately to any difficulties observed in the real sphere. A striking effect is the exchange rate sensibility of foreign exchanges reflected in the foreign exchange crises of Mexico in 1994 and Asia in 1997-98.

The scope of action of certain governments declined significantly in global economy. The level of exchange rates and that of interests cannot be determined independently. This decreases the possibility to regulate the boom. As regards the budgetary policy the scope of action is also rather strained.

Globalization involves both positive processes and risks in the respect of Hungary’s economy. The fee level remaining far below that of Western Europe and the closeness to Western markets induced several foreign companies to hold filials in Hungary in the past years. The settling of these companies induces a higher level and more competitive production culture at the domestic companies as well. Getting capital easier may support their development. Capital investments flown to Hungary contributed to the financing of the balance of payments to a large extent in the nineties, by means of the liberalized capital market. At the same time the USD 15 billion portfolio of investments is influenced by the fluctuations of international money markets in an increased degree. This may endanger the financing of the balance of payments from time to time.

Globalization takes place paralel to the different development dynamics of the certain regions in the world. The average growth of world economy amounted 1.9 percent in our decade until recently, remaining far below the 2.9 figure of the previous decade. In the next medium-term period the tendencies having started in the early eighties are expected to continue. Widely known economy research institutes (IMF, OECD, Institute for Economy Research of France, Institute for Economy Research of Germany) suppose 2.5-3 percent growth for the developed industrial countries and for the countries of the European Union. As regards newly industrialized Asian countries the effects of the foreign exchange crisis 1997 are expected to calm down by 2000 and a lower-than-earlier but rather dynamic path of 5-6 percent growth is supposed in this group of countries. Countries of Africa, the Near East and Latin America may increase less dynamically, by 3-5 percent whereas the concomitant figure of Middle Europe is expected to amount 3.5-4 percent by foreign economy research institutes.

Liberalization and deregulation stimulated considerably the international trade originating more and more from the dynamic increase of trade within multinational companies (among filials). In the nineties 1 percent growth of the GDP was accompanied by 2.5-3 percent increase of imports and exports in the EU. The dynamics of foreign trade is expected to exceed the rate of economic growth significantly in the following years as well. However, the great flexibility of the nineties resulting from deregulation and liberalization is expected to moderate in the next medium term period. The average growth of 2-3 percent will be accompanied by 5-6 percent extraction in exports. The earlier 5 percent dynamics of exports (having remained below the average then) may be maintained in Europe however. This would mean the maintenance of compatibility. In other words, the slow contraction of Europe in the world trade would stop.

This favorable continuity cannot be considered as a certainty recently since the higher profitability of the financial sphere impedes furthermore the financability of productive activities. There are significant international economic conflicts appearing by reason of reducing subventions in agriculture, the further liberalization of trade, services and capital flows. In the background of the latter the interests of multinational firms and investors confront with that of national ventures and national economic policy purposes. As regards the increase of market competition and financial speculations in some countries or groups of countries we cannot preclude the possibility of crises similar to that of Mexico 1995 or the industrializing countries of Asia 1997. In order to avoid such situations, anomalies of the real sphere have to be sold rapidly and correction measures cannot be delayed. Should a regional crisis break out still, significant international actions are needed to control unfavorable processes.

As regards international factors influencing the development of Hungary the most decisive for us is the growth of developed industrial countries and mainly that of the EU. In the next medium term (four-five years’) period the tendencies having started in the eighties are expected to continue in these countries. Namely, economy and foreign trade are supposed to be up by 2.5-3 percent and 5-6 percent respectively annually.

Hungary’s join to the EU countries is subjected to the condition that economic growth should significantly exceed that of the developed countries. The economic development of Hungary was paralel to the average of Western European countries in the 20th century except in the period of 1957-78 when it exceeded the latter considerably. By reason of international experiences lower developed countries with favorable external and internal conditions may approach to developed ones by means of taking over the developed technology. This can be seen in the industrializing countries in Asia in the second half of the century. Following the transformation losses of past years’, privatization and developed technology flowing in the country mean a potential possibility for Hungary’s economy to start a joining growth path in the following years.

The past years’s dynamic and export oriented growth of companies amounting to one third of the business sphere facilitate the join. This sector characterized mainly by the significant presence of foreign (Western European) capital indicated an annual economic growth of 15 percent in the average in the period of 1993-96 whereas they exports increased threefold. The second third of the business sphere includes companies with a 3 percent annual growth only. Their exports however increased by 20 percent annually. Further expansion of these sectors may recover economy. By reason of past years’ experiences their contribution to the GDP may incline by 8-10 percent.

Considering the 40-45 percent recent ratio of the business sphere in the GDP and the growth of other sectors (financial ventures, state budgetary institutions, households) decreasing the growth of the GDP we may conclude to a 5.5-6.0 percent potencial growth of national economy in the next years. This means that the join to developed regions is a realistic possibility for Hungary in the case of favorable external and internal conditions.

The realization of results compared to this potential possibility depends strongly on the successful compensation of balance risks involved by rapid growth.

By reason of the first, optimistic variant of ECOSTAT referring to the medium term development of Hungary external economic conditions will support the join of our economy in the concomitant period. The recent Asian crisis will calm down, countries of the region start to grow again. The average growth of developed industrial countries is expected to be rather counterbalanced although at a lower rate than earlier. Supposing all these the total GDP of world economy may increase by 3-4 percent. As regards Germany and France determining the development of Europe a growth of 2.5-3.0 percent is expected. Neither do the prospects of other European countries remain considerably below these figures. An annual increase of 5.5-6 percent may be projected for international trade (services included). This figure meets the slowly inclining trend of past decades, however it remains below the striking values of the nineties. The earlier import demand intensity of the United States, Japan, the Asian industrializing countries and developing regions is expected to decline. The about 5 percent dynamics of exports of Europe can be maintained however.

The schedule of Hungary’s EU join is expected to meet recent conceptions. The total membership can be dated to 2002 or somewhat later. The closeness of the EU membership would stimulate direct capital investors with the result of a gradual increase of foreign capital inflow in the annual amount of USD 3 billion. It would be easy to finance thus the occasional deficit of the balance of payments by means of the economic recovery. In fact, the external depts of Hungary could be decreased further.

An important item of the condition system is a more intensive economic policy stimulating ventures in the favorable situation of the external economy. In the scope of this policy tax and duty burdens should decrease resulting in the expansion and modernization of productive capacities in ventures. Productivity would also increase and the specific decrease of labor force costs would incline the international compatibility of the Hungarian venturer sphere. Economic recovery accompanied by increased export orientation enables the stability of the external balance.

The growth surplus increases the taxable values. The ratio of the deficit of state budget compared to the GDP does not deteriorate thus, it may even improve. The loss of prosperity deriving from the decline of the households’ social security benefits may be compensated by the income increase originating from the higher growth.

By means of this external condition system and economic policy, Hungary’s economy may indicate a dynamics of 5.5-6 percent in the yearly average of the following medium term period at an accelerating rate. This dynamic variant is supported by the continuous growth of the accumulation ratio projected to increase from the 26.5 percent figure of 1996 to 34 percent by 2002. Investments should increase furthermore dynamically by 10 percent in a yearly average paralel to the 4 percent average incline of consumption accordingly. The annual 13-14 percent growth of exports and imports is accompanied by the USD 1.3-1.4 billion deficit of the balance of payments. This figure can easily be financed by the inflow of active capital. The about 2-3 percentage points gradual moderation of inflation per year is accompanied by the gradual decline of tax burdens of the budget enabling thus the assistance of the export oriented structure of economy besides the improvement of both the amount and the ratio of the deficit of the budget.

Foreign fee work and the expected development of small and medium companies are important factors of the successful outcome of the export offensive. Our recent study refers only to these topics. By reason of our experiences it can be stated however that the export ability of small- and medium-size companies has to be improved by central measures.

The above mentioned growth path as a whole presents a possible way of Hungary to begin the join to the EU. This development variant is thought to be optimistic and even realistic. However, we have to mention the risk that policy stimulating ventures would not succeed. In that case the decrease of tax rates does not induce the adequate widening of the taxable value (e.g. due to the relatively slow expansion of production). Revenues of the state budget decrease whereas the deficit grows. The growth of the deficit of the state budget induces inflation and increases state depts. The central bank decreases the money supply in order to stop the above process. This results in the increase of interests and the drop of private investments and finally the moderation of economic development.

A greater deficit of the state budget cannot be fully financed domestically. It increases thus the deficit of the balance of payments which has to be declined by fiscal restriction measures to a financable amount again. This variant indicates a strogly cyclic (stop-go) growth path in economy. The attempt of dynamism is followed by the deterioration of the balance which enforces restriction measures of economic policy.

This growth path is rather similar to the development characterizing Hungary’s economy in the past two decades when the attempts to dynamize economy induced a significant deterioration of the external balance. This path enables a moderate growth of 4.0-4.5 percent in the average. The intensity of the stop-go effect is moderated by the advantages that structural changes of economy have already taken place and recovery is not accompanied by the reproduction of an obsolete structure but a modern and competitive one.

We would like to mention here an interesting topic of our future long term projection. By reason of recent surveys and conclusions drawn from them ECOSTAT expects the growth rate of GDP per head to be rather stabile in international comparisons on the long term. As regards overall historic trends there are two significant differences observable in certain periods. Namely in the so called reconstruction periods after a war and in the case of other favorable conditions so called joining periods may develop. Growth rates of economy are higher than average in both cases. A joining up period can be observed in the contemporary history of Hungary in the period of 1967-1978 with a growth rate of 5.6 percent. Development results and tendencies of 1997 and 1998 suggest a long-lasting reconstruction period following the losses of the transformation crisis of the nineties. The growth rate is expected to exceed the average again. Neither the begin of a long-lasting joining up period can be excluded after that in the case of utilizing the advantages of the EU join.

The EU membership is one of the main factors of the economic join of Hungary. Even the close possibility of it influences the amount of direct capital flowing in the country, the settlement of multinational companies, their investments and export performances. Should the date of the join exceed significantly the expected termin of 2002, this delay decreases the inflow of active capital, impedes the growth rate of investments and the growth of exports will be lower as well. This case would enable a moderate, 4.0-4.5 percent growth path without larger fluctuations for the next medium term period. At the same time certain informations on the prolonged delay of the join would give reason for an other economic policy instead of the direct preparation for the EU membership. E.g. this different economic policy would try to hold economy on a higher growth path by regaining a part of domestic markets and strengthening vertical economic connections in Hungary.

A sudden and long-lasting deterioration of the external economy, a so called ‘havary’ variant is not considered to be a realistic possibility in our projection. Should economic conditions suffer a long-lasting and drastic deterioration in the respect of Hungary due to unexpected reasons, economic policy would need special and individual measures to manage this new situation. They cannot be projected on the merits so we do not want to discuss this topic.

The three variants outlined by ECOSTAT present no election alternatives since the purpose is to realize the conditions of the first variant setting about the join. At the same time unfavorable external conditions or the failure of economic policy stimulating ventures in order to dynamize economy would drive economic development of Hungary into the destination of the second or third variant. This gives reason for considering conceptionally the measures needed in the case of an unfavorable external condition system.