Hungary WT/TPR/S/40 
 Page 1 
 
 
I. THE ECONOMIC ENVIRONMENT 
(1) BACKGROUND  
1. Hungary was the first of the former CMEA (COMECON) countries to begin broad economic 
reforms, as early as 1968, however, its active transi tion to a market economy began in 1988.  That 
year marked the establishment of the right of all companies and private persons to engage in trade 
with the convertible currency area, the adoption of legislation on foreign direct investment (FDI) 
guaranteeing investment protection and providing investment incentives, and the introduction of 
comprehensive price and tax reforms, including in troduction of a VAT and personal income tax.  
Building on these and other measures, in 1990 the ne wly elected Government launched its Programme 
for National Renewal, the key objectives of which were macroeconomic stabilization and structural 
adjustment aimed at transformi ng Hungary into a market economy.1    
2. The Programme included a fiscal austerity pack age designed to reduce a rising budget deficit, 
measures to contain Hungary's large and growing fo reign debt, and a tight monetary policy to check 
inflation.  Among the main structural features of the Programme were greater currency convertibility, 
the further opening of the economy to international trade ( inter alia  through reduction in the scope of 
import licensing) and intensification of links with  western Europe, together with new legislation 
designed to facilitate FDI, a radical privati zation programme, and additional price and wage 
liberalization.  Other reforms included major cha nges in company law, the establishment of a stock 
exchange and the adoption of a new competition law.   Moreover, the reduction of subsidies and the 
process of deregulation were accelerated.  These reforms were supplemented by social policies 
designed to alleviate the heavy unemployment initia lly associated with structural adjustment and 
facilitate the restructuring of the Hungarian economy. 
3. Following the collapse of trade with former CMEA members, one of the most striking 
features of Hungary's structural adjustment during the period under review has been the continuing 
shift in trade to more advanced industrialized countries, particularly EU members, and CEFTA 
partners.  Clearly, this re-orientation has been gr eatly facilitated by the Europe Agreement and the 
creation of the CEFTA as well as by the WTO Agreem ents.  Other important features of Hungary's 
structural adjustment have been the liquidation of a large number of companies owing to the 
implementation of a strict bankruptcy law, large-scale privatization of state-owned enterprises and a prominent role for foreign direct investment, not ju st in privatization but in the transition process 
generally.  Privatization, together with much reduced levels of subs idization, has greatly reduced the 
intrusiveness of the Government in economic decisions. 
4. Among the principal macroeconomic developmen ts at the beginning of the period under 
review was a marked deterioration in overall ec onomic performance, notably a 15% decline in real 
GDP during the period 1991-93, as well as high infla tion and rising unemployment.  Another major 
development was the emergence of large and rapi dly increasing budget and current account deficits.  
However, the introduction of a major stabilization package in March 1995 appears to have restored 
macroeconomic balance, paving the way for su stained improvements in Hungary's economic 
performance. 
                                                      
1 GATT (1991). 
 WT/TPR/S/40 Trade Policies Review 
Page 2 
 
 
(2) MACROECONOMIC DEVELOPMENTS  
5. The Programme for National Renewal notw ithstanding, among the most noteworthy 
developments since the previous Trade Policy Revi ew in 1991 was the sharp initial deterioration in 
Hungary's macroeconomic performance (Table I.1) .  Real GDP shrank by a cumulative amount of 
roughly 15% during the period 1991-93, before growi ng by 2.9% in 1994.  Real domestic demand 
also declined in 1991-92, before growing by 9.9% and 2.2% in 1993 and 1994, largely associated with 
a surge in imports. At the same time , although on the decline, the rate of inflation remained within the 
range of 20-30%, which may well have contri buted to Hungary's poor output performance.2  I n  
addition, officially registered unemployment rose from 7.5% in 1991 to over 12% in 1993, before falling to 10.4% in 1994. 
6. Another major macroeconomic development was the emergence of a large and rapidly 
increasing budget deficit.  By 1994, the consolidat ed government deficit (excluding privatization 
receipts) reached 8.4% of GDP.  This development too may have adversely affected output.   By 
contributing to the gap between gross national saving and gross investment, which had greatly 
widened in 1993-1994 owing to the decline in gross national saving and rise in gross investment as a percentage of GDP,
3 the rise in the budget deficit also resu lted in a seriously deteriorating current 
account deficit, which rose to over 9% of GDP in 1994.  At the same time, gross government debt was 
in the range of 85-90% of GDP while net extern al debt was around 46% of GDP.  In early 1995, 
therefore, the Hungarian economy appeared to be on the brink of a debt trap, which threatened to 
result in rising net domestic and foreign indebtedn ess as a proportion of GDP as interest payments on 
government debt outstripped government revenues. 
7. Faced with this prospect, the Hungarian Gove rnment introduced a major stabilization package 
in March 1995.  The package contained several m acroeconomic elements, including a 9% devaluation 
of the Hungarian forint (Ft) and the establishment of a crawling peg exchange  rate regime, cuts in 
government consumption, and wage re straint, particularly in the public sector.  At the same time, a 
temporary import surcharge was imposed;  the surc harge, initially set at 8% from March 1995, was 
reduced progressively during 1996 and phased out by 1 July 1997.4  This package - which brought 
about a marked shift of resources from the domestic to the export sector on the supply side, together 
with a sharp reduction in domestic demand - const ituted an important turning point in Hungary's 
macroeconomic policy during the period under review. 
                                                      
2 According to Sarel (1996), slow progress in reducing inflation could have reduced Hungary's growth 
rate by two percentage points.   
 
3 The household saving rate increased sharply at the beginning of the transition period in 1990-91, 
thereby partially cushioning the economy from the decline in saving elsewhere, notably by enterprises.  This 
increase in household saving was due to the rise in the share of income going to households as wage indexation and increased social welfare contributions by employers eroded business profits.  High household saving during 
this period may also have been in response to inflation and associated capital losses on the stock of private 
wealth.  After 1991, however, the household saving rate halved within a two-year period before rebounding 
somewhat in 1994.  This drop was a key factor contributing to the deterioration in the aggregate saving-
investment balance in period 1993-94.  (See European Bank for Reconstruction and Development (1996), p. 82).  
 
4 This measure was notified to, and discussed in, the WTO Balance-of-Payments Committee 
(documents WT/BOP/R/3, WT/BOP/R/17 and WT/BOP/R/23).  Hungary's reserves at end-1994 were estimated 
at around seven months of imports in convertible currencies, on a rising trend.  The BOP Committee, in 
September 1996, concluded that there was no longer an "imminent threat of a serious decline in the level of 
Hungary's monetary reserves" (WT/BOP/R/17, paragraph 11). 
 Hungary WT/TPR/S/40 
 Page 3 
 
 
Table I.1  
Selected macroeconomic  indicators, 1991-97 
 1991 1992 1993 1994 1995 1996 1997 
Real economy (% change)        
Real GDP -11.9 -3.1 -0.6 2.9 1.5 1.0 3.5 
Real domestic demand -9.1 -3.6 9.9 2.2 -3.8 -0.8 2.9 
Of which:     Private consumption 5.6 0.0 1.9 -0.2 -5.7 -2.2 -2.0 
 Gross fixed investment -10.4 -2.6 2.0 12.5 1.2 -1.0 12.0 
Exports (real) of goods and services -13.9 2.1 -10.1 13.7 15.4 12.3 9.9 
Imports (real) of goods and servicesa -6.1 0.2 18.6 8.8 -0.7 6.6 9.3 
CPI (end-year) 31.0 24.7 21.1 21.2 28.3 19.8 18.2 
GDP deflator 26.0 21.5 24.2 19.5 24.2 20.9 17.1 
Employment -3.2 -10.6 -10.2 -5.2 -2.3 -1.8 .. 
Unemployment rate (end-year, in % of labour 
force) 7.5 12.3 12.1 10.4 10.4 10.5 .. 
Public finance (% of GDP)b        
  Consolidated government balancec -3.0 -6.2 -6.2 -7.6 -3.5 -0.8 -1.8 
    (Excluding privatization receipts)c -3.0 -7.0 -6.5 -8.4 -6.6 -3.1 -4.6 
  Primary balance, excluding privatizationd 2.9 -2.6 -2.9 -2.7 1.7 4.3 3.6 
  Public debt (central government) 74.1 78.5 89.7 87.1 85.2 72.4 66.2 
Money and credit (end of year, % change)e        
  Domestic credit 8.0 10.3 16.8 16.2 -0.8 28.3 .. 
  Broad money (M2) 29.4 27.3 16.8 13.0 18.5 20.9 19.8 
  M3 35.9 27.6 15.3 13.0 20.2 22.1 17.6 
  Interest rate (90-day treasury bill level,  
  end-year) 36.6 15.5 26.6 35.6 33.7 23.5 .. 
Gross national savingsf 18.1 15.3 10.6 14.4 20.4 22.4 23.4 
Gross investmentf 20.5 16.1 20.0 22.2 24.1 24.5 25.4 
Trade (% of GDP)        
  Exports of goods and services 32.6 31.4 26.4 28.9 34.4 39.8 .. 
  Imports of goods and servicesa 33.7 31.7 34.6 35.4 36.6 41.0 .. 
Balance-of-payments        
  Current account (% of GDP)f 0.8 0.9 -9.0 -9.5 -5.6 -3.8 -3.7 
     (US$ billion) 0.3 0.3 -3.5 -3.9 -2.5   -1.7 -1.7 
Reserves in convertible currencies        
  (National valuation of gold, US$ billion) 4.0 4.4 6. 7 6.8 12.0 9.8 9.1 
  (In months of merchandise imports) 5.2 5.2 7.1 7.2 9.4 7.0 5.6 
Foreign direct investment (net) in US$ billion 1.5 1.5 2. 3 1.1 4.5 2.0 2.0 
Gross external debt in convertible currencies 
(end-year)        
  In % of GDP 68.0 57.7 63.8 68.9 71.2 62.4 57.9 
  In US$ billion 22.7 21.4 24.6 28.5 31.7 27.6 26.5 
Net external debt in convertible currencies 
(end-year)        
  In % of GDP 43.7 35.1 38.8 45.8 36.8 32.2 30.2 
  In US$ billion 14.6 13.1 14.9 18.9 16.3 14.3 13.8 
Exchange rate (annual average)        
  Nominal effective rate (1990 = 100)g 88.8 84.9 81.3 72.0 56.1 48.1 47.5 
  CPI real effective rate (1990 = 100)g 111.6 120.9 132.1 131.0 125.9 128.6 132.3 
.. Not available. 
a In 1993, includes imports of military equipment fr om Russia in lieu of outstanding claims by Hungary. 
b The fiscal deficit in 1997 includes the cost of cleaning up the NBH balance sheet (about 1.5% of GDP);  this has to be deduct ed 
to facilitate comparisons with 1996. 
c The figure for 1997 includes the cost of  cleaning up the NBH balance sheet and add itional hedging costs on external debt;  th e 
figures for both 1996 and 1997 are also adjusted for some items (m ostly sale of assets) that shou ld be regarded as financing 
items. 
d Overall balance, excluding intere st expenditure and other debt charges.  1997 figures also exclude profit transfers from the NBH. 
e The growth rate for 1997 is relative to 1 January 1997. 
f The current account deficit is on a settlements basis and differ s from the saving-investment balance which is on a national 
accounts basis. 
g May figures for 1997. 
Source: Data provided by the Hunga rian authorities and the IMF.  WT/TPR/S/40 Trade Policies Review 
Page 4 
 
 
(i) Exchange rate and monetary policies 
8. Among the principal elements of the package were the immediate 9% devaluation of the 
forint and the adoption of a crawling peg exchange rate regime, set within a narrow band (2.25%) of a 
central parity related to a currency basket.  The basket initially consisted of 70% ECU and 30% US$, 
reflecting the shares of trade with EU and non-EU  countries;  beginning in 1997, the basket was 
changed to 70% Deutsche mark and 30% US$.  The crawling peg involved a pre-announced monthly 
devaluation of 1.9% from April to June 1995, 1.3% for the rest of the year (approximately the 
expected rate of inflation) and 1.2% in 1996.  Thus, after the blip attributable to the initial 9% 
devaluation, the crawling peg served as an effectiv e anchor for inflation expectations, the main aim 
being to secure a sustainable decline in inflation, through a gradual lowering of the rate of crawl, and 
therefore a more predictable macroeconomic policy environment.  The monetary authorities did not 
wish to achieve a faster pace of disinflation be cause of the perceived vulnerability of external 
equilibrium and economic growth.  There were fears th at if a lower rate of inflation were targeted by 
means of tighter monetary policy, with higher interest rates, the outcome would have been a strong real appreciation of the forint (as observed in 199 2-93), which would contribute to the erosion of 
Hungary's competitiveness and therefore to an uns ustainable deterioration in the current account 
deficit.  In the event, the real exchange rate has remained relatively stable since 1993 (Chart I.1).  At 
the same time, consistent with the crawling peg and reflecting an accommodating monetary stance, 
slightly positive real interest rate s have, by and large, been maintain ed so as not to discourage private 
saving.  
1991 1992 1993 1994 1995 1996 1997406080100120140Chart I.I
Nominal and real effective exch ange rate indices, 1991-97
Index; 1990 = 100
Source :  IMF Staff Country Report, October 1997.CPI-based real effective rate
Nominal effective rate
 
9. As a result of the new Act on foreign excha nge, which entered into force in 1996, and 
subsequent government decrees, all restrictions on current account transacti ons on residents and non-
residents alike were lifted.  The provisions of the Act are in line with the convertibility standard of Hungary WT/TPR/S/40 
 Page 5 
 
 
Article VIII of the Articles of Agreement of the International Monetary Fund, which Hungary 
accepted as of 1 January 1996.  The Hungarian author ities have indicated their intention of gradually 
liberalizing remaining restrictions in the Act,  especially those concerning short-term capital 
movements.  The foreign exchange regime was furt her liberalized as a result of Hungary's accession 
to the OECD and its adherence to the OECD Codes on Capital Movement and Current Account 
Transactions. 
10. With the National Bank of Hungary (NBH) having become fully independent on 1 
January 1997,  permanent financing of the governme nt deficit through the creation of money is now 
prohibited.  Moreover, the NBH no longer has obliga tions for the foreign debt of the Government. 
(ii) Fiscal policy 
11. Another main element of the March 1995 packag e was the consolidation of fiscal policy with 
a view to achieving a better balance between th is and monetary policy.  On the government 
expenditure side, large cuts were made, mainly thro ugh public sector wage restraint but also including 
reductions in the number of civil servants, as well as reduced social security payments, particularly 
family allowances.  As a consequence of these cu ts and further measures contained in subsequent 
budgets, the share of government expenditure in GDP fell from 54% in 1994 to 40.5% in 1996. 
12. The principal revenue-raising measures apart from the import surcharge (which gave a yield 
of over 1% of GDP in 1996), were higher excise ta xes, especially on cars,  and increased social 
security contributions, as well as new charges for hi gher education.  Despite these tax and social 
security contribution increases together with measu res contained in subsequent budgets, government 
revenues fell from 51.3% of GDP in 1994 to 45.9% in 1995 and to 44.8% in 1996. 
13. One of the most fundamental and long-standing problems facing the authorities in collecting 
tax revenue concerns tax avoidance and evasion.5  It has been estimated that as much as one third of 
economic activity may be escaping tax through evasion.6  Non-payment of taxes in connection with 
unofficial activities tends to favour these at the expen se of official activities that are subject to tax.7  
Tax avoidance and evasion are also both the result, and the cause, of high marginal tax rates, which 
tend to further distort economic decisions, including those concerning work and saving.8  With tax 
revenues as a share of recorded income well below the revenues that should be  generated by official 
                                                      
5 See, for example, OECD (1995a), p.43.  Tax avoidance is conventionally defined as the outcome of 
legitimate tax planning operations (and therefore legal);  tax evasion involves the concealment of income from 
tax authorities and is thus illegal. 
 
6 This estimate is consistent w ith the fact that the unofficial economy is thought to constitute the 
equivalent of nearly one third of GDP (Johnson, Kaufman and Schleifer (1997)).  According to estimates by the 
Hungarian business courts, one third of businesses are re gistered under false names in order to evade taxes. 
 
7 Likewise, arrears on tax and social security paym ents by business are tantamount to implicit subsidies 
inasmuch as taxes are deferred indefinitely, or forgiven, and penalty interest on such  arrears falls short of the 
appropriate market interest rate. According to OECD (1995a), p. 44, the bulk of arrears concern social insurance 
contributions.  Such arrears rose from Ft 135 billion in 1993 to Ft 205 billion in June 1995.  Some large state-owned firms, especially the railways, were among the largest debtors.  These estimates should be regarded as 
approximate, however, because the undeveloped accounti ng and information systems do not allow an accurate 
accounting of unpaid enterprise obligations.  
 
8 According to OECD (1997a), the average productio n worker faced a marginal tax rate of 43.5% on 
additional income. 
 WT/TPR/S/40 Trade Policies Review 
Page 6 
 
 
tax rates, the Government is clearly concerned by these problems and has actively pursued measures 
aimed at addressing them.  These include the allocation of more resources to tax audit and compliance functions together with presumptive minimum taxes on entrepreneurial income in an effort to reduce 
what is considered to be widespread non-paymen t of tax from this source.  Clearly, solving the 
problem of non-compliance is of central importanc e for, and would be assisted by, a settled and 
satisfactorily functioning tax system.
9  At the same time, however, government attempts to introduce 
measures to address tax evasion are constrained by newly introduced privacy laws. 
14. The Government has also taken steps to contain de ficits in the social security funds.  In the 
case of the Health Insurance F und (HIF), the measures involved greater control of pharmaceutical 
subsidies and health expenditure together with e nhanced cooperation between social security and tax 
authorities in the collection of social security cont ributions.  Following Parliamentary approval of its 
proposal in 1997, the Government is now in the process of implementing a major reform of the 
pension system.  This involves transforming the existing pay-as-you-go (PAYGO) pension system into a three-tiered system consisting of a scaled back PAYGO first tier, a fully-funded, mandatory and 
privately operated second tier and a third voluntary fully funded third tier.  As a result, the annual contribution of the pension fund to net national savi ngs is expected to average 0.5% of GDP over the 
next 50 years or so, as against an average outfl ow of 0.7% in the absence of such reform. 
(iii) Incomes policy 
15. While a substantial part of the cut in the budget deficit in 1995 and 1996 (as a proportion of 
GDP) was due to public wage restraint, the latter's ef fects were not solely fiscal.  Such restraint also 
extended to wage bargaining in the business sector, as a result of the Government's direct influence on 
remaining state-owned enterprises, and moral suasi on effects on private enterprises.  Subsequent 
central wage agreements falling within the guidelines  of the Interest Reconciliation Council (IRC) and 
the rising level of unemployment helped to reinforce this restraint.  The outcome was substantial falls 
in real wages in 1995 and 1996, which greatly im proved business profitability and thus its capacity 
and willingness to invest.  However, wage growth in  the business sector during the early part of 1997 
was well above IRC guidelines, reflecting one-off f actors (such as a wage increase that had been 
postponed by 13 months in 1996) and stronge r than expected productivity growth.  
(iv) Effects on macroeconomic performance 
16. It would appear that the March 1995 package,  together with measures contained in 
subsequent budgets and a st and-by arrangement with the Intern ational Monetary Fund, have been 
successful in restoring macroeconomic balance to the economy.  The budget and current deficits (as a 
proportion of GDP) have diminished considerably;  the consolidated government deficit fell to 3.5% 
in 1996 before rising to 5.1% in 1997, while the current account defic it declined to 3.7% in 1997.  
Moreover, gross government debt dropped from 85% of GDP in 1995 to 66% in 1997 and is projected 
to fall to 60% by the end of 1998 (thereby satisfy ing one of the Maastricht criteria for European 
Monetary Union).  Likewise, the Government's net external (foreign currency) debt has fallen 
substantially, from around 45% of GDP in 1994 to 30% in 1997.
10  The spectacular drop in 
government indebtedness has been due not only to tighter fiscal policy but also to privatization 
receipts, much of which has been used to repay domestic and foreign debt, thereby reducing interest 
                                                      
9 According to OECD (1997a), p. 43, "changes to tax policy have been too frequent and implemented 
without sufficient cons ultation, with the result, on  several occasions, that major tax initiatives have been 
withdrawn or substantially altered very shortly after implementation". 
 
10 National Bank of Hungary (1997), p. 71. 
 Hungary WT/TPR/S/40 
 Page 7 
 
 
payments on such debt;  the cost of servicing fo reign debt as a percentage of export value dropped 
from 42% in 1995 to 21% in 1997.11  Hitherto, privatization has yielded more than Ft 1,400 billion 
(US$7 billion) (Chapter III(4)(v)).    
17. The restoration of macroeconomic balance togeth er with radical restructuring of the economy 
have greatly improved Hungary's economic performance in several r espects.  Although the immediate 
impact of the March 1995 package was to cause domestic demand to drop in both 1995 and 1996 and 
a sharp slowdown in GDP growth, the latter remained  positive because of strong growth in net exports 
(Table I.1).  The devaluation of the forint, comb ined with the crawling peg, was instrumental in 
increasing exports, while the fall in domestic dema nd in conjunction with the import surcharge was 
the main restraining influence on imports.  Real GDP  growth subsequently r ecovered to 3.5% in 1997 
and is expected to be within the 4-5% range in 19 98.  After reaching 28.3% in 1995, as a result of the 
depreciation of the forint and sharp increases in regul ated energy prices, inflation dropped to 18.2% in 
1997 and is forecast to fall to 12-13% in 1998.  With  the drop in inflation, the central bank (National 
Bank of Hungary) has cut the monthly currency depreciation rate from 1% in 1997 to 0.9% in 1998.  Officially registered unemployment has remained around 10%, however
12.  While manufacturing has 
experienced double-digit growth rates in labour productivity since 1992, owing to investment in 
state-of-the-art production facilities,13 productivity growth in the economy as a whole has gradually 
declined, from 7.2% in 1992 to 1.6% in 1996.14   
(3) MAIN STRUCTURAL DEVELOPMENTS  
18. The deterioration in macroeconomic performance in the early 1990s coincided with a marked 
slow-down in the process of structural reform  from 1993 to mid-1995, when little headway was made 
in dealing with loss-making enterprises, privatizati on and the restructuring of the financial system.  
Structural reform resumed, however, in the latte r part of 1995, and encompassed these and several 
other areas.  It also involved implementation of WTO and regional agreements.  Indeed, trade and 
trade-related policies, notably those pertaining to fo reign direct investment (FDI), have played key 
roles throughout Hungary's transition to a market economy.   
(i) Merchandise trade 
19. Perhaps the most dramatic feature of Hungary's structural adjustment h as been the collapse of 
trade with former CMEA members, and the shift of the geographical pattern of trade from former 
socialist countries to industrialized countries, partic ularly European Union (EU) members, as well as 
to CEFTA partners.  This re-orientation of trade was greatly facilitated by the Europe Agreement, 
which removed tariffs and quantitative restrictions  on most trade between Hungary and the EU, and 
the creation of the CEFTA.  Between 1990 and 1996,  the share of Hungary's trade with former 
socialist countries (other than CEFTA partners) roughl y halved (Chart I.2).  By contrast, the EU's 
share of Hungary's total exports grew from 45.4% to 62.8%, while its share in Hungary's imports 
increased from 49.1% to 59.7%.  During the same pe riod, CEFTA countries' share of Hungary's total 
exports grew from 1.7% to 8.7%, while its share in  Hungary's imports increased from 2.4% to 7.2%.  
                                                      
11 The fall in the Government's indebtedness also contributed to an improvement in its credit rating, 
which reduced the cost of borrowing. 
 
12 Around 1.5 million people have left the labour market since 1990. 
 
13 European Bank for Reconstruction and Development (1996), p.118. 
 
14 OECD (1997a), p. 22. WT/TPR/S/40 Trade Policies Review 
Page 8 
 
 
Chart I.2
Changes in direction of export s and imports of  Hungary, 1990-96
(Per cent)
Source : UNSD, Comtrade database.Exports
Market economies Forme r socialist countries
Imports
Market economies Former soc. countries
European Union EFTA United States Asia Other countries with 
market economy
CEFTA Former Soviet Union Other CMEA Other countries with non-market economy1990
19951994199319921991
1996
1990
19951994199319921991
199645.4
62.862.863.758.162.358.62.1
1.51.61.72.12.12.13.5
3.24.04.23.23.2
3.5 3.83.84.56.25.88.88.3 3.5
2.94.22.72.62.23.11.7
8.77.97.16.81.32.1
9.420.2
13.4
13.1
15.3
11.6
11.03.7
5.25.54.04.03.23.411.6
0.0
2.20.70.76.85.3
49.1
59.761.561.154.460.056.93.2
3.6
2.32.62.83.03.36.9
7.16.56.36.25.47.12.6
3.53.13.13.92.92.6
3.93.73.74.14.07.28.0 2.4
7.26.46.25.21.61.919.1
14.814.815.122.216.915.41.1
1.00.90.90.80.70.77.6
0.55.24.6
0.50.3
0.8
 Hungary WT/TPR/S/40 
 Page 9 
 
 
20. With the tariffication of quantitative restricti ons on agricultural products and relaxation of 
other non-tariff measures (NTMs) as a result of the Uruguay Round, the proportion of tariff lines 
affected by NTMs declined from almost 20% in 1991 to under 8% in 1997, with the global quota on 
consumer goods and the prohibition of imported used cars over four  years old being the principal 
remaining NTMs (Chapter III(2)(iii)).  During the same period, however, the overall simple average 
level of applied MFN tariff protection increased fro m 11% to 14.3%, largely as a result of agricultural 
tariffication.   
21. Judging from the growing shares of imports and exports in GDP, the Hungarian economy has 
became considerably more open during the period under review.  Imports rose from nearly 34% of 
GDP in 1991 to 41% in 1996, while exports incr eased from almost 33% of GDP to approximately 
40% (Table I.1).  Reflecting the re-orientation of policy, however, this increased openness to trade has 
been much stronger in relation to EU and CEFTA co untries than to MFN partners such as the United 
States, Asia, and non-European market economies.   Whereas exports to EU and CEFTA countries 
rose from 15.5%  to 28.6% of GDP between 1990 and 1996, exports to the United States, Asia, and non-European market economies fell from 5% to 4.1% of GDP.  During the same period, imports from EU and CEFTA countries rose from 17.5% to  26.8% of GDP while imports from the United 
States, Asia, and non-European market economies incr eased marginally from 5.6% to 5.9% of GDP.  
Given that Hungary's real GDP shrank by around 7% during the period 1990-97, this suggests that 
there has been a degree of diversion of actual a nd potential trade among market economies as a result 
of Hungary's preferential agreemen ts with EU and CEFTA countries. 
22. As a consequence of the general contraction of production and trade in the first half of the 
1990s followed by the recovery of competitive sector s, the sectoral composition of Hungary's imports 
and exports also changed considerably during the period under review (Chart I.3).  The shares of 
clothing  and electrical machinery in total exports increased substantially while the shares of non-
electrical machinery, transport equipment, chemical s and meat products declin ed.  As regards imports, 
whereas the shares of textile yarn, gas and other mi neral fuels (except petrol eum) rose, the shares of 
non-electrical machinery, transport equipment, chemicals and petroleum dropped.   
(ii) Foreign direct investment 
23. Foreign direct investment (FDI) has made a major contribution to Hungary's economic and 
trade restructuring, amounting to roughly US$2 b illion in 1997, thereby reach ing a cumulative level 
of US$18 billion,
15 which is roughly double the Government's  net external indebtedness.  FDI has 
been attracted by a skilled labour force with rela tively low wage costs, and by Hungary's growing 
policy orientation towards European markets.  Hunga ry's success in attracting FDI is highlighted by 
its 40% share of total FDI in central and eastern Eu rope.  FDI has largely been directed to processing 
industry, gas and electricity, retail trade and banking.  The main sources of FDI are Germany, the United States and Austria.  With two thirds of  the 200 largest companies now foreign-owned, 
multinational enterprises dominate the Hungarian ec onomy.  Companies with foreign participation 
currently account for 14% of GDP and 16-17% of to tal employment.  The same group of companies 
also accounts for 70% of Hungary's  exports of industrial goods.   
                                                      
15 This value does not include an estimated $3 billion of profits reinvested by multinational companies 
(Financial Times, Survey - Hung ary, 9 December 1997, p. 1). 
 WT/TPR/S/40 Trade Policies Review 
Page 10 
 
 
Chart I.3
Merchandise trade by sector, 1990 and 1996
Source : UNSD, Comtrade database.Other 
34.3%1990 1996
Total : (US$ million): 9,587.6Exports
ImportsTotal (US$ million): 13,138.0
1990 1996
Other 
29.0%Electrical 
machinery
8.7%Other  manufactured 
goods except textile
12.9%Gas and other mineral fuels
except petroleum
5.2%Non-electrical 
machinery 
10.6%Manufactured 
materials
18.5%
Transport 
equipment
7.4%Chemicals
12.4%
Clothing
3.7%Electrical machinery 
7.6%
Total (US$ million): 8,646.4 Total (US$ million): 16,206.4Petroleum
9.0%
Chemical elements 
and compounds
4.8%Other 
26.6%Textile yarn
2.6%Non-electrical 
machinery
18.1%
Transport
 equipment
7.8%
Miscellaneous 
manufactured goods
1.9Textile yarn
5.6%Other  manufactured 
goods except textile
17.2%Petroleum
6.5%Gas and other mineral fuels
except petroleum
7.1%
Electrical 
machinery
11.3%
Non-electrical 
machinery
11.3%
Transport
 equipment
6.8%
Miscellaneous 
manufactured goods
4.4%Chemical elements 
and compounds
3.2%Meat and 
preparations 
8.7%
Fruit and vegetables
4.8%
Special transactions
2.5%Miscellaneous 
manufactured goods
1.6%Manufactured 
materials
18.3%Electrical machinery 
13.3%
Chemicals
10.4%
Clothing
8.5%
Non-electrical 
machinery 
6.1%
Meat and 
preparations 
6.0%
Transport equipment
4.5%
Fruit and vegetables
4.0%Special transactions
3.9%Miscellaneous 
manufactured goods
3.3%Other 
21.7%
 Hungary WT/TPR/S/40 
 Page 11 
 
 
(iii) Privatization 
24. A large proportion of FDI (two thirds in 1995 and roughly one third in 1996 and 199716 )has 
involved the purchase of formerly state-owned enterprises under the Government's privatization programme.  This programme has hitherto involved the sale of over 450 large state-owned enterprises 
to strategic investors, mainly in return for cash  (Table I.2).  It has encompassed not only firms 
engaged in manufacturing, but those provi ding services (including financial services, 
telecommunications, electricity and gas).  In the case of financial services, foreign participation in the 
privatization of the banking sector has helped to place banks on a much sounder footing and thereby 
contributed to the smooth functioning of fina ncial markets, which is essential for both the 
mobilization and efficient allocation of savings and i nvestment.  As a consequence of the privatization 
of three quarters of total state assets since 1990, the private sector currently accounts for around 75-
80% of GDP compared to 10% a decade ago.  As pointed out earlier, a large part of the proceeds of 
privatization have been used to pay off governme nt domestic and external debt, thereby improving 
fiscal balance.  
Table I.2  
Revenue from privatization, 1990-97  
(In billions of forint) 
 1990 1991 1992 1993 1994 1995 1996 1997a 
Total revenue 0.7 31.4 74.3 173.8 130.3 474.0 158.0 349.8 
 Cash 0.7 30.4 63.0 134.9 36.9 451.6 113.9 317.2 
  Foreign exchange 0.5 24.6 41.0 110.7  12.9 412.1 77.5 208.4 
  Forint 0.1 5.7 22.0 24.2 23.9 39.5 36.4 8.8 
 Credit 0.0 1.0 9.1 21.7 29.3 3.9 2.4 0.3 
 Compensation vouchers 0.0 0.0 2.3 17.3 64.2 18.5 41.6 22.7 
a Estimate. 
Source: State Privatization Agency. 
(iv) Incentives/subsidies 
25. Although the Government acknowledged in the course of this review that incentive 
programmes play a relatively minor role in attrac ting FDI, it maintains an array of tax and non-tax 
incentives.  Some of the incentives th at have been used entail elements of discrimination in favour of 
foreign investors.  Examples are the duty-free status for equipment and other goods deemed to be in-
kind capital contributions, whic h was abolished in 1996, and the corporate tax concession for 
companies with foreign participation, which is  now being phased out.  Some other investment 
incentives are conditional upon export performance;  for example, corporate tax is currently halved 
for companies investing Ft 1 billion and increasing exports by at least 25%. 
26. However, total budgetary subsidies as a per centage of GDP dropped from 11% in 1988 to 
3.9% in 1991.  Since then they have fallen further, to 1.9% of GDP in 1997 (Table I.3).  While no 
information is available concerning trends in over all tax expenditures (that is, revenues forgone as a 
                                                      
16 National Bank of Hungary (1997), p. 75. 
 WT/TPR/S/40 Trade Policies Review 
Page 12 
 
 
consequence of tax incentives), the value of corpor ate taxes paid (1.9% of GDP in 1996) is largely 
offset by the value of subsidies.17  This tends to have adverse repercussions on fiscal balance. 
Table I.3  
Subsidies, 1991-97 
 1991 1992 1993 1994 1995 1996 1997 
 (In billions of forint) 
I.  Total subsidies to enterprises, of which: 56.4 54.2 60.2 101.1 96.4 114.1 103.0 
Production subsidies 23.8 21.6 14.7 37.2 28.3 41.1 45.9 
Reorganization subsidies 0 0.4 1.2 5.0 7.5 10.9 0 
Other subsidies 4.8 2.0 1.6 2.3 1.5 0.6 0.6 
Agricultural export and marketing subsidies 26.8 22.9 25.5 46.7 47.5 45.1 38.6 
Agricultural production subsidies 1.0 7.3 17.2 9.9 11.6 16.4 18.6 
II.  Consumer subsidies 42.3 19.1 21.7 27.0 32.5 44.9 55.0 
Total 98.7 73.3 81.9 128.1 128.9 159.0 158.0 
Total as percentage of GDP 3.9 2.5 2.3 2. 9 2.3 2.3 1.9 
GDP 2,499 2,943 3,548 4,365 5,614 6,846 8,370 
Source:  Hungarian authorities. 
(v) Price controls 
27. While the scope of price controls has been considerably reduced in comparison with the 
earlier period covered by the previous Trade Policy Re view, the share of prices subject to controls has 
nevertheless increased from just under 11% in 1992 to 16% in 1997 (Table AIII.9). 
(vi) Other structural developments 
28. Among the other major structural achievements we re the adoption of a strict bankruptcy law 
which, together with banking sector reform, cont ributed to additional financial disciplines on 
businesses, the establishment of a regulatory framework  for privatized utilities that retained a degree 
of monopoly power, and the strengthening of competiti on laws.  These have contributed significantly 
to the restructuring of the economy and its improved competitiveness. 
(vii) Sectoral trends in output and employment 
29. As a result of the above structural developments, the distribution of output and employment 
has considerably changed (Table I.4).  In broad terms, production in agriculture and resource-based 
industries dropped in relation to manufacturing and especially services during the period 1991-95.  
More specifically, the combined shar e of the primary sector (agriculture, forestry, fishing and mining) 
in gross value added fell from 11.1% in 1991 to 6.6% in 1995, while the share of construction 
dropped from 4.9% to 4.4%.  By contrast, whereas the share of manufacturing in gross value added 
remained close to 20% of GDP, the share of services increased from 52.6% to 54%.   
                                                      
17 National Bank of Hungary (1997), p. 67. 
 Hungary WT/TPR/S/40 
 Page 13 
 
 
Table I.4  
Gross value added by sector at current prices, 1991 and 1995a 
Sectorsb 1991  1995 
 Current 
prices 
(Ft billion) % of 
GDP  Current 
prices 
(Ft billion) % of 
GDP 
Agriculture, hunting, forestry and fishing 195.1 7.8  347.4 6.2 
Industry 666.5 26.7  1,294.1 23.3 
Mining and quarrying 81.8 3.3  22.4 0.4 
Manufacturing 494.2 19.8  1,108.3 19.9 
Electricity, gas, st eam, and water supply 90.5 3.6  163.4 2.9 
Construction 123.5 4.9  246.3 4.4 
Transport, storage and communication 209.9 8.4  474.4 8.5 
Wholesale and retail trade;  repair of motor vehicles and household goods307.2 12.3  528.7 9.5 
Other services 796.7 31.9  2,001.7 36.0 
Hotels and restaurants  48.5 1.9  84.8 1.5 
Financial intermediation 101.8 4.1  260.3 4.7 
Real estate, renting and other business activities 234.8 9.4  666.5 12.0 
Public administration and defence, and compulsory social security 147.1 5.9  345.6 6.2 
Education 110.0 4.4  255.6 4.6 
Health and social work 95.8 3.8  220.3 4.0 
Other  58.7 °2.3  168.6 3.0 
Total 2,298.9 92.0  4,892.6 88.0 
Imputed bank charges -107.7 -4.3  -219.3 -3.9 
GDP at basic prices 2,191.2 87.7  4,673.3 84.0 
Net taxes 307.1 12.3  888.6 16.0 
GDP at market prices 2,498.3 100.0  5,561.9 100.0 
a Based on the new System of National Accounts (SNA). 
b From 1992 the mining activity of MOL Rt. is accounted for with in the chemical industry.  From 1993 the production of the 
collieries belonging to the electric energy complex is acc ounted for in electricity, gas, heat and water supply. 
Source: National Bank of Hungary. WT/TPR/S/40 Trade Policies Review 
Page 14 
 
 
(4) EU ACCESSION  
30. As the Hungarian economy has ente red an advanced stage of transition, the Government has 
intensified its preparations for accession to the EU.  Clearly, such preparations will involve further 
far-reaching structural and institutional adjustment s for the economy.  In this regard, much of 
Hungary's legislation concerning internal measures (notably regulations and standards, intellectual 
property rights, government procurement, compe tition) is being adapted to conform with EU 
legislation.  In some instances, such as the prot ection of intellectual prope rty, adaptation to EU 
legislation involves Hungary assuming obligations exceeding those contained in WTO Agreements.  
The relationship between Hungary's participation in the WTO and other multilateral fora and its 
moves towards EU membership (Chapter II) will be a determining factor in the formulation of Hungary's future trade policies. 