The process of macroeconomic adjustment and structural reform in Hungary during 1995–97 deserves attention for several reasons.

The process of macroeconomic adjustment and structural reform in Hungary during 1995–97 deserves attention for several reasons.

  • First, the performance of the Hungarian economy improved dramatically during this period, correcting some long-standing macroeconomic imbalances that had deepened through 1994.

  • Second, this improvement reflected primarily a consistent set of macroeconomic and structural policies implemented by the authorities, rather than favorable external developments. Thus, there are important lessons to be learned for other countries facing macroeconomic imbalances.

  • Third, while the process of macroeconomic adjustment and convergence toward European market economies is not yet over, an important phase in the transition can be regarded as completed. This phase was initiated with the economic adjustment package enacted in March 1995, and has continued with the support of a precautionary Stand-By Arrangement with the IMF during March 1996-February 1998.

During this period, several momentous steps in the integration of the Hungarian economy with the rest of Europe and the industrial countries community have taken place. In May 1996, Hungary acceded to the Organization for Economic Cooperation and Development (OECD); in July 1997, it was invited to join the North Atlantic Treaty Organization (NATO); and, in the same month, the European Commission recommended that the European Union (EU) start membership talks in the near future. These steps cast future economic developments and issues in Hungary in a new perspective. While economic developments are never characterized by quantum leaps, the end of the Stand-By Arrangement with the IMF provides a symbolic turning point in Hungary’s recent economic history.

This paper is organized as follows. After providing a bird’s-eye view of economic developments in Hungary before the March 1995 stabilization, Chapter II discusses the main features of the stabilization package, outlines the macroeconomic and structural policies that characterized 1995–97, and describes the outcome of those policies. The chapters that follow can ideally—and somewhat schematically—be grouped under two headings: Chapters IIIVII deal with “macroeconomic” issues, while Chapters VIIIXII focus on “structural” issues.

Four main macroeconomic issues are explored. Chapter III looks at Hungary’s external balance and at the appropriate contribution to investment that, in such a country, should come from external saving. This is a key issue, as historically, Hungary’s external debt has been high and has often constrained the country’s growth potential during the 1990s. Chapters IV and V focus on the fiscal balance, describing the process of fiscal consolidation during 1995–97, outlining the main structural measures undertaken in the fiscal area, and assessing the areas where further reform appears to be needed. Chapter VI deals with growth. In Hungary, the output shock related to the collapse of central planning was not as severe as in other transition economies. The subsequent recovery had, until recently, also been more modest. The chapter discusses the factors behind this performance and looks at Hungary’s growth potential in the medium term. The last chapter on macroeconomic issues, Chapter VII, looks at inflation. One achievement of the 1995–97 adjustment program is that, despite a sizable up-front depreciation of the forint and increases in administered prices, the increase in inflation was only temporary: indeed inflation fell below 20 percent in 1997, which had rarely happened during the 1990s. Progress has been less rapid, however, in the most recent period. Chapter VII also discusses the factors that sustained inflation in the 1990s and looks at the prospects for disinflation in the future.

The structural chapters focus on goods, labor, and financial markets. Chapters VIII and IX deal with two developments that have increased competitiveness and the medium-term growth potential of the Hungarian economy: privatization (mostly through the sale of enterprises to foreign investors) and the increased openness of the economy. Chapter X focuses on the labor market, discussing its degree of flexibility compared with other transition and nontransition economies, and highlighting the rigidities arising from overly generous and poorly targeted social programs. Chapters XI and XII discuss the factors behind increased competition and efficiency in financial markets, including the recent strengthening of the banking system, and the progressive liberalization of the capital account of the balance of payments. Finally, Chapter XIII looks at the policy agenda for the future.