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Hungary, Economy

economic reform program, economy of Hungary, direct foreign investment, Hungarian government, EBRD

Before World War II, the economy of Hungary was based primarily on agriculture. What little industry the country had was almost entirely destroyed during the war. After the Communists took power in 1948, the Hungarian government took control of the economy and set forth a series of long-range economic development plans in which the emphasis was on industrialization, particularly the development of heavy industry. However, these plans were not well matched with Hungary’s resources and capabilities, and the new industries were not able to meet the government’s high production goals. In the late 1950s and 1960s the government was forced to readjust its plans and place more emphasis on agriculture and the manufacturing of consumer goods. In 1968 the government introduced an economic reform program known as the New Economic Mechanism (NEM), which allowed for limited decentralization of the economy. The first years of the NEM were considered a success; the production of consumer goods rose, and Hungarians experienced a substantial improvement in their standard of living. However, opposition among Soviet and Hungarian Communist leaders prevented the full development of the program and the NEM ended in the 1980s.

As the economy continued to decline throughout the 1980s, Hungary began turning to Western nations for trade and economic assistance. At the same time, the government began to encourage the formation of private businesses and partnerships with foreign companies. When non-Communists came to power in 1990, the country accelerated the pace of free-market reforms. The government was particularly successful at attracting foreign investment, and by 1993 Hungary accounted for more than half of all direct foreign investment in Eastern Europe. Numerous state-owned companies were transferred to private ownership as part of a widespread privatization program, and by 1993 the private sector’s share of gross domestic product (GDP) was about 50 percent. When socialists gained the majority of parliament in 1994, the pace of privatization and other economic reforms slowed. However, in May 1995 the government passed legislation to accelerate the sale of government-owned enterprises and prepare for the sale of public utilities and a number of major industries, including steel and electricity.

The 1999 budget showed revenues of $18.5 billion and expenditures of $20.8 billion. The GDP in 2000 was $45.6 billion, and per-capita income was about $4,550. Inflation in Hungary has remained high and resistant to Finance Ministry efforts to reduce the rate more quickly. However, it did drop slightly, from more than 28 percent in 1995 to 18 percent in 1996. Between 1990 and 1996 Hungary received $15 billion in foreign investment. Hungary is a member of the World Trade Organization (WTO), the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the European Bank for Reconstruction and Development (EBRD). In May 1996 it became a member of the Organization for Economic Cooperation and Development (OECD). Hungary is an associate member of the European Union (EU), and in December 1997 the EU invited Hungary to begin the process of becoming a full member.

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Article key phrases:

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