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Hungary Index

In the Seventh Five-Year Plan period (1986-90), the leadership expected the economy to supply consumers with a greater assortment of foodstuffs, to improve the country's balance of payments by raising exports, and to increase productivity and profitability. Planners called for net material product to grow by 15 to 17 percent over the 1985 level. The plan also called for industrial production to rise by 14 to 16 percent over the 1981-85 plan period; agricultural output to rise 7 to 10 percent; domestic consumption, 13 to 16 percent; real per capita income, 9 to 11 percent; and both imports and exports, 16 to 18 percent.

In 1986 Hungary's national income grew by only 0.5 percent, far short of the planned 2.3 to 2.7 percent. Both industrial production, which rose 1.8 percent, and agricultural production, which increased 1 percent, were far short of planned levels. At the same time, domestic consumption jumped 3 percent, consumer prices increased 5.3 percent, and per capita real income rose 0.7 percent. Investment grew by 5.1 percent, the maximum envisaged in the plan. Compared with the previous year, Hungary's imports in 1986 rose by 2.5 percent, while exports fell by 2 percent.

In 1987 national income grew as planned by about 2 percent. Industrial production rose by 3.7 percent, higher than the planned 2 to 2.5 percent, but bad weather caused agricultural output to fall far short of the 1986-90 plan target. In 1987 investment grew by 6 percent, approximately six times the planned amount, while per capita income remained at the 1986 level. The government increased prices on energy and foodstuffs sharply in 1987 and increased prices on 53 percent of the items sold in the country in January 1988. The consumer price index for the first eight months of 1988 was 16 percent higher than for the same period in 1987, while the official inflation rate was 17.7 percent. The government also devalued the forint an average of 13 percent against Western currencies in 1987.

Hungary has enjoyed favorable treatment from international capital markets despite disappointing growth and continued deterioration in external accounts. At least one author has pointed out that Western banks have shown the greatest confidence in countries such as Hungary that have good debt-servicing records, regardless of the countries' economic problems. In the latter half of the 1980s, Japanese banks increased their loan portfolio and sought to make low-risk loans to East European countries, particularly Hungary. Hungary took on loans to restructure its industry, renovate power stations, implement its energy rationalization program, upgrade its telecommunications system, and finance foreign trade.

The current value of Hungarian exports declined between 1984 and 1986, and the country ran a US$548 million trade deficit in 1986 followed by a US$390 million deficit in 1987. As a result of a deteriorating convertible-currency current account, Hungary's debt more than doubled in two years from US$8.6 billion in 1985 to US$18 billion in December 1987, and the country's ratio of debt to convertible-currency exports reached 338 percent by 1986. In May 1988, the government signed a US$350 million standby credit agreement with the IMF and announced strict austerity measures. In the first nine months of 1988, Hungary's convertible-currency trade netted a US$200 million surplus, rebounding from the US$470 million deficit it showed in the same period in 1987. The surplus marked the first time since 1981 that Hungary's foreign trade with developed countries was balanced.

In 1989 the government sought to achieve large trade surpluses with convertible-currency markets that would enable the country to repay its foreign debt and import raw materials and technology. Hungary could create those surpluses only by importing more raw materials or using existing resources more efficiently. Hungary's major supplier, the Soviet Union, was experiencing shortfalls in oil and other raw-materials production that were forcing it to slow and even reduce exports. Thus, Hungary again was forced to turn to convertible-currency markets to secure additional raw materials. Because neither Hungary nor the Comecon countries generally had the technology and know-how that were necessary to improve efficiency and increase the output of products marketable in the West, Hungary also had to turn to the West for technology. The leadership understood that realizing the benefits of economic relations with the West required significant further improvement of the economic system. At the Thirteenth Party Congress in March 1985, the leadership reaffirmed its commitment to continue economic reforms that promised to improve efficiency and enhance the competitiveness of Hungary's exports. In the last years of the Kadar era, the government had enacted many such reform measures, but the implementation and enforcement of these measures were uneven. With the emergence of a new leadership under Karoly Grosz in 1988, Hungary appeared poised to enact and implement more dramatic reforms, including political changes, that could radically alter the country's economic life in the 1990s.

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Hungary's economic reforms proceeded so rapidly in the 1980s that works on the country's economic system have become outdated shortly after appearing in print. The most comprehensive description of Hungary's economic reforms available is Paul Marer's "Economic Reform in Hungary" in East European Economies: Slow Growth in the 1980s, a publication of the United States Congress. Marer's East-West Technology Transfer: Study of Hungary also examines Hungary's economic reforms and provides detailed analyses of Hungary's major economic sectors and its trade with the Comecon countries and the West. Janos Kornai's article "The Hungarian Reform Process: Visions, Hopes, and Reality" provides a sober assessment of the reforms by a leading Hungarian economist. Also interesting are Paul Hare's "Industrial Development of Hungary since World War II" and "The Beginnings of Institutional Reform in Hungary." (For further information and complete citations, see Bibliography.)

Data as of September 1989

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