Commission Report 2002 (Hungary)

2.2. Summary of economic developments since 1997

On the basis of far-reaching institutional and structural reform, Hungary achieved robust economic growth and falling unemployment, combined with sustainable external deficits. After several years of structural reforms that encouraged the emergence of a dynamic foreign-led export sector, the focus of economic policy since 2000 has shifted towards an immediate improvement of living standards through wage and pension increases, and of infrastructure through public investment, at the cost of a higher budget deficit. The resulting strong domestic demand, both private and public, helped to moderate the decrease in economic growth since the second half of 2001. Average real GDP growth between 1997 and 2001 was strong, at an annual rate of 4.5%. The current account deficit peaked at 4.9% of GDP in 1998, and has continuously declined since. The low external deficits were easily financed, thanks to the continuous inflow of foreign direct investment (FDI). Inflation, which had remained relatively high, only started to decline after the depreciating exchange rate target was replaced by an inflation target as the main monetary policy anchor in mid-2001. The general government deficit measured according to harmonised EU standards (ESA95) has averaged 5.4% of GDP since 1997. Over the period since the Opinion, general government gross debt has declined rapidly, from 64.2% of GDP in 1997 to 53.1% in 2001. A fiscal stabilisation package during the period 1995-1998 effectively balanced the economy, and laid the foundations for rapid growth thereafter. Since 2001, fiscal policy has turned expansionary to support growth during the economic slowdown. The introduction of a mixed public-private three-pillar pension system in 1998 constituted a major step towards long-term sustainability of public finances. Reforms of the health-care system have been initiated, but need to be further advanced.

Having started the process of structural reforms at an early stage of transition, Hungary is already at an advanced stage of second-generation reforms. first-generation reforms with regard to trade and price liberalisation and to the privatisation of the manufacturing base and the financial sector had been broadly completed by 1997. The country is now addressing the challenge of reducing the gap between Hungarian living standards and the EU average, by expanding the growth base of the economy, where the most important factors include an improved infrastructure and increased labour market participation. Plans for structural reform had been bundled since 2000 in the so-called ``Szechenyi Plan`, which has achieved some first positive results with regard to tourism infrastructure, access to financing for SMEs and private housing construction. The new government has announced that it will continue the successful measures of the Plan in modified versions, concentrating the available funds primarily on SME development and preparations for EU accession. At a later stage, the Plan would be integrated into the country`s National Development Plan. Infrastructure shortcomings, the main obstacle to opening up the disadvantaged regions to economic development, are being tackled through a massive public motorway construction programme, while the restructuring of the railway system proceeds rather slowly. A few remaining enterprises are being restructured by the privatisation agency for later sale, while a number of enterprises earmarked as ``strategic` are intended to remain in state ownership. The opening up of the telecom market in early 2002 was a step forward in price liberalisation, and will continue with the partial opening up of the electricity market as of January 2003, according to the electricity law adopted in December 2001. However, public transport, household energy and certain publicly subsidised pharmaceuticals remain tightly regulated. The business climate continues to be good, and is supported by the high degree of credibility attached to the country`s proven track record of successful macro-economic management over the review period.

Hungary has made good progress in catching up with the EU average income level. GDP per capita in purchasing power standards (PPS) was 51% of the EU average in 2001. However, there are significant regional disparities: per capita GDP in PPS of the central region around Budapest was 76% of the EU average, while that of the northern great plain stood at a modest 32%. The official unemployment rate in the Northern Hungary region in 2001 remained at 8.5% (with evidence suggesting a considerable level of hidden unemployment adding to this ratio) while Budapest and the industrialised west of the country enjoy virtually full employment. The employment rate at the national level has been steadily increasing from 52.7% in 1997 to 56.6% in 2001, generating a downward trend in the unemployment rate from 8.7% to 5.7%. While male and female employment have both grown steadily, the female employment rate has grown faster, starting from a lower level. Female unemployment (5.1%) was even lower than male unemployment (6.3%) in 2001. At 44.8%, the share of long-term unemployment in total unemployment is high and points to a rather low active labour reserve. This share has constantly declined from a 50.8% peak in 1998. Youth unemployment as a percentage of the 15 to 24 year old population stood at only 3.9% in 2001, a rate that had also constantly fallen from 6.1% in 1997. Pensions and wages, and in particular the statutory minimum wage - which was lifted to a level above half of the national average wage in two steps - increased substantially in 2001 and 2002. Living standards for the low-skills segment of the workforce have improved accordingly. However, a strong continuation of this trend could also develop opposite effects, by pricing out parts of the lower skilled work force in certain industries.

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