Macroeconomic Policy, Liberalization and Transition: Hungary's Case

Abstract

The paper concentrates on economic developments; it does not treat issues related to domestic and foreign policy. It may well be the case that in the latter fields the trends are not encouraging, but these problems are beyond the focus of our paper. One of the major points we wish to demonstrate is that in spite of the clearly unfavourable recent economic developments, it would be too early to attribute Hungary`s present economic problems to its specific - non-shock - approach to the transition. Economic transition from a centrally planned economy to a market economy has no precedents and experience clearly indicates that almost all respective predictions turned out to be unfounded. The transition seems to be an extremely difficult Process, involving heavy economic and social costs. Temporary successes may be followed by lengthy set-backs. This is not to say that without political and economic transformation countries of the region would be better off; it only implies that as yet there are no solid grounds for forming strong judgements on the observed performance or the strategies pursued by individual countries. This paper discusses some of the major macroeconomic issues related to economic transition in Hungary and touches certain points related to comparison with other countries of the region. The first section treats the economic legacy of the democratically elected Hungarian government. The second deals with the initial policy-dilemma: shock-therapy or gradual changes. The major macroeconomic developments and policy issues of 1991-1992 are covered in section three. The fourth section deals with the major challenges facing the country in and after 1993. As a conclusion, the outlook of the Hungarian economy is discussed, comparisons with other countries of Central-Eastern Europe (CEE) are drawn and some lessons of the Hungarian experience are spelled out. It should be emphasized that the present survey does not cover the specific issues related to privatization in Hungary and in other CEE countries. This is explained by two reasons. First, the (English language) literature on the Hungarian transition and those of other CEE economies is saturated with publications on privatization; there is very little one can add to the already existing, vast amount of information.1 Second, and more importantly, those issues of macroeconomic policy that this study wishes to treat are not related directly to the problems of privatization. To put it more strongly, the over-discussed and over-politicised question of privatization is not considered to be a fundamental issue from the point of view of short-term macroeconomic management by the authors. The latter questions are covered only in the context of macroeconomic policies in this paper.