Hungary: Structure Reforms for Sustainable Growth

by World Bank Group (contributor)

The Hungarian economy is coming out of a four-year recession after going through several important structural changes. More than 60 percent of output is now produced by the private sector, the major force behind the current recovery. Household income, driven by the strong performance of small-scale private activities, is growing in real terms for the first time since 1989. Industrial production, investment, and exports, have continued the growth started in 1993, and unemployment, while still high, is declining. Despite these positive developments, Hungary is also coming out of " transformational " recession with two major weaknesses. First, the recent recovery has been accompanied by large fiscal and current account deficits, and further increases in Hungary ' s high external debt. Second, despite Hungary ' s progress in transforming its economy, serious structural bottlenecks remain. This report argues the following 1) the current macroeconomic imbalances are due to the emergence of fiscal deficits during the early 1990s, or more specifically, to Hungary ' s failure to rationalize transfer payments during the ' transformational " recession; 2) Hungary ' s very large fiscal expenditures have resulted not only in large deficits, but also in very high and distorting tax rates; 3) a substantial reduction in household transfers is achievable while protecting the most vulnerable in society; and 4) public-sector reform has to be accompanied by eliminating loss-making activities at the level of enterprises and banks. The most efficient way to bring this about is to rejuvenate the privatization of enterprises and to accelerate the privatization of state-owned banks. Finally, the reportexamines the impact of macroeconomic stabilization and the recommended structural reforms on Hungary ' s growth.

177 pages, Paperback

First published August 1, 1995

About the author

The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to developing countries. It is the largest and most famous development bank in the world and is an observer at the United Nations Development Group. The bank is based in Washington, D.C. and provided around $61 billion in loans and assistance to "developing" and transition countries in the 2014 fiscal year. The bank's stated mission is to achieve the twin goals of ending extreme poverty and building shared prosperity. Its five organizations are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

The World Bank's (the IBRD and IDA's) activities are focused on developing countries, in fields such as human development (e.g. education, health), agriculture and rural development (e.g. irrigation and rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. roads, urban regeneration, and electricity), large industrial construction projects, and governance (e.g. anti-corruption, legal institutions development). The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to the poorest countries. Loans or grants for specific projects are often linked to wider policy changes in the sector or the country's economy as a whole. For example, a loan to improve coastal environmental management may be linked to development of new environmental institutions at national and local levels and the implementation of new regulations to limit pollution, or not, such as in the World Bank financed constructions of paper mills along the Rio Uruguay in 2006.