Economy of Hungary

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Economy of Hungary
Currency	Hungarian Forint (HUF)
Fiscal year	Calendar Year
Trade organisations	WTO, OECD, EU
Statistics
GDP	$196.6 bn
GDP growth	0.5% (2008)
GDP per capita	$19,799 (2008 IMF est.)
GDP by sector	agriculture (2.9%), industry (36.9%), services (60.2%) (2008 est.)
Inflation (CPI)	3.0% (February 2009)[1]
Unemployment	8.4% (January 2009)[2]
Main industries	mining, metallurgy, construction materials, processed foods, textiles, chemicals (especially pharmaceuticals), motor vehicles
External
Exports	$106.6 bn (2008 est.)
Export goods	machinery and equipment 61%, other manufactures 29%, food products 7%, raw materials 2%, fuels and electricity 2%
Imports	$86 bn f.o.b (2007 est.)
Import goods	machinery and equipment 52%, other manufactures 36%, fuels and electricity 8%, food products 3%, raw materials 2% (2003)
Main import partners	Germany 25.4%, Russia 9%, China 7.6%, Austria 6.1%, Netherlands 4.4%, France 4.4%, Italy 4.3% (2008)
Gross external debt	$140 billion (June 2008)
Public finances
Public debt	76% of GDP
Revenues	$67.7 bn (2008 est.)
Expenses	$73 bn (2008 est.)
Economic aid	recipient, $302 million in available EU structural adjustment and cohesion funds (2004), and $25 billion as an IMF-arranged financial assistance package
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars

The economy of Hungary is a medium-sized, structurally, politically and institutionally open economy in Central Europe and is part of the European Union's (EU) single market. Like most Eastern European economies, the economy of Hungary experienced market liberalisation in the early 1990s as part of the transition from socialist economy to market economy. Hungary is a member of the Organisation for Economic Co-operation and Development (OECD) since 1995^[3], a member of the World Trade Organization (WTO) since 1996^[4], and a member of the European Union since 2004^[5].

Contents 1 History of the Hungarian Economy 2 Hungarian economy today 2.1 2008-2009 Financial Crisis 3 Physical properties 3.1 Natural Resources 3.2 Infrastructure 4 Sectors 4.1 Agriculture 4.2 Industry 4.2.1 Automobile production 4.3 Services 4.3.1 Tourism 5 Currency 5.1 The fulfillment of the Maastricht criteria 5.2 Exchange rates 6 Socio-economic characteristics 6.1 Human capital 6.2 Social stratification 6.3 Institutional quality 7 State participation 7.1 Monetary policy 7.2 Fiscal policy 7.3 Tax system 8 External relations 8.1 The EU 8.2 Rest of the world 9 References 10 See also 11 External links

[edit] History of the Hungarian Economy

Hungarian economy prior to World War II was primarily oriented towards agriculture and small-scale manufacturing. Hungary's strategic position in Europe and its relative lack of natural resources 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.

Social and economical changes have already taken place starting from 1968. This year the Hungarian Socialist Workers' Party (HSWP) introduced the New Economic Mechanism which had three main fields.

• State enterprises were more free in investments and hiring. They also got greater autonomy in internal decisions thus making them more efficient. Limited number of small private businesses were allowed to operate in the private sector, too.
• Prices were put in three categories: fixed prices determined by the ministry (mainly raw materials), limited prices (which included basic aliments and could move in a certain price window), and completely free-floating prices.
• Liberalised import which improved the efficiency of enterprises and made Hungary a part of international flow of goods.

Starting from the '70s Hungary's foreign debts rose from $1 billion in 1973 to $15 billion in 1993 because of the wide social welfare system, consumer subsidies, and unprofitable state enterprises ^[6] which were core elements of HSWP First Secretary János Kádár's so-called "Goulash communism". Joint venture law was introduced as well as income tax and Hungary built a two-tier banking system^[6].

Because of these preliminary changes, the change of regime in 1989 went quite smoothly in Hungary. The government and the opposition met in the Hungarian Round Table Talks from March to September 1989 where the ground rules of the transition were declared. The first democratic elections were held in April 1990 and brought the victory of Hungarian Democratic Forum (MDF) with József Antall as prime minister.

GDP growth, inflation, and active population in Hungary 1990-2010

GDP per capita in USD at 2000 market prices in Hungary 1991-2010

General government gross debt in Hungary amongst other countries and the EU

Reaching 1995, Hungary's fiscal indices deteriorated: foreign investment fell as well as judgement of foreign analysts on economic outlook. ^[7] Due to high demand in import goods, Hungary also had a high trade deficit ^[8] and budget gap, and it could not reach an aggreement with the IMF, either. ^{[7] [9]} After not having a minister of finance for more than a month, prime minister Gyula Horn appointed Lajos Bokros as Finance Minister on March 1, 1995. He introduced a string of austerity measures (the "Bokros Package") on March 12, 1995 which had the following key points: one-time 9% devaluation of the forint, introducing a constant sliding devaluation, 8% additional customs duty on all goods except for energy sources, limitation of growth of wages in the public sector, simplified and accelerated privatization. The package also included welfare cutbacks, including abolition of free higher education and dental service; reduced family allowances, child-care benefits, and maternity payments depending on income and wealth; lowering subsidies of pharmaceuticals, and raising retirement age.

These reforms not only increased investor confidence ^[10], but they were also supported by the IMF and the World Bank^[11], however, they were not welcome widely by the Hungarians; Bokros broke the negative record of popularity: 9% of the population wanted to see him in an "important political position" ^[12] and only 4% were convinced that the reforms would "improve the country's finances in a big way" ^[7]

In 1996, the Ministry of Finance introduced a new pension system instead of the fully state-backed one: private pension savings accounts were introduced, which were 50% social security based and 50% funded.^[11]

[edit] Hungarian economy today

In 2006 Prime Minister Ferenc Gyurcsány was reelected on a platform promising economic “reform without austerity.” However, after the elections in April 2006, the Socialist coalition under Prime Minister Ferenc Gyurcsany unveiled a package of austerity measures which were designed to reduce the budget deficit to 3% of GDP by 2008.

Hungary, as a member state of the European Union may seek to adopt the common European currency, the Euro. To achieve this, Hungary would need to fulfill the Maastricht criteria.

Because of the austerity program, the economy of Hungary slowed down in 2007. However, due to many large investments, GDP growth may improve to 2.8-4.0 percent in the second half of 2008. In foreign investments, Hungary has seen a shift from lower-value textile and food industry to investment in luxury vehicle production, renewable energy systems, high-end tourism, and information technology.

[edit] 2008-2009 Financial Crisis

On 27 October 2008, Hungary reached an agreement with the IMF and EU for a rescue package of US$25 billion, aiming to restore financial stability and investors' confidence.^[13]

Because of the uncertainty of the crisis, banks gave less loans which led to a decrease in investment. This along with price-awareness and fear of bankruptcy led to a fallback in consumption which then increased job losses and decreased consumption even further. Inflation did not rise significantly, but real wages decreased. ^[14]

This chart shows forint exchange rates for the British pound (GBP), euro (EUR), Swiss franc (CHF), and the U.S. dollar (USD) from June 2008 to September 2009. It indicates that a relatively strong forint weakened since the beginning of the financial crisis, and that its value has recently taken an upward turn again.

Compared to the euro the forint was at peak on June 18, 2008 when 1Ft was 0.00436€ and 1€ was 229.11Ft. The forint was worth the least on March 6, 2009; this day 1Ft was 0.00316€ and 1€ was 316Ft).

Compared to USD, most expensive/cheapest dates are June 22, 2008 and March 6, 2009 with HUF/USD rates 0.00694 and 0.00401 respectively.

The fact that the euro and the Swiss franc is worth a lot more in forints than they did before affected a lot of people. According to The Daily Telegraph, "statistics show that more than 60 per cent of Hungarian mortgages and car loans are denominated in foreign currencies"^[15].

Though the forint has got stronger, some economists believe that "The Hungarian forint is too strong in the current economic environment". ^[16]

[edit] Physical properties

[edit] Natural Resources

Hungary's total land area is 93,030 km² along with 690 km² of water surface area which altogether makes up 1% of Europe's area.

Nearly 75% of Hungary's landscape consists of flat plains. Additional 20% of the country's area consists of foothills whose altitude is 400 m at the most; higher hills and water surface makes up the remaining 5%.

The two flat plains that take up three quarters of Hungary's area are the Great Hungarian Plain and the Little Hungarian Plain. Hungary's most significant natural resource is arable land. About 70% of the country's total territory is suitable for arable farming; of this portion, 72% (50% of the country's area) is covered by arable land. Hungary lacks extensive domestic sources of energy and raw materials needed for further industrial development.

19% of the country is covered by forests. These are located mainly in the foothills such as the Northern and the Transdanubian Medium Mountains, and the Alpokalja. The composition of forests is various; mostly oak or beech, but the rest include fir, willow, acacia and plane.

In European terms, Hungary's underground water reserve is one of the largest. Hence the country is rich in brooks and hot springs as well as medicinal springs and spas; as of 2003, there are 1250 springs that provide water warmer than 30 degrees.^[17] 90% of Hungary's drinking water is mostly retrieved from such sources.^[18]

The major rivers of Hungary are the Danube and the Tisza. The Danube also flows through parts of Germany, Austria, Slovakia, Serbia, and Romania. It is navigable within Hungary for 418 km. The Tisza River is navigable for 444 km in the country. Hungary has three major lakes. Lake Balaton, the largest, is 78 km long and from 3 to 14 km wide, with an area of 592 km². Lake Balaton is Central Europe's largest lake and a prosperous tourist spot and recreation area. Its shallow waters offer summer bathing and during the winter its frozen surface provides facilities for winter sports. Smaller bodies of water include Lake Velence (26 km²) in Fejér County and Lake Fertő (82 km² within Hungary).

[edit] Infrastructure

Hungary has 31 058 km of roads and 11 motorways of 754 km. There are also several airports in Hungary, five of which are international. In 2006 the railroad system was 7685 km long (2791 km electrified).

[edit] Sectors

[edit] Agriculture

Agriculture accounted for 3% of GDP in 2007 and along with the food industry occupied 11,7% of the labor force (1997). The Hungarian agriculture is virtually self-sufficient and 20-25% of exports come from agriculture and related industries. About 10% of Hungary’s total area is under cultivation due to its favourable conditions including continental climate and the plains that make up about half of Hungary’s landscape. The most important crops are wheat, corn, sunflower, potato, sugar beet, canola and a wide variety of fruits (notably apple, peach, pear, grape, watermelon, plum etc.). Hungary has several wine regions producing among others the worldwide famous white dessert wine Tokaji and the red Bull’s Blood. Another traditional alcoholic drink is a fruit brandy called pálinka.

Mainly cattle, pigs, poultry and sheep are raised in the country. The livestock includes the Hungarian Grey Cattle which is a major tourist attraction in the Hungarian National Park of Hortobágy. An important component of the country’s gastronomic heritage is foie gras with about 33000 farmers engaged in the industry. Hungary is the second largest world producer and the biggest exporter of foie gras (exporting mainly to France).

Another symbol of Hungarian agriculture and cuisine is the paprika (both sweet and hot types). The country is one of the leading paprika producers of the world with Szeged and Kalocsa being the centre of production.

[edit] Industry

The main sectors of Hungarian industry are heavy industry (mining, metallurgy, machine and steel production), energy production, mechanical engineering, chemicals, food industry and automobile production. The industry is leaning mainly on processing industry and (including construction) accounted for 29,32% of GDP in 2008^[19]. Due to the sparse energy and raw material resources, Hungary is forced to import most of these materials to satisfy the demands of the industry. Following the transition to market economy, the industry underwent restructuring and remarkable modernization. The leading industry is machinery, followed by chemical industry (plastic production, pharmaceuticals), while mining, metallurgy and textile industry seemed to be losing importance in the past two decades. In spite of the significant drop in the last decade, food industry is still giving up to 14% of total industrial production and amounts to 7-8% of the country's exports^[20].

Nearly 50% of energy consumption is dependent on imported energy sources. Gas and oil are transported through pipelines from Russia forming 72% of the energy structure, while nuclear power produced by the nuclear power station of Paks accounts for 12%.

[edit] Automobile production

Hungary is a favoured destination of foreign investors of automotive industry resulting in the presence of General Motors (Szentgotthárd), Suzuki (Esztergom) and the largest Audi factory (Győr) in Central Europe.

Mercedes-Benz has announced in 2008 that it will build a factory in Kecskemét. They signed the land sales contracts with the city council of Kecskemét in 2009 and plan to roll out the first cars in 2013.^[21]

17% of the total Hungarian exports comes from the exports of Audi, Opel and Suzuki. The sector employs about 90.000 people in more than 350 car component manufacturing companies.^[22]

[edit] Services

The tertiary sector accounted for 64% of GDP in 2007 and its role in the Hungarian economy is steadily growing due to constant investments into transport and other services in the last 15 years. Located in the heart of Central-Europe, Hungary’s geostrategic location plays a significant role in the rise of the service sector as the country’s central position makes it suitable and rewarding to invest.

The total value of imports was 68,62 millard euros, the value of exports was 68,18 milliard euros in 2007. The external trade deficit decreased by 12,5% since the previous year, easing down from 2,4 billion to 308 million euros in 2007. In the same year, 79% of Hungary’s export and 70% of the imports were transacted inside the EU.^[23]

[edit] Tourism

Tourism employs nearly 4 million people and the total income from tourism was 4 billion euros in 2008.^[24] One of Hungary’s top tourist destinations is Lake Balaton, the largest freshwater lake in Central Europe, with a number of 1,2 million visitors in 2008. The most visited region is Budapest, the Hungarian capital attracted 3,61 million visitors in 2008.

Hungary was the world’s 26th most visited country in 2007.^[25] The Hungarian spa culture is world-famous, with thermal baths of all sort and over 50 spa hotels located in many towns, each of which offer the opportunity of a pleasant, relaxing holiday and a wide range of quality medical and beauty treatments.

[edit] Currency

The currency of Hungary is the Hungarian forint (HUF, Ft) A forint consists of 100 fillérs, however, these have not been in circulation since 1999, they are only used in accounting. There are six coins (5, 10, 20, 50, 100, 200)^[26] and six banknotes (500, 1000, 2000, 5000, 10000 and 20000)^[27]. The 1 and 2 forint coins were withdrawn in 2008, yet prices remained the same as stores follow the official rounding scheme ^[28] for the final price.

[edit] The fulfillment of the Maastricht criteria

	Convergence criteria					Obligation to adopt 4	Target date		Euro coins design
Country 1	Inflation rate²	Government finances		ERM II membership	Interest rate ³		set by the country	recommended by the Commission
		annual government deficit to GDP	gross government debt to GDP
Reference value 5	max 3.0%	max. 3%	max. 60%	min. 2 years	max 6.4%	NA	NA	NA	NA
Hungary	3.5%	2.6%	69%	0 years	7.5%	yes	2010-2014	NA	in progress

¹ Current EU member states that have not yet adopted the Euro, candidates and official potential candidates.
² No more than 1.5% higher than the 3 best-performing EU member states.
³ No more than 2% higher than the 3 best-performing EU member states.
⁴ Formal obligation for Euro adoption in the country EU Treaty of Accession or the Framework for membership negotiations.
⁵ Values from May 2007 report [1]. To be updated each year.

The austerity measures introduced by the government are in part an attempt to fulfill the Maastricht-criteria.

The austerity measures include a 2% rise in social security contributions, half of which is paid by employees, and a large increase in the minimum rate of sales tax (levied on food and basic services) from 15 to 20%. While it was widely recognised that something needed to be done, investors have levelled criticism at the program for emphasizing tax increases as opposed to spending cuts.^{[citation needed]}

The Hungarian Central Statistical Office reported a decrease in real wages in the first five months of 2007. Gross average income rose by 7%, while net average income increased by 1%. When adjusted for inflation, this corresponded to a 7% decline compared with real wages a year before. The drop was due mainly to the 2006 austerity package; however, state measures to combat the black economy may also have had an impact on pay developments.

Hungary's low employment rate remains a key structural handicap to achieving higher living standards. The government introduced useful measures in the key areas, namely early retirement, disability and old pensions.

[edit] Exchange rates

You can check exchange rates with graphs of past rates at Google Finance.

[edit] Socio-economic characteristics

[edit] Human capital

[edit] Social stratification

[edit] Institutional quality

[edit] State participation

[edit] Monetary policy

The Hungarian organization responsible for controlling the country's monetary policy is the Hungarian National Bank (Hungarian: Magyar Nemzeti Bank, MNB) which is the central bank in Hungary.^[29] According to the Hungarian Law of National Bank (which became operative in 2001. – LVIII. Law about The Hungarian National Bank^[30]), the primary objective of MNB is to achieve and maintain price stability. This aim is in line with the European and international practice.

Price stability means achieving and maintaining a basically low, but positive inflation rate. This level is around 2-2.5% according to international observations, while the European Central Bank „aims at inflation rates of below, but close to 2% over the medium term”.^[31] Since Hungary is in the process of catching up (Balassa-Samuelson effect), the long-term objective is a slightly higher figure, around 2.3-3.2%.^[32] Therefore the medium term inflation target of the Hungarian National Bank is 3%. ^[33]

Concerning the exchange rate system, the floating exchange rate system is in use since 26th February, 2008, as a result of which HUF is fluctuating in accordance with the effects of the market in the face of the reference currency, the euro.

[edit] Fiscal policy

In Hungary, state revenue makes up 44% and expenditure makes up 45% of the GDP which is relatively high compared to other EU members.^[34]This can be traced back to historical reasons such as socialist economic tradition as well as cultural characteristics that endorse paternalist beaviour on the state’s part, meaning that people have a habitual reflex that make them call for state subsidies^[35]. Some economists^[36] dispute this point, claiming that expenditure ran up to today’s critical amount from 2001, during two left-wing government cycles.^[34]

Along with joining the EU the country undertook the task of joining the Eurozone as well. Therefore, the Maastricht criteria which forms the conditionalies of joining the Eurozone acts as an authoritative guideline to Hungarian fiscal politics.

Although there has been remarkable progress, recent years’ statistics still point at significant discrepancies between the criteria and fiscal indices.

General government deficit has shown a drastic decline to -3.4% (2008) from -9.2% (2006)^[37]. According to an MNB forecast however, until 2011, the deficit will by a small margin fall short of the 3.0% criterion.^[38]

Another criterion that is found lacking is the ratio of gross government debt to GDP which, since 2005, exceeds the allowed 60%^[39]. According to an ESA95 figure, in 2008 the ratio increased from 65.67% to 72.61%, which primarily results from the requisition of an IMF-arranged financial assistance package^[40].

Hungary’s balance of payments has been negative since 1995, around 6-8% in the 2000s^[41] reaching a negative peak 8.5% in 2008.^[41] Still, current account deficit will expectedly decrease in the following period, as imports will diminish compared to exports as an effect of the financial crisis.^[42]

[edit] Tax system

In Hungary, the 1988 reform of taxes introduced a comprehensive tax system which mainly consists of central and local taxes, including a personal income tax, a corporate income tax and a value added tax^[43]. Among the total tax income the ratio of local taxes is solely 5% while the EU average is 30% ^[44].

The central tax system consists of three components:

1. Personal Income Tax

The taxation of an individual is progressive, determining the tax rate based on the individual’s income:

             Since 1 of July, 2009 
    Earnings	                 Tax rate
 0 - 1 900 000 HUF	            18%
from 1 900 001 HUF	            36%

Source: [2]

According to the income-tax returns of 2008, 14,6% of taxpayers was charged for 64,5% of the total tax burdens ^[45].

2. Corporate income tax

Corporate tax is fixed at 16% of the positive rateable value, with an additional tax called solidarity tax of 4%, the measure of which is calculated based on the result before tax of the company (the solidarity tax has been in use since September, 2006). The actual rateable value might be different is the two cases.

3. Value added tax (VAT)

The rate of value added tax in Hungary is 25% since 1 of July, 2009. At the same time, reduced rates of 18% came into practice, concerning basic food (milk, flavoured milk, dairy products, corn, flour) and distance heating ^[46]

[edit] External relations

[edit] The EU

Hungary joined the European Union on 05/01/2004 after a successful referendum^[47] among the EU-10. The EU's free trade system helps Hungary, as it is a reatively small country and thus needs export and import.

After the accession to the EU, Hungarian workers could immediately go to work to Ireland, Sweden and the United Kingdom. Other countries imposed restrictions^[48].

The European Union had assisted Hungary with pre-accession funds in before full entry in 2004, and with structural and cohesion funds since entry (some 6800 HUF between 2006 and 2013).^[49]

[edit] Rest of the world

[edit] References

Jon Adam: The transition to a market economy in Hungary

[edit] See also

• Hungarian National Bank
• List of Hungarian companies
• List of banks in Hungary
• Budapest Stock Exchange
• BUX
• Economy of Europe
• Hungary
• Tourism in Hungary

[edit] External links

• Hungarian National Bank
• Hungarian Central Statistical Office
• Hungarian Financial Supervisory Authority
• Hungarian Competition Authority
• Ministry of Finance
• OECD's Hungary country web site
• OECD economic survey of Hungary
• Hungarian IT: Coping With Economic Transition And Globalisation
• The Political and Economic Transition in Hungary
• CIA The World Factbook

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