Industrial policy in eastern Europe: The case of Hungary

Abstract

This paper reviews western conceptions of industrial policy and discusses how they may be applied to an economy in transition such as Hungary. At present, Hungary envisages a “moderately active” industrial policy, though in practice it will be limited by Hungary's desire to conform to EC practices as far as possible, by the need to give firms clear incentives to adapt, and by budgetary constraints. The analysis of industrial competitiveness and structural change shows that Hungary entered the 1990s as an economy in severe disequilibrium, and that industry per se will not quickly return to its pre-1990 state. One of the most difficult tasks for industrial policy, therefore, will be to manage a process of structural change that will have differential effects both across sectors and between regions. While the best industrial policy is provided by means of a stable regulatory and legal environment for business and sound macro-policy, Hungary will need more than this in the medium term to overcome inherited structural imbalances in the presence of severely imperfect markets; e.g., the financial and labor markets.