The economic reform in Hungary: Ten years after

Abstract

The major features of the economic reform in Hungary are described. In a system of physical planning, firms act on the basis of central directives pertaining to output targets, the labor allocation and capital inputs, and the exchange of products within the state sector. Direction from the state causes the assignment of unrealistic and contradictory targets necessitating modification of plans. The rigidity of the allocation process makes the task of remedying the ensuing imbalances difficult. The new economic mechanism gives considerable scope for investment decisions by the firm. The need for bank credits for new investment gives great power to the state banking system. Price reform carried out in conjunction with the new economic mechanism has brought about changes in producer and consumer prices, creating a certain amount of flexibility in the process of price determination. The reform attempts to create a direct link between success in exportation an profitability, thereby improving foreign trade. The most important results of the economic reform have entailed the cessation of plan directives to the firm, the use of profit incentives, greater pricing flexibility, and the use of uniform conversion ratios to link domestic and foreign prices.