Business > Hungarian Economy in the European Union

The nation of Hungary is a country that has come a long way in a short period of time. In the years since the fall of communism in 1989, Hungary has managed to establish an extremely prosperous economy and population. Because of this, Hungary has developed into one of Eastern Europe’s most attractive business environments. The level of political, structural and economic stability it has achieved demonstrates the success of its transition into a modern market economy. This stability has allowed for Hungary to become a member of numerous international organizations, such as the OECD, NATO, and most recently the European Union in May 2004. Hungary’s membership in the EU, although short so far, has brought about many changes in the nation, both positive and negative. The nation has always served as a crossroads that connects Eastern Europe to Western Europe, and this coupled with EU membership will only allow Hungary’s economy to grow more.

In 1990 when the non-Communists came to power, Hungary accelerated the pace of free-market reforms. The government was successful in attracting foreign investment, and by 1993 Hungary accounted for more than half of all foreign direct investment in Eastern Europe. Since 1989, the private sector has grown from approximately 20% to over 80% of the GDP, and nearly 2,000 state-owned companies were privatized. One of the main attractions of Hungary is that it has a developed western-style business infrastructure available at one of the lowest costs in Central and Eastern Europe. The main industries of the Hungarian are in industrial production of high-tech products such as computers, telecommunication equipment, and electronic consumer goods like televisions. Another important industry in Hungary is the automotive industry with motor vehicle manufacturing and automotive parts manufacturing. These industries account for over half of Hungary’s industrial output.

In the early 1990’s as Hungary’s economy began to grow, the nation wanted to join the European Union. An application for membership was submitted in 1994 and we were finally made a full member in May 2004. For Hungary to become a member, we had to meet many conditions set forth in the Copenhagen Criteria; these included economic, political, and infrastructure conditions. For the first condition, Hungary had to demonstrate, stability of institutions guaranteeing democracy, the rule of law, human rights and respect and protection of minorities. Hungary had met this condition by having free and fair democratic elections, a constitution that guarantees freedom of expression and civil rights. The nation also had anti-discrimination laws that meet international standards as well as a well-developed framework protecting the interests of minorities and promoting their cultural. The second condition Hungary had to meet was demonstrating the existence of a functioning market economy with the capacity to cope with competitive pressure and market forces within the EU. This was achieved through price and trade liberalization, an enforceable legal system with property rights for individuals, an economic policy that has enhanced the performance of the market economy, and a well-developed financial sector with the absence of any significant barriers to entry and exit. These have all improved the efficiency of the economy. Hungary also has a highly skilled and educated labor force. Funds from the EU were used for new infrastructure projects like improving airports, roads, and rails, all of which greatly helped the nation. The final criteria Hungary had to meet was to demonstrate the ability to take on obligations of membership including adherence to the aims of political, economic and monetary union. To meet this, Hungary made advancements in a number of areas, like social policy, justice and home affairs, telecommunications, culture, the energy market, environmental laws, consumer and health protection, and with the budget and financing issues, all to meet the requirements. Hungary has achieved all of the EU requirements and was thus finally made a full member in 2004.

Since joining, Hungary has had many positive experiences. The nation has enjoyed increased stability, growth, and welfare. Security has been increased because we now can rely on other EU nations for support and protection. New markets are now open for Hungarian goods and new opportunities for the inflow of foreign capital from member states have occurred as well. Because of the new markets, exports and imports are the highest they have ever been. Hungary has access to different development funds of the EU since we are new to the union and are also not a terribly wealthy nation compared to other European countries. Finally, Hungarian citizens can enjoy easier, visa-free travel between member nations because of open borders. All of these and other positive benefits of joining the EU will help Hungary to continue to prosper in the years to come.

Even though there are many positive aspects of joining the EU, Hungary has also experienced some negative effects. Within the EU, citizens are allowed to live in one nation and to work freely in other EU nations. Some of the nations that have been in the EU longer are not allowing Hungarian citizens to work in their nations yet because they are afraid Hungarian laborers will work for cheaper wages and take away many jobs from their citizens. This is expected to change in the next few years, but for now this discrimination is taking away possible jobs from Hungarians. Another negative factor is the rise in illegal immigrants entering Hungary. Citizens of poorer and less prosperous nations surrounding Hungary are seeking refuge in Hungary to escape conditions in their nation. One of the requirements of joining the EU was to provide refuge to these people, but there are an enormous number of people attempting this, causing a huge problem for Hungary. In addition to this, even though Hungary’s economy is growing and prospering, we still have high inflation and, because of this, we cannot yet join the European Monetary Union (EMU) and adopt the euro. Originally, we were aiming to join the EMU in 2008, but this date had to be pushed back to 2010 because of our monetary problems. Finally, some Hungarians feel as if they are losing their national identity. The purpose of the EU is to achieve a more unified Europe with similar policies in every nation. Because of this assimilation, nations are becoming more and more alike in Europe. Even though this is occurring, each nation can still maintain their own national identity and unique culture.

In order to understand how Hungary has evolved both before and after joining the European Union, an analysis of the country’s business environment should be conducted. Porter’s National Diamond examines factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry. All of these elements relate to the success that the company has both domestically and globally. They successfully guide analyses of internal and external markets. Recently, in 1995-6, Hungary developed a program that involved privatization and liberalization, leading to a rise in foreign direct investment. This helped factor conditions such as land and capital. Upon choosing where to allocate capital, Hungarian investors now had the option to put their money towards companies in the domestic market. This capital allowed for expansion and the improvement of production processes.

While producing more efficiently and at higher volumes with the creation of new plants, Hungary’s exports became more competitive. Capital from countries abroad also has a meaningful role in its competitiveness. Companies with foreign-ownership contribute 70% of Hungary’s exports. 29% of these exports come from US investors. The location of Hungary itself is also an important factor condition when considering its opportunities for trade. It has Europe to the west and developing countries to the southeast. It can serve as the distribution center for these southeastern developing countries. They tend to manufacture products with cheap labor for the developed countries to the west that capitalize in innovation and R & D. Hungary now becomes a channel for the imports/exports of these goods. Hungarian exports took a hit, however, when the country abandoned its peg exchange rate and allowed for a +/- 15% in 2001. This allowed for inflation of the forint by almost 18% in less than a year. The economy as a whole did not suffer though, due to a strong tourist industry, boosted wages, and overall consumer demand. Labor is a factor condition contributing to Hungary’s competitiveness as well.

The labor force is composed of 65% in services, 27% in industry related jobs, and 8% in agriculture, as of 2005. The labor force is composed of about 3.88 billion people. They are well educated and specialize in engineering, medicine, and science. This knowledge brings a competitive edge to Hungary in R & D. Many students are pursuing education in the US and Germany, while becoming bilingual. A global competitive advantage can be achieved in the future when these students become professionals and can act as liaisons between multinational firms. Wages and productivity in Hungary are lower than Western Europe yet higher than countries in the southeast. Thus, countries in the west can outsource some of their labor to Hungary. Even more beneficial to Hungary is the fact that their labor, although cheaper, is still skilled. The jobs outsourced can contribute to Hungary’s economy as ideas for innovation and process improvements are spilled over. The country has the knowledge and Foreign Direct Investment (FDI) to be able to remain competitive.

The demand conditions within Hungary’s domestic market are important in terms of global success. The Information and Communications Technology market represents a large segment in Hungary’s overall domestic market. The country recognizes that in the 21st century innovations in technology are very important. Hungary has responded to consumer demand for mobile phones and has triggered market penetration for Hungary in June 2002. By penetrating the mobile phone market, Hungary can compete for market share in countries not developed enough to have their own share in the market, but who have citizens wealthy enough to demand mobile phone services. Also, in response to Hungarian consumers, is a rise in advertising on the Internet. 150 Hungarian companies are selling their products via E-Commerce. These responses, which meet the needs of the domestic market, help the economy to grow, as consumers world wide purchase Hungarian products.

Sometimes, domestic markets are slow in recognizing global trends. A market that Hungary is currently penetrating is bio cultivation. Hungarian organic farmers have taken note of the growing demand for healthier living amongst consumers. However, due to the 10-15 % price difference in organic products versus those normally found in the market, only wealthier consumers can afford to buy them. Most of Hungary’s consumers opt not to buy these products. The exportation of organic products has been successful but in order to continue to grow, they need the support of their local retailers and wholesalers. Food retailers in Hungary tend to compete in price and not quality of their products.

Hungary’s automobile industry is another strong competitor in the global market. Automobiles account for a quarter of its exports. OEMs (Original Equipment Manufacturers) have produced demand for a number of automobile parts. Thus, the supporting industries, those that manufacture an array of parts such as cables, camshafts, and cylinder heads, have been able to gain market share. These locally produced parts represent 65 % of the total market but have been increasing. These parts manufacturers have also been able to produce exports for automobile assembly plants in Western Europe. There are many multinational automobile companies located in Hungary as well. Companies such as Audi Motor, Suzuki, and Lear Automotive have plants in the region. The local manufacturers can produce for these well known companies. Since they are multinational, the parts manufacturers may even be able to export to the Audi Motors, Suzuki’s and Lear Automotives located throughout Central Europe. This market access will become even easier now that Hungary is a part of the EU.

When making predictions on Hungary’s future success after entering the EU, it is helpful to take a look at the general business practices in the country. The firms structures and existing regulations must be taken into consideration because they can both help and hurt market opportunities. Hungary has a convertible currency and repatriation of business profits. Therefore FDI is both encouraged and feasible. Privatization in Hungary over the past 10 years has also contributed to economic success. Private proprietors and strategic investors have become the owners of previously state owned companies who were under the management of only a few government figures. These newly privatized companies have begun to grow and become competitive under the management of profit hungry investors. This allows for more firm rivalry now that individuals own different companies as opposed to a cluster of companies under one government entity. Unfortunately, monopolies are not totally avoided as some of the state-owned large firms were sold to investors as a monopoly package. To be able to compete on a global scale, domestic competition needs to be present in order for companies to push each other to innovate. Now that some of the privatized companies have had success in expansion and innovation, they have been taking the initiative to partake in the FDI of other nations. If companies within Hungary’s borders look to each other for ideas on market strategy, this motivation for FDI will be shared across industries. Not only are some firms interested in FDI, but in green field investments. This type of investment means that the companies will not buy existing companies on foreign land, but instead establish new firms abroad. This will allow them not only to build supporting operations within the plant itself, but also to have the freedom to construct the building to cater to the nature of their business. After entering the EU, Hungary will be able to pursue FDI easier in all member countries. Great opportunities will exist in the 10 new developing countries where land and labor are both cheap.

The beginning of the political and social transition in Central and Eastern Europe in the 1980s and 1990s opened new perspectives for the region to join the club of democratic countries of the continent. After the changes, European integration became one of the top priorities of Hungary's foreign, security and economic policies. Not like many other controversial debates on crucial political issues concerning the future of the country, Hungarians agreed from the very beginning that after centuries of isolation the historic opportunity of re-integration into the European mainstream of economic and cultural progress has arrived. Hungary became a member of the European Union on May 1, 2004, which will eventually influence the country on different aspects. In this part of the paper, I will evaluate my country’s economic status after it became a member of the European Union, regarding its GDP, currency value, import and export rates, unemployment, and other policies and objectives. The main theme is what happened to the country’s overall economy after Hungary’s integration to the EU, based on the Diamond of the National Advantage, such as the labor, wages, economic strategies, structures, the government and other factor conditions. In its drive to join the EU, it has concentrated on completing the transformation agenda while establishing a sustainable, carefully managed macroeconomic environment.

The gap with the rest of the EU has narrowed and further advances are expected. GDP growth slowed down to just below 3 percent in 2004 but is expected to accelerate progressively in the coming years. Meanwhile, significant macroeconomic imbalances have emerged. Both the fiscal and the external current-account deficits are large and unsustainable. In addition to fiscal consolidation, reforms are needed notably in the health sector, sub-national finance, and public administration. When we look at the recent economic developments- based on the data in the World Bank website- we would notice that output growth slowed toward the end of 2004, and early indicators for 2005 suggest that this slowdown is persisting and likely to lower growth rates this year relative to last. Inflation has declined form 14% in 1998 to 7% in 2004. The National Bank of Hungary (NBH) has begun easing monetary policy; after hiking its interest rates to 12.5% in November 2003 to prevent another attack on the forint as well as to curb domestic inflation and a growing current account deficit, the NBH reduced its interest rates gradually to 11%, reflecting in part upward pressures on the exchange rate. The Government is making efforts to decrease the size of the deficit by rationalizing employment in the public sector and cutting the deficit of central-budget-funded institutions; it has also formulated a proposal for healthcare reform. Meanwhile the World Bank has been assisting the country in various ways for EU accession. The Bank’s assistance program for 2003-2005 will focus on a program of analytical and advisory activities on the following priority areas which are; sub-national development, which will enable the country to receive and administer EU structural funds. Energy; the World Bank is hoping to continue to give support to help Hungary complete the energy-policy requirements. Social exclusion and poverty; the program helps to develop financing mechanisms to ensure the sustainability of successful projects and pilots; and provide policy advice on specific sectors such as education and housing.

Healthcare financing; the Bank will provide support for the reform of healthcare financing to help ensure quality health services. Environment; by strengthening compliance with Hungarian and EU environmental standards, such as the ongoing Municipal Wastewater project is part of a EUR100-million investment aimed at reducing the pollution load in the Danube River basin. Knowledge Economy; by developing the Knowledge Economy, e-Europe, e-government, e-commerce, enhanced research and development, innovation, and education will be a focus of future Bank activity in selected accession countries including Hungary and center of excellence, which is a part of the overall framework for Bank support to EU accession countries, Hungary with enhanced interaction with other countries in the sub-region would be one of the regional centers of excellence.

The Convergence Program of Hungary-2004 indicates that, in 2001-2002, the Hungarian economy diverted from the investment and export driven growth path. Consumption growth over that of GDP, and real wage growth exceeding that of productivity created a situation, which definitely called for a change in economic policy. From 2003, the focus has been shifted from the stimulation of domestic demand to the improvement of competitiveness, and to the reduction of the increased budget deficit. In the 2003 budget, the government set up the conditions for a stricter fiscal policy than before, which, beside the improvement of the internal balance, aimed to promote a more favorable environment for enterprises.

According to the web site of the Ministry of Finance of Hungary, the export volume has strongly increased since last year, due to external conditions turning more favorable and improved competitiveness. Import growth was primarily related to the import of consumer goods (cars and pharmaceutical products) and increasing imports of machinery for investment and production purposes. Real GDP grew by 4% in 2004. However, growth slowed in the second half of the year, with investment affected by domestic cyclical factors. These recent developments and the expected lower EU growth in 2005 suggest that GDP growth will moderate in 2005 to around 3.7 percent. The deficit of the trade balance amounted to EUR 4.3 billion. Nevertheless, the gap between the growth of exports and that of imports has begun to narrow since July 2003. The dynamic growth of exports was maintained in 2004, while imports increased slower than exports, primarily due to the lower growth of household consumption. As of April 29, 2005, the exchange rates are as follows: 252.40 Hungarian Forint per Euro, and 0.0039 Euro per Hungarian Forint. The Hungarian currency continued its appreciating trend to be strengthened. In 2004 due to tax changes related to EU harmonization, increase in preferential VAT rates and energy prices, the disinflation of the last few years will temporarily come to a halt. On a medium term, inflation will start to gradually decelerate again.

The key settings of Convergence Program include increase of employment and productivity, which require improvement in competitiveness. The Government intends to improve competitiveness with the use of numerous economic policy instruments. Of these, modification of the proportions of income redistribution in favor of the entrepreneurs, easing of the tax burden, and reduction of the financing needs of the public sector are of fundamental importance. The program also states that increased efficiency and productivity is one of the main sources of competitiveness, requiring continuous innovation, development and investments from the corporate sector. In order to promote this, the Government provides support to R & D activities, and, in the framework of SMART Hungary and Economic Competitiveness Operational Programme, which provides access to financial sources from the EU; it allocates funds for various development and capital investment projects. The reduction of the deficit and the scope of the general government are expected to encourage investments by the private sector, and promote more effective capital allocation. A lower tax burden (primarily in relation to labor) contributes to an increase of competitiveness through cost reduction and release of additional resources. On the other hand increasing competition arising from the accession to the European Union will probably force enterprises to increase wages only in accordance with productivity growth. According to an article on website of Inter fax Europe; Hungary's unemployment rate was 5.9% and the labor force participation was 60.3% in 2004.

As Hungary enters the European Union, it should see much economic success. The country as a whole has been growing greatly over the past years, and its admission to the EU should perpetuate this growth. Out of the new ten nations added to the European Union, Hungary ranked highly in terms of the criteria required for admission. The nation’s admittance into the EU will bring with it many victories. Innovation will grow due to an increase in market accessibility. Also, with so much inward foreign direct investment pouring into the country, Hungary will soon be able to participate in a great amount of outward foreign direct investment. The highly developed nations of the European Union will serve as role models for strategy and success, and perhaps, in the future, Hungary will become a role model itself. I was born and lived in Hungary from 1975 to 1994, and back then, joining the EU seemed like a distant dream for most of us. I'm really pleased to see my country I love so well demonstrating along with several of its neighbors, how far a society can come from an isolated dictatorship to a prospering democracy, ready to embrace an international alliance based on openness and cooperation rather than hollow ideology and mistrust.

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