Hungary [antikvár]

Abstract The objective of this country study is to assess the transformation of the Hungarian economy given the country's intention to join the European Union (EU) during the early years of the next century. To this end, it analyzes economic developments in Hungary in recent years, in particular since 1997, and describes institutional improvements and structural reforms implemented during this same time period. The report is based on the findings of several missions that visited Hungary in 1998 and early 1999. The report's main conclusion is that Hungary is one of the top performers among the Central European transition countries and is well placed to accede the EU. Hungary's achievements in constructing the elements of a market economy are impressive. The enterprise and financial sectors are now mostly private, with strong foreign participation, and increasingly robust and efficient. Labor markets have facilitated fundamental restructuring of the economy while maintaining low levels of unemployment by European standards. Significant progress has also been made in privatizing key enterprises in the infrastructure sectors and setting up modern regulatory systems for these sectors. Hungary is also proving to be competitive in international markets, in particular, most importantly, in the EU market; today, three-quarters of Hungary's exports are to the EU. Export performance, especially since 1996, has been strong, specifically in high-technology intensive and human capital intensive products. While Hungary benefited from good initial conditions compared to other transition economies, its strong performance is mainly the result of the successful stabilization program implemented in the mid-1990's, and of deep structural reforms that began earlier in the decade and accelerated in subsequent years. The report also concludes that the challenge facing Hungary today is to consolidate stabilization gains and finalize the structural reforms to ensure that the economy remains competitive and that income is placed on a rapid and sustainable convergence path with the EU average. In the macroeconomic arena, in order to maintain the ongoing investment expansion while at the same time avoiding the emergence of external imbalances, the authorities should strengthen over the medium-term their fiscal adjustment effort. In the structural and institutional area, a three prong approach is required. First, policymakers should design and implement reform programs for the health sector, local government, and in infrastructure. While some of these new reform programs are not directly related to the legislation that Hungary needs to adopt with EU membership, they are, however, essential to maintain growth and/or macro stability over the medium-term. Second, the authorities should complete the successful structural reform efforts already underway in key markets and sectors such as pensions, the financial sector, the labor market and external trade. Finally, policymakers need to refine and strengthen the institutional framework in public administration, environment and agriculture to improve compliance with EU directives, and ensure a smooth and successful negotiation and entry into the EU's single market. The report is composed of two parts. Part 1 is the summary report with the main findings and conclusions. Part 2 is the main report that provides, against the backdrop of prospective membership in the EU, an analysis and assessment of the macroeconomic framework, the medium-term fiscal stance, and selected sectors and markets of the Hungarian economy. Part 2 has 10 chapters and is structured as follows. Chapter 1 provides an overview of recent economic developments, and analyzes prospects for growth and income convergence with the EU. In particular, it discusses the medium-term macro framework that, based on additional fiscal adjustment over the medium-term, would both maintain external balances and achieve