The Economic

State of the Nation

[...]

Most of the results of the stabilization programme were achieved through measures stimulating exports and limiting imports. The former was served by a one-off 9 per cent devaluation of the forint, followed by crawling peg devaluation still in effect; the latter was achieved by the introduction of a customs surcharge on imports, to be lifted in mid-1997. These measures were far from ineffective but their effect is declining: whereas exports increased by nearly 22 per cent in 1995, 12.6 per cent in 1996, only 8–10 per cent is expected this year, imports grew only by 7 per cent in 1995, but by 11 per cent in 1996, and are expected to increase at a rate similar to that of exports in 1997. Consequently the foreign trade deficit swelled from 2.6 billion dollars in 1995 to 3.1 billion dollars in 1996, and may be even higher than that in 1997.

[...]

At the same time, the role of exports as the engine of growth is rather doubtful. The increase in exports of the past two years is seen by analysts mainly as a consequence of increased competitiveness stemming from the general decline in real wages (basically because the inflation rate has been higher than the rise in real incomes). Whether this can be continued is questionable. In addition, there is much debate amongst experts on whether or not the crawling peg devaluation is costing more than it earns. The introduction of that measure of monetary policy was widely welcomed in 1995: it replaced a hectic, unbalanced exchange rate policy, stimulating speculation, with that element of predictability which had been so sorely needed. After having been in operation for two years, however, there are a growing number of those who believe that its export-stimulating effect is negatively counterbalanced by its inflation-generating
impact.

[...]

Main Macroeconomic Characteristics

Change compared to the previous year (%)

				1997	1998	1999
Volume of GDP	about 2	3–4	4–5
Domestic exploitation of the GDP	about 1	2–3	3–4
Individual consumption	about 0	about 1	1–2
Communal consumption	about –10	–2– 0	about 0
Investment	10–12	10–12	10–12
Direct foreign trade turnover
Change in the volume of exports	8–10	8–10	8–10
Change in the volume of imports	5–7	7–9	7–9
Price indices
Consumer price index (annual average)	17–19	12–14	about 10
Producer price index, material prices	16–17	10–11	about 9
(annual average)
Current balance of payments (billion $)
Balance of foreign trade turnover	–2– –1,5	about –1,5	about –1,5
Customs statistics (billion $)	–2– –1,5	–2– –1,5	–2– –1,5

Source: Draft for the 1997 Budget Act of the Hungarian Republic

Main Living Standard Indicators (%)

Item	1997	1998	1999
		Index: last year = 100
Gross total earnings	116–117	113–114	112–113
Gross average earnings	116–117	113–114	112–113
Net average earnings	117–118	114–115	112–113
Consumer price level	117–119	112–114	about 110
Real wages per earner	about 100	101–102	101–102
Real wages per head	about 100	101–102	101–102
Consumption by the population	about 100	about 101	101–102
Savings rate (%)*	13–14	13–14	13–14
Gross money savings, billion forints	490–510	600–620	660–670
Credit borrowing surplus, billion forints	0	30–40	40–50
Net credit, billion forints	490–510	570–590	620–630

Note: * total net savings of households (money and hoarding) compared to their total income.

The year 1997 will also be critical for the Hungarian economy struggling in the Bermuda Triangle of equilibrium, inflation and growth because, according to many analysts, the driving engine of the economic growth so much yearned for may be precisely a small-scale increase in domestic buying power. Several experts claim that in the past few years, export orientation alone has not been sufficient to achieve an increase in GDP. One of the reasons is that the business sector is being split into two groups and the gap is rapidly widening between them: on one side are the mainly foreign-owned or jointly-owned companies concentrating on external markets, which, embedded as they are in the world economy, are less sensitive to the domestic trade cycle - two thirds of both Hungary's imports and exports involve companies with foreign interests, mainly large multinational corporations. On the other side, there is a mass of domestically owned small and medium-size businesses, which are generally in rather bad shape, relying on domestic credit and on domestic markets. Analysts point to several remarkable consequences of this structure. With the expansion of the multinationals, Hungarian industry is growing increasingly dependent on processes on a global scale, policy makers thus having diminishing elbow-room to influence tendencies in the Hungarian economy. Also, their gaining strength in the retail sector means that legal sales are expanding, whereas privately owned Hungarian businesses, fighting for survival, are fleeing into the black economy, which is estimated at nearly a third of the GDP.

[...]

Experts agree that the most important yardstick for the actual success of the stabilization programme deeply affecting Hungarian society will be the extent to which external equilibrium, especially the foreign trade balance, will decline as a consequence of the expected economic growth. This will show whether the economic policy involved has really produced deeper-lying structural changes, whether transformations have taken place in the micro-structure of the economy that will prevent growth in domestic demand, once again producing a surge in imports. As the more pessimistic of Hungarian experts see it, stop-go cycles, repeated every two years, will continue. The same thing will happen as between 1993 and 1996: rapid growth and a rapid deterioration of the balance, then a halt, with an improvement in the balance - and then the same all over again. The optimists, however, believe that - even if the stop-go will not fully vanish - the swings of the pendulum will become less and less wide.

Györgyi Kocsis and Anikó Szántó

are on the staff of the economic weekly Heti Világgazdaság.