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Economy

Hungary’s painful economic restructuring finally appears to be paying off. After seeing their living standard decline through the first half of this decade. Hungarians can at last be optimistic that they will be able to approach the economic level of their Western neighbours in the coming years.

Because Hungary started to liberalise its economy under socialism long before the other countries of Eastern Europe, both Hungarians and foreigners had high hopes for a rapid rise in the standard of living when Communist structures were dismantled. But instead of producing a solid market economy leading to greater growth, unemployment soared from virtually nil to as high as 14% in the spring of 1994, inflation topped 35% and the forint lost half its value from 1992 to 1996.

Hungary’s economic titans recognised early on that they could not rely on the local population to restructure antiquated companies and infrastructure, funds and modern management techniques had to come from outside the country. After a slow start, Hungary’ approach to privatisation, which relies heavily on foreign investment, has been a driving force behind the turnaround.

Hungary has received more than 90% of all capital by foreign companies investing in Eastern Europe. Taking advantage of the country’s low wages and skilled-labour base, European, Asian and North American companies have established automobile-assembly plants, high-tech electronics factories and light manufacturing works in the country. As a result, unemployment has dropped to just over 10%, though most of the jobs are in relatively prosperous Budapest and Transdanubia. The north-east part of Hungary, traditionally an economic ‘black hole’ , has largely been passed over, and unemployment still reaches double digits in many towns and villages there.

Paying on motorways was also a new thing in the middle of the `90s. Nowadays there are 7 motorways in Hungary, which can be used after buying a ticket.

To a large extent Hungary had no option but to rely on foreign investors to pay for the country’s modernisation. There simply wasn’t any money left in the government’s coffers. During the spendthrift days of the former regime, little heed was paid to the consequences of the cost of Hungary’s relatively generous social services and leisure facilities.

Over-borrowing – and the over-spending of hard currency – resulted in Hungary’s foreign debt rising to a dangerously high level. Foreign debt climbed throughout the 1990s from around US$30 billion but is now falling thanks to decent exports and the continued inflow of foreign capital. Money that should be going to cushion Hungarians against hard-hitting economic reforms has instead been redirected to pay off the country’s interest payments.

Reducing the national social-security bill, a big drain on the country as the birth rate remains static and the population gets older, has been one of the toughest challenges facing the government. Because of the large role the so-called shadow (or black market) economy plays, Hungary simply cannot raise enough funds through taxes to meet its budget commitments. Domestic interest rates have been forced up as the government has lured savings away from citizens into bonds and bills.

Despite the political risk in chopping back on social-security benefits, government officials in Hungary remain committed to tough anti-spending measures. Domestic borrowing has declined, allowing interest rates to drop to 24% - well below their high of 34% in 1995.

Hungary joined the EU on May 1, 2004.