10 x 10 years in numbers

10 x 10 years in numbers â&#x20AC;&#x201C; The economic history of Hungary for the last 100 years

10 x 10 years in numbers – The economic history of Hungary for the last 100 years © Magyar Nemzeti Bank, 2020 Contributors: Directorate for Fiscal and Competitiveness Analysis Directorate Economic Forecast and Analysis Directorate Statistics Edited by: Barnabás Virág The editor would like to express their gratitude to the Governor György Matolcsy, Deputy Governors Csaba Kandrács and Mihály Patai for their professional comments during editing. Published by: Magyar Nemzeti Bank Szabadság tér 9. 1054 Budapest, Hungary www.mnb.hu All rights reserved. Prepress and printing: Prospektus Kft. ISBN 978-615-5318-38-2 2020

Contents Foreword 7 100 years of economic history, one decade of sustainable convergence

1 The reviving economy of the truncated country: the 1920s

2 Global crisis and stabilisation: the 1930s

3 Global conflagration and reconstruction: the 1940s

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

5 The evolution of goulash communism: the 1960s

121

6 Oil price shock and indebtedness: the 1970s

157

7 Lack of turnaround and reform: the 1980s

185

8 Free again: the 1990s

207

9 From Vanguard to the Rear: the 2000s

241

10 An era of balance and growth: the 2010s

269

Annex: Statistical tables

295

Acknowledgements 327

Foreword This centennial book covers the last hundred years of Hungary’s economic history. The purpose of our analyses is twofold. On the centenary of the externally imposed Trianon Peace Treaty, the Magyar Nemzeti Bank commemorates one of the most painful moments in Hungarian history. We also believe that the lessons from all of Hungary’s previous crises can be useful in the current global pandemic situation and in the corresponding global economic crisis. We can learn from mistakes and we must constantly build on virtues. Moreover, there are numerous past episodes that are worth studying. If the ten decades behind us were to be characterised by a single term, “continuous resumption” could best describe the situation. In addition to internal economic developments and economic policy decisions, our country’s history has been shaped at least as much by waves of tectonic geopolitical movements or by recurring shocks in the world economy. Apart from rare periods, the Hungarian economy was unable to enjoy such a stable and secure environment that, for most of the 20th century, characterised Western Europe or the quickly emerging Asian countries. Since 1920, Hungary has suffered the pains of the tragic, externally imposed Trianon Peace Treaty, the horrors of World War II, oppression by communist state power that lasted for nearly half a century, and the period of the liberating regime change that nevertheless created considerable economic uncertainty. All of these events set Hungary’s development back for many years, and thus, the long-standing desire to converge to Western European living standards remained a mere dream.

—7—

Foreword

In addition to wars and decades of political repression, recurring global economic crises and domestic economic policy mistakes hampered Hungary’s convergence. As the country financed its development mostly from mounting external indebtedness, Hungary’s growth model was long characterised by a choice between growth and balance. In the absence of a modernising economy and improving competitiveness, convergence opportunities often very quickly fell by the wayside as the winds of the world economy changed. It is no coincidence that the Great Depression of 19291933, the oil price explosions of the 1970s and the financial crisis of 2008-2009 all had serious consequences. In the summer of 2020 we are again in the first phase of a restoration period after a world wide crisis. The big challenge ahead of us is to overcome the Covid-19 pandemic. For the first time in the last 100 years, we can tackle the problems after an exceptionally expceptionally successful decade that has fostered economic growth while also maintaining equilibrium. At the same time, this successful decade also led to a widespread prosperity in Hungarian society. The current task is again to tackle the crisis with a growth model that can ensure Hungary’s continuous convergence in the decades after the coronavirus. We can learn a lot from the economic history of the last hundred years in this regard. Our history books often contains hidden answers for current problems. Dr Mandeep Rai’s book (The Values Compass) published in recent months tries to characterise each country with a single attribute. It is instructive that the author emphasises the word “competitiveness” in the case of Hungary. According to her assessment, the memory of the serious and painful treaty that has existed in Hungarian society since 1920 has created energies affecting all areas of life. Of these energies, it is the willingness to compete that has been behind the exceptional Hungarian successes in the fields of sport, gastronomy, arts or even sciences over the last hundred years. We do have values that we also need to build on, this time in the field of economy. On the other —8—

Foreword

hand, as the analyses in this book show, we have also made recurring mistakes that we should definitely avoid. This can be a new recipe for success. It is a huge challenge to write an economic history book covering a period that spans a whole century. Economic statistics are often incomplete, and the concept of prosperity has also changed over time. Our goal was to use the most comprehensive data from the last ten decades, to facilitate the comparison of the different periods’ results. We hope that both non-professional readers and professional economic analysts looking for more comprehensive data will find this approach satisfactory.

—9—

100 years of economic history, one decade of sustainable convergence The economic history of the past 100 years is summarised here in three respects: developments in economic growth, financial equilibrium and standards of living. During the difficult, but instructive decades between 1920 and 2020, one of these three aspects was always a key issue, and thus we can perhaps conclude that an economic policy can only be successful over the longer run if it keeps in mind all the three of them simultaneously. This requires an appropriate balance of a state which fosters development and a market economy, which – due to historical traumas and the socialist system prevailing for nearly half of the period – could only be achieved in Hungary in the past decade. For 1,100 years, Hungary has been one of the states shaping the history and culture of Europe. This also means that – in terms of economic development, national income and living standards – its objective must be to achieve the same level as the most developed countries in Europe. Although during Hungary’s long history, mainly in the 14th and 15th centuries, Hungary did experience continuous and independent development, in other periods this opportunity, in contrast to most Western European states, was not given. The past 100 years were especially hard: during this period Hungary had to completely rebuild its economy three times and also had to survive two global crises. The consequence of these external and internal shocks is that, although Hungary was able to achieve partial success, overall it still could not achieve lasting, sustainable economic growth and experience convergence. In recent years, however, Hungary has joined forces with the also rapidly developing countries of the Carpathian Basin, and this may make a significant contribution to our future successful convergence and at the same time to improving the fate of our fellow

— 11 —

100 years of economic history, one decade of sustainable convergence

Hungarians who live outside Hungary. As Prime Minister Viktor Orbán said, this means that the 100 years of post-Trianon Hungarian loneliness has come to an end. Of the ten decades under review, it was the ten years between 2010 and 2020 when economic growth was achieved in parallel with maintaining equilibrium, and the standards of living improved for broad swathes of society. While Hungary had previously experienced periods of rapid growth, financial equilibrium deteriorated during these periods and on many occasions the high growth rates still fell short of the corresponding growth rates seen in Western European countries. Following the trauma of Trianon, Hungary was unable to achieve durable, widespread growth, as development was interrupted first by the Great Depression and then by World War II. Although after WWII, during the first decades of socialism, Hungary achieved high economic growth, the western part of Europe developed its economies at an even faster pace and in a more organic manner. Moreover, due to the deficiencies of the socialist system, internal and external imbalances accumulated, which decelerated economic growth from the 1970s. The shock therapy during the period of political transformation led to a deep economic crisis, which was followed by a long period of 20 years when phases of growth alternated with mounting imbalances and tightening policies. Novel responses to the financial crisis of 2008 set the stage for a new era from 2010. Economic growth and financial equilibrium received equal attention, and economic policy considered the expansion of employment as the common basis for the two. The rise in the proportion of those living on wage income, the reduction of labour taxes and the rapid growth together led to a widespread improvement in the standard of living. The historically exceptional achievements of the 2010s created a suitable basis for Hungary to break out of the middle-income growth trap and become one of the most developed countries.

— 12 —

100 years of economic history, one decade of sustainable convergence

Economic growth – real economic sustainability For Hungary, the past one hundred years started with a historic trauma, the Trianon peace treaty – which was dictated by external forces – from which the country recovered and achieved significant economic development until World War II. As a result of the forced treaty, Hungary lost 71 per cent of its territory and more than 63 per cent of its population. Moreover, the new borders completely destroyed the structure of the economy, which had already suffered huge losses during World War I. A major part of the arable land that served as a basis for the high quality milling industry, more than 60 per cent of the railway and public road networks, nearly half of the domestic manufacturing industry and a considerable proportion of raw material production ended up outside the borders of the country. Hungary’s economic development was a mere 48 per cent of the level of Austria in 1920, which was partly attributable to the unfavourable division of labour within the Monarchy and partly to the trauma of the war and Trianon. An outstanding achievement of the 1920s was that the economy recovered from this major, unprecedented shock, and production already reached the pre-war level by 1927 (in the territory of post-Trianon Hungary). The Great Depression of 1929-1933, however, strongly impacted Hungary via recessions in its export markets, and thus the 1930s can again be considered as a decade of recovery. Several Hungarian companies reached European levels in their production, which – in a country poor in raw materials – operated in high-valueadded sectors. Examples of these are Tungsram and Orion in the manufacturing of electronic equipment sector, or the Weiss Manfréd Works and the Ganz factories in machine construction. Economic development was supported by the state as well, primarily by the Győr programme in 1938. Between the mid-1920s and the late 1930s, in spite of the Great Depression, Hungary’s domestic product expanded by nearly 50 per cent. Unfortunately, the Hungarian economy did not have another ten years of freedom and peace for development, as World War II made it necessary to introduce

— 13 —

100 years of economic history, one decade of sustainable convergence

a wartime economy, before leading to widespread destruction again. During the war, some 40 per cent of the national wealth, equivalent to around four years of GDP was lost, and war reparations amounted to another 2.5 years of GDP. In 1945, Hungary began a second reconstruction period only 25 years after the first one. By 1949, the national income reached the 1938 level, but the successful reconstruction was led astray by the communist takeover. Chart 1: Periods of growth and convergence in Hungary compared to Austria 2013–2019

1996-2008

1986-1988

Relative development compared to Austria 1971-1982

1957-1969

1947-1955

1933-1936

1927-1929

Relative development compared to Austria 1921-1925

80 70 60

0 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Growth period Growth and convergence period Growth, convergence and equilibrium period

Note: On the basis of the data of Maddison until 1990, Ameco from 1991 and Eurostat from 1995. Source: Maddison, Ameco, Eurostat and MNB.

— 14 —

100 years of economic history, one decade of sustainable convergence

The communist regime, which came to full power from 1949, introduced socialism, a new economic principle based on state ownership and complete state control. As this new principle was very different from the Hungarian and European organic economic development, it finally collapsed throughout the whole region due to its inconsistencies. Hungary became embedded in the socialist economies’ centrally directed international division of labour and planned economy-based operation, which led to the end of the agricultural and light industry traditions that had existed until then (e.g. collectivisation of agriculture), and also to the forced development of heavy industry, which did not have a raw material base. Initially, Hungary recorded considerable economic growth. However, this was not primarily the socialist system’s achievement, but the consequence of very low initial levels (Jánossy’s reconstruction period). In the 1960s, it was already apparent that the socialist system – which discourages individual performance and prefers equality to efficiency – was unable to produce long-lasting economic results. Therefore, from 1968, the command economy system was slightly eased with the introduction of the New Economic Mechanism. In the mid-1970s, however, the reforms were withdrawn. As a result of the peculiarities of the socialist system, the economic problems of capitalist countries – such as inflation and unemployment – did not come to the fore. Inflation was prevented by system of officially fixed prices, while unemployment was countered by inefficient employment, i.e. ‘unemployment within the gates’. Of course, these were not real solutions to the underlying structural problems, but only postponed them at a significant cost (low-efficiency production). Economic growth was hindered by the absence of market coordination, the lack of incentives to innovate and to put efforts into boosting productivity. Companies received hardly any profits from their innovations, while their losses were covered by the state (soft budget constraint). As a result of slowing economic growth and the oil price shocks of the 1970s, it was apparent that the system was unsustainable, as it was unable to provide a standard of living that would prevent the intensification of social tensions. Therefore, on the one hand it relied upon international loans to cover consumption, which exceeded the level of production, and, on the other hand, it gradually allowed the spread of — 15 —

100 years of economic history, one decade of sustainable convergence

independent economic activities. Finally, under economic and social pressures, the socialist systems collapsed roughly simultaneously in Central Eastern Europe, but Hungary was a leader in the preceding developments. Chart 2: Growth and convergence periods of the Hungarian economy 3

Growth surplus Single convergence period with equilibrium: 2010–2019

–+

2010–2019 2000–2009

1930–1939

–

1920–1929

–

1970–1979

-1 1980–1989

–

-2

1960–1969 1950–1959

-3 -4

1990–1999

–

-5 -2

-1

–

– GDP growth

1940–1949

Positive current account balance Negative current account balance No current account balance data available

Note: The additional growth is the difference in growth compared to Austria. Source: MNB, based on Maddison and Eurostat.

In 1990, the Hungarian economy was on the verge of a third restart in 70 years, and a transitional period of 20 years began, which was harder and longer than expected. Hungary held free, democratic elections for the first time in its history, and Prime Minister József Antall formed a government. The general public expected democracy — 16 —

100 years of economic history, one decade of sustainable convergence

and market economy to result in rapid development and a quick achievement of Western welfare, but the transition proved to be very difficult. The government simultaneously had to cope with the political and social transformation as well as with the deep economic crisis caused by the disintegration of the socialist system, as a result of which around 1 million people lost their jobs, with the Hungarian economy thus also losing the knowledge and experience they had accumulated. Economic policy applied a rapid transition to a market economy, the so-called shock therapy. This gave little time for economic agents to adjust to the new conditions. Hungary lost its East European trading partners, while it was not competitive vis-à-vis the Western economies. The country managed to cope with the crisis of the economic transition after several years, but the dilemma of choosing between economic growth and equilibrium arose again. In the mid-1990s, the government wanted to create equilibrium at the expense of economic growth, for which it applied fiscal tightening, devaluated the exchange rate, introduced import duties and raised inflation. These tightening measures led to lower economic growth, consumption and investment. Foreign companies settling in Hungary played an important role in economic growth and modernisation, but at the same time they contributed to the development of a dual economic structure. Foreign-owned large corporations were competitive and exported to the whole world, whereas the productivity and competitiveness of Hungarian-owned small enterprises lagged behind. By the late 1990s, the share of the European Union became dominant in Hungary’s foreign trade. The strengthening of Hungary’s new types of relations is indicated by the country’s joining NATO in 1999 and the European Union in 2004. The first years of the new millennium made Hungary the economic front-runner of the CEE region, but by the mid-2000s the state and households could only maintain economic growth from external funds, paying the price in the form of simultaneously high budget and current account deficits and mounting external debt. All of this led to the stoppage of economic growth already after 2006, and an even more severe consequence was that the global financial crisis of 2008-2009 found Hungary in a very vulnerable position. In addition to low employment and subdued investment activity, high indebtedness in foreign currency — 17 —

100 years of economic history, one decade of sustainable convergence

was the most serious structural problem. As a result of the unsuccessful economic policy of the 2000s, Hungary, which had been a front-runner in the region, became one of the weakest countries of the region. The new economic policy approach that started in 2010 aimed at the simultaneous achievement of economic growth and equilibrium, and regarded the increase of employment as a crucial factor. At the same time, this ensured that a large proportion of people could benefit from the advantages of growth. As a result of fiscal reforms after 2010 and monetary policy measures from 2013, Hungary embarked on the path of growth and convergence. Between 2013 and 2019, the average growth rate of the Hungarian economy was 3.8 per cent, 2 percentage points higher than the average of the European Union, and this also led to a convergence process. By the end of the decade, the investment rate had become one of the highest in the European Union, projecting the sustainability of growth. By the end of the decade, the Hungarian economic development exceeded 57 per cent of the level of Austria, and surpassed the levels of Poland and Greece, the latter of which had previously been more developed, but endured a severe crisis.

Equilibrium – financial sustainability From time to time over the past 100 years, the Hungarian economy was temporarily able to achieve rapid economic growth, but prior to 2010 this always occurred in conjunction with a deterioration in external and internal balances. Equilibrium is a sometimes disregarded factor of economic development, but its importance is similar to growth. Economic history makes it obvious that persistent economic growth is only possible if equilibrium is maintained, as imbalance often leads to crises that slow down growth for years or even a whole decade. One of the main obstacles to developing countries’ convergence is that they are hit by more frequent and stronger crises than developed countries. These crises may stem from serious — 18 —

100 years of economic history, one decade of sustainable convergence

internal problems, or if there is imbalance, a country may also be hit hard by external shocks. There are various examples of this in Hungarian economic history. In the 1980s and the 2000s, accumulating internal problems first led to stagnation and then to an even more severe crisis as a result of strong external shocks (disintegration of the socialist bloc and the global financial crisis, respectively). After the trauma of Trianon, financial stability had to be created from the very ground up in Hungary. The country had practically no foreign currency, and a considerable portion of its assets were destroyed by the world war and the following two years. Its currency, which was initially the stamped crown of the Austro-Hungarian Monarchy, depreciated rapidly. The country’s supply with foreign currency was only increased by the 1924 loan from the League of Nations, leading to Hungary establishing the independent Magyar Nemzeti Bank. From 1927, Hungary introduced its own currency, the pengő, which stopped further inflation. In the second half of the 1920s, the budget continuously had a surplus, but the current account remained negative, which was attributable to the import intensity of reconstruction and the interest burden of external debt. The Great Depression of 1929-1933 strongly affected Hungary as well, although not for internal reasons, but due to the recession in Hungary’s trading partners. Prices declined (deflation), the budget deficit and government debt increased during the crisis, but imports also fell by 75 per cent, and thus the current account remained balanced. World War II destroyed the fragile balance that had existed until then. Government debt increased in all of the involved countries, rising to about 50 per cent of GDP in Hungary by 1943. External borrowing was not an option, so the Magyar Nemzeti Bank printed money to cover the general government’s expenditures, which again led to higher inflation. Although the depreciation of the currency was significant during the years of the war as well, it was not even close to the inflation experienced after the war, leading to one of the fastest depreciations in global history. Inflation was only stopped by the introduction of the new currency, the forint, in 1946. As a result of the pressure exerted by the Soviet Union, Hungary did not participate in the Marshall Plan, which — 19 —

100 years of economic history, one decade of sustainable convergence

helped reconstruction after the war. Moreover, Hungary paid high war reparations and thus it tried to start the reconstruction mainly relying upon internal sources, and working within the system of socialist countries from 1949. During the decades of socialism, statistics on the (shortage) economy often concealed the imbalances that accumulated due to internal tensions, but eventually they became apparent and resulted in the end of the socialist system. Hungary started the 1950s under forced equilibrium, as borrowing was hardly possible. In the system based on nearly complete state ownership, the general government deficit and government debt became concepts that were hard to interpret, because it was not easy to draw the line between the general government and the system of state-owned companies. While financial equilibrium was inevitable, the socialist planned economy did not care about the internal balance of the economy at all. Heavy industry was artificially developed to the detriment of light industry, services and agriculture, price ratios were distorted, and the ratio of investment to consumption was decided on the basis of five-year plans instead of economic considerations. Although statistical data indicate equilibrium, they conceal internal social tensions and welfare problems (compulsory deliveries to the state, rationing). The latter came to the surface in the 1970s, the internal reason for which was the withdrawal of the reforms that eased the command economy at the end of the 1960s, while the external reason was the increasingly unfavourable change in the terms of trade (primarily due to sudden oil price increases). This only affected the socialist countries with a delay, as the price of the Soviet oil exports only started to increase from 1976. Due to these unfavourable changes in trade prices and to the uncompetitive exports, from 1974 significant deficits emerged in the trade balance and also in the current account. Due to the strong interdependence between the economy and the state, the above was reflected in the increase in government debt as well, which rose from 30 per cent of GDP to 71 per cent during the decade. The debt was almost entirely external, and more than half of it was denominated in US dollars and German marks (in fact, some if it was lent on to other socialist countries). Hungary’s accession to the IMF in 1982 was primarily motivated — 20 —

100 years of economic history, one decade of sustainable convergence

by the interest in remaining able to borrow from Western investors. In the 1980s, the amount of loans outstanding was increased not only by real economic developments, but also by poor financial decisions (the appreciation of the outstanding loans and their high interest rates). Finally, one of the most important reasons of the many that led to the collapse of the socialist system was the simultaneous, continuous and high deficit of the current account and the general government budget (twin deficit), in addition to the unsustainably increasing debt, while consumer prices, which had been kept at an artificially low level until then, were also rising. Although in 1987 the banking system became a two-tier system again, the tasks of the Magyar Nemzeti Bank remained excessively wide-ranging, and its unprioritised system of objectives and tools was not yet suitable for ensuring price stability. Chart 3: Government debt and inflation 50

Per cent

As percentage of GDP

100

–10

Government debt (right axis) Inflation

Source: HCSO and MNB.

— 21 —

2016

2010

2004

1998

1992

1986

1980

1974

1968

1962

1956

1950

1944

1938

1932

1926

1920

–20

100 years of economic history, one decade of sustainable convergence

For most of the 20 years following the regime change, equilibrium and economic growth could only be achieved to the detriment of one another. During the first years of the transition, the economic recession reduced imports, resulting in a balanced current account, but the budget deficit grew further due to the fall in tax revenues. In the CEE region, Hungary switched to a market economy with the highest level of government debt, and the crisis of economic transition increased the debt ratio from 66 per cent in 1990 to 90 per cent in 1993. Following that, the economy showed signs of recovery, as GDP expanded, while the debt ratio declined. At the same time, however, the current account deteriorated. The government of the mid-1990s intended to treat this situation with considerable tightening, devaluation of the forint and measures to increase inflation. The rate of inflation remained high for years (declining to below 20 per cent only in the late 1990s). Around the millennium, economic policy was appropriate, as it simultaneously achieved an improvement in financial equilibrium and accelerated economic growth, but this period ended with the drastic increase in the budget deficit from 2002. Serious twin deficit evolved again by the mid-2000s; government debt and the foreign debt of the whole economy grew simultaneously. Households’ foreign currency loans were a major equilibrium problem. As a result of all of this, the outbreak of the global financial crisis in 2008-2009 found Hungary in a very vulnerable state and hit the Hungarian economy especially hard. The balance in the general government and other indicators of macro-financial stability gradually improved after 2010. With the necessary adjustment of the economy, the current account already started to improve during the crisis, followed by rebalancing of the budget from 2012 as a result of new types of fiscal reforms focusing on both economic growth and equilibrium. Starting from 2013, there was also a turnaround in monetary policy, in the course of which the central bank reduced interest rates while respecting the priority of the inflation target, encouraged lending in a sound structure, supported the transformation of households’ foreign currency

— 22 —

100 years of economic history, one decade of sustainable convergence

loans into forint-denominated loans, and contributed to the financing of the economy from domestic funds. During the decade, both government debt and external debt declined steadily, with net external debt falling to around 10 per cent of GDP. The almost completely balanced state of the economy is further reflected by the low inflation, which has been close to the 3-per cent central bank target since 2017.

Standard of living – social sustainability In addition to growth and equilibrium, the third factor of economic convergence is the standard of living and welfare, which are closely associated with the former. On the one hand, the nature of economic growth determines how widespread the range is where its returns are distributed within the society; on the other hand, crises may jeopardise the everyday living of many. Therefore, balance is also necessary in this respect. Hungary experienced that the failure of the socialist system was inherent in the fact that while it aimed for excessive equality, it did not reward individual performance and innovation. It is also seen, however, that unregulated liberal market economies, at the other extreme, lead to excessive disparity, increase social conflicts, and decelerate future economic growth through limited social mobility and its negative effects on human capital. The economic history of the past 200 years suggests that those countries were successful where the abilities and strengths of the state and the market were harmonised. The balance between the state and the market contributes to the rise of a broad middle class, which increases cohesion, facilitates the development of human capital and contributes to rising labour productivity. In the two decades following the 1920 trauma, economic growth entailed a gradual rise in the standard of living. Trianon was an enormous trauma not only at a national level, but at the family level as well. 63 per cent of the population found themselves

— 23 —

100 years of economic history, one decade of sustainable convergence

outside Hungary, and thus many families were torn apart. According to the 1920 census, the population of Hungary was slightly below 8 million. The number of inhabitants increased steadily, exceeding 9.3 million by the beginning of World War II. However, the housing situation was a permanent problem; in this period the number of people per room declined only slightly, from 2.9 to 2.5. As a result of the Great Depression, in the latter half of the 1930s, real income in the industrial sector still did not reach the pre-war level, although working hours exceeded 48 hours per week for more than half of the workers, while in agriculture, where more than half of the employed worked, the land reform in the early 1920s was very limited. On the other hand, however, various achievements of modern social policy (health and accident insurance, pension, paid holiday and child-raising allowance) started to gain ground, and the results of Kunó Klebelsberg’s Hungarian public education reform were outstanding. By 1930, 90 per cent of the population could write and read, which was an outstanding proportion in the region at that time. As a result of the development of public health, life expectancy at birth increased from 42 years to more than 55 years. World War II caused catastrophic losses of lives on the battlefield, in prison camps and among deported civilians, and the fighting in Hungary destroyed even the basic means of life in many places. The gradually evolving socialist system meant not only economic, but social transformation as well. Although it aimed to steadily raise standards of living, in practice it was only able to attain rough equality at a low level. An example for this is the land reform that took place in 1947. This provided land for many, but the size of these plots was too small to ensure sustainable living (later the organisation of agriculture into cooperatives hurt the economy in another way). One development with a lasting effect in the 1950s was the increase in the employment of women, which – apart from the Ratkó era – was coupled with a decline in the number of children. By 1960, the number of children per woman decreased to below 2.1, the necessary rate

— 24 —

100 years of economic history, one decade of sustainable convergence

for maintaining the population size. At 10.7 million people, the number of inhabitants of Hungary peaked in 1980. Life expectancy at birth rose to 69 years by 1966, when it stopped, and only exceeded that level at the turn of the millennium. The decline in the weight of agriculture also led to the flowing of the population into towns, i.e. urbanisation. Solving the housing problem was one of the objectives of the socialist system. Apparently this is why around 60,000 flats per year were built in the 1960s and 80,000–90,000 annually in the 1970s, but two thirds of these were built privately. This entailed a decline in the number of people per room from 2.6 to 1.1 during the decades of socialism. Nevertheless, in 1969 nearly two thirds of the population still lived in homes without modern utilities, and this is what the housing estate construction wave of the 1970s intended to change. From the 1960s, households were already able to save an increasing portion of their disposable income, which was initially reflected in savings for housing and later in a rise in financial wealth. Unemployment did not exist according to the statistics, but companies were not always able to give work to the employees they were obliged to hire (unemployment within the gates). Starting from the end of the 1970s, partly due to the surge in oil prices and partly as a result demographic factors, the standard of living stopped rising. Both the population and the number of employed declined, and real earnings also started to decrease, which could only be offset by increasing the benefits provided by the state. At the end of the 1980s, however, this was also not sufficient to prevent incomes and consumption from declining, which triggered the fall of the socialist system as the departure from the living standard of Western Europe became increasingly visible.

— 25 —

100 years of economic history, one decade of sustainable convergence

Chart 4: Life expectancy at birth and the number of people living in one room 80

Life expectancy (years)

Number of inhabitants per room (persons)

3.5

0.5

0.0 2010’s

1.0

2000’s

1990’s

1.5

1980’s

1970’s

2.0

1960’s

1950’s

2.5

1940’s

1930’s

3.0

1920’s

Number of inhabitants per room (right axis) Life expectancy at birth

Source: HCSO and MNB.

Although the first 20 years following 1990 saw an overall improvement in the standard of living, there were strong fluctuations, and widespread development only evolved in the 2010s. The political transformation caused a strong social shock again instead of the expected freedom and welfare. The hidden unemployment and inflation, which was suppressed through the system of price regulation, became visible. As a result of forced market liberalisation, deregulation and privatisation, a large portion of the domestic industry and enterprises disappeared, and around 1 million people lost their jobs, many of them permanently, while real wages declined considerably in the remaining positions as well. Consumption only started to increase again in 1993 and real income in 1994, but then a fiscal austerity package restrained further improvement. Starting from 1995, real wages declined by 16 per cent in two years, and per capita consumption fell by nearly one tenth. Following that, households’ income and consumption rose — 26 —

100 years of economic history, one decade of sustainable convergence

steadily until 2006, but after 2002 this occurred only as a result of increasing government debt and household loans. The fiscal austerity package in 2006 reduced the standard of living again, even prior to the outbreak of the financial crisis. Following that, the crisis and its initial improper management also strongly affected Hungarian families’ existence. The number of unemployed grew by around 150,000, while the real earnings of those employed declined. One major problem was the rise in the instalment of households’ previously accumulated foreign currency-denominated loans, jeopardising the housing situation of a large number of foreign currency debtors. A response to the problem of employment was only given by the employment stimulating fiscal reforms introduced from 2010. In 2010, the proportion of working people within the population in Hungary was the lowest in the European Union, but employment expanded by some 800,000 people in 10 years, and thus Hungary reached the EU average. The increase in employment allowed more and more people to benefit from the economic growth. The recovery that started in 2010 turned into persistent growth from 2013, and real wages also grew rapidly in the second half of the decade. There was a major increase in income disparity at the time of the political transformation, but following that – apart from the period of the global crisis in 2008 – this inequality remained more or less constant, and thus it is still considered moderate in an international comparison. In the 2010s, Hungary experienced the largest decline in the proportion of social groups that face the risk of poverty and social exclusion. Socialism was unable to solve the housing problem completely, which also did not ease after the political transformation. A sufficient number of new homes, exceeding 40,000 per year, was built only in the mid-2000s, as a result of the successful housing market subsidies in the early 2000s. Later, however, instead of these subsidies, households’ foreign currency-denominated loans became the source for housing construction, resulting in drastic increases in households’ repayment burdens and jeopardising the dwelling of hundreds of thousands of people during the financial crisis after 2008. Only the coordinated action of the government, the central bank and the banking sector after 2013 was able to remedy this situation. As a result of the decline in the population, the number of people living in one room decreased

— 27 —

100 years of economic history, one decade of sustainable convergence

to below 1 in spite of the moderate pace of housing construction. The demographic challenges, which had been accumulating since the 1960s, became even more serious in the new millennium, as fertility hit the bottom around 2010, from which it increased to 1.5, also as a result of the family-friendly programmes that were introduced. Life expectancy at birth has been rising again since the mid-1990s, reaching 76 years in 2019.

Conclusions The indicators for growth, financial equilibrium and standards of living were taken as a basis for the comparison of economic growth at a decennial scale. From the combination of these three aspects, we created a sustainable convergence index, which quantifies the degree of Hungary’s convergence to the economically more developed European states in terms of economic power and the standard of living, and also shows whether the country was able to maintain its financial equilibrium. The sustainable convergence index shows that over the past 100 years, notwithstanding the extreme shocks, Hungary was able to develop together with Europe, but real convergence, which also preserves the macro-financial equilibrium, was only typical of the 2010s. The economic upswing and slow catching-up by Hungary recovering from the Trianon shock was interrupted by the Great Depression and ended by World War II. The decades of socialism started with rapid economic growth, but in the reconstruction period the western part of Europe developed even faster, thus leading to a further lag instead of convergence for Hungary. In many cases the imbalance stemming from the command economy was not reflected by economic statistics but rather by structurally accumulating tensions, which eventually resulted in a decline in living standards and the collapse of the socialist system. The economic transition of the 1990s was longer and harder than expected, and thus an adequate combination of growth and equilibrium only evolved by the end of the decade. This harmony was broken again in the 2000s, when imbalances once more — 28 —

100 years of economic history, one decade of sustainable convergence

became an obstacle to economic growth. It was the wide-ranging economic reforms starting in 2010 that created the conditions for successful convergence, leading first to equilibrium and then also to significant economic growth from 2013. Chart 5: Sustainable convergence index 3

Index

-3

Welfare Equilibrium

2010-2019

-2

2000-2009

-2

1990-1999

-1

1980-1989

-1

1970-1979

1960-1969

1950-1959

1940-1949

1930-1939

1920-1929

Growth Sustainable Convergence Index

Note: The sustainable convergence index is the sum of these components: growth, balance and welfare. The individual time series were standardised, i.e. transformed, so that as an average of the period under review their average and their standard deviation should be zero and one unit, respectively. This allows the comparison and averaging of the variables expressed in different units of measure. The growth component is determined by the average change in domestic GDP and the difference in the average change in per capita GDP compared to Austria. The balance component comprises the absolute distance from the inflation target (3 per cent), the current account balance and the change in the government debt-to-GDP ratio. Changes in inflation and debt ratio are included with opposite signs. The welfare sub-index is quantified on the basis of the changes in life expectancy and in the per capita number of rooms. Source: MNB calculations based on HSCSO, Eurostat, Maddison and Faragó (2010).

— 29 —

100 years of economic history, one decade of sustainable convergence

1920s

1930s

1940s

1950s

1960s

1970s

1980s

1990s

2000s

2010s

a. Average change in per capita GDP

4.0

1.5

2.9

4.1

3.8

2.2

1.0

-0.6

2.7

3.0

b. G rowth difference compared to Austria (average change in per capita GDP)

-1.1

-0.5

0.8

-3.2

-0.8

-1.4

-1.7

-4.0

1.5

2.1

c. R elative level of development as a percentage of Austria (end of decade)

44.7

53.4

61.6

52.5

55.3

57.5

54.1

39.4

50.5

57.5

15.9

23.9

32.0

24.1

21.9

24.0

22.0

3.8

3.9

2.0

-1.2

2.3

1.8

1. Economic growth

d. Investment rate e. Average change in household consumption f. C hange in employment (thousand people)

173

464

-95

456

347

-220

-839

-124

762

g. Change in employment rate as a proportion of the population (percentage points)

-1.6

2.1

-0.9

1.9

-1.0

-0.6

-7.5

-0.5

8.6

a. Inflation

0.4

-1.4

19.2

6.3

0.5

3.8

9.0

22.3

6.1

2.5

b. C urrent account balance as a percentage of GDP

-5.3

-1.0

-1.5

-0.9

-4.0

-2.3

-4.4

-6.8

1.5

c. C hange in net external liability (percentage points)

2.3

0.2

25.1

15.5

25.9

41.4

-53.6

d. General government balance

-0.9

-0.1

-2.6

-1.7

-7.3

-6.0

-2.8

6.4

5.2

40.4

3.3

-5.7

22.5

-14.3

2.3

2.7

-0.8

-1.4

3.3

4.5

2. Balance and inflation

e. C hange in government debt ratio (percentage points)

-2.6

2.9

n.a.

3. Quality of life a. Average change in real wage per earner b. Life expectancy

c. N umber of people living in one room

2.9

2.6

2.5

2.6

2.3

2.0

1.5

1.1

1.0

0.8

22.2

22.1

28.9

26.2

28.0

d. Income Gini index

— 30 —

1 The reviving economy of the truncated country: the 1920s Antónia Hüttl – Pál Pozsonyi Main economic indicators 1920–1929 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 GDP growth *

19.7

-1.5

6.3

6.8

Change in consumer price index

-6.1

-6.5

9.2

5.3

0.0

Government debt as percentage of GDP

27.2

25.6

25.8

23.5

21.9

-2.8

-8.2

-7.9

-3.1

Current account balance as percentage of GDP

Note: *Instead of GDP the time series present the national product and instead of calendar year the periods refer to the January-July period of the given year and to the August-December period of the previous year. Source: MNB.

After World War I, the Treaty of Trianon left the Hungarian economy in an extraordinary situation. Three fundamental problems had to be solved at the same time: the disintegration of production linkages within the country, dissolution of the AustroHungarian Monarchy and other restrictions arising from the terms of the Peace Treaty.

1.1 Economic policy challenges The dismemberment of the country shocked Hungarian society. Hungary1 lost 71.4 per cent of its territory and 63.5 per cent of its population. In terms of the structure of the economy, the losses were also significant: 1

Together with Croatia and Slavonia.

— 31 —

1 The reviving economy of the truncated country: the 1920s

Chart 1-1: Impact of the Treaty of Trianon on the main macroeconomic indicators and structure of the Hungarian economy 100 Per cent Arable land

38.6

Pasture

Forest

Cattle

29.4

Coal

72.8

Iron ore

16.9

Length of railways

37.9

Length of roads

35.5

Factory production

53.1

Import

38.2

Export

40.9

Foreign trade surplus

Net national wealth

37.8

National income

39.7

Government’s tax revenues Capital of a credit institutions

61.4 74 88 70.6 27.2 83.1 62.1 64.5 46.9 61.8 59.1 84 62.2 60.3

46.6

53.4

73.1

26.9

Remained

Lost

Source: Magyar Statisztikai Szemle (1938).

The dismemberment of the country severed previously established production chains. While a significant portion of the processing capacities remained in the new truncated part of the country, the extraction of mineral resources and the majority of agricultural — 32 —

1 The reviving economy of the truncated country: the 1920s

production went to the detached parts. Based on the 1913 data, in the manufacturing industry, 53.1 per cent of production value, 49.2 per cent of working days and 55.1 per cent of wages remained in the truncated part of the country. This meant that – calculated at the pre-war level – average wages in the manufacturing industry of the truncated part of the country became higher: while in Greater Hungary before the Peace Treaty the average wages per working day were 3.5 gold koronas, in post-Trianon Hungary they were more than 10 per cent higher (3.92 gold koronas). Presumably, this was due to the sectoral and skill composition of the workforce. Due to the disruption of supply chains, the situation of the mechanical engineering and food industries became critical: 82.2 per cent of the mechanical engineering and 54 per cent of the food industry remained within the new borders. In railway machinery manufacturing, production had previously met the overall need for machinery throughout the country’s rail network, but after the Treaty, there was significant overcapacity, as barely 40 per cent of the rail network was within the new national borders. A similarly critical situation emerged in the food industry, particularly in the milling industry. The previously world-famous Hungarian milling industry lost most of its raw material base. Before the war, Budapest was the world’s second largest mill city. In the early 1920s, however, grain production in the new territory of the country was not even enough to tie up the capacity of the mills in Budapest alone. The structure of agricultural holdings also changed unfavourably. In particular, the problem was that about 58 per cent of estates between 500 and 1,000 acres and more than 70 per cent of estates of over 1,000 acres remained in post-Trianon Hungary. Inequality in land ownership exacerbated social tensions within the rural population and the need for land distribution became increasingly acute. At the beginning of the decade, the land reform under István Szabó Nagyatádi was implemented for less than 9 per cent of the total cultivated area, and about 425,000 families received land, mostly in the form of smallholdings. — 33 —

1 The reviving economy of the truncated country: the 1920s

The dissolution of the Austro-Hungarian Monarchy created a completely new situation for both the real economy and the financial sector. Previously, the majority of Hungarian production was sold in the Monarchy’s protected internal market of 50 million inhabitants, and this is where most of the domestic use came from. In the new situation, foreign trade – which had previously played a marginal role – became more important, both to meet industrial demand for raw materials and to satisfy households’ consumption needs; initially this trade was traditionally largely among the former successor states. It would have made sense to maintain the customs and currency union between the successor states, but most of the successor states rejected this, voicing extreme nationalist arguments. Thus, in order to regulate Hungarian foreign trade, on the one hand, a suitable tariff regime had to be established, and on the other hand, it had to be ensured that the necessary amount of foreign currency was available for essential imports. The customs policy primarily protected the interests of Hungarian industry and less so of agricultural exports: on average, tariffs of 30 per cent were imposed on processed products and duty rates on light industry were close to 50 per cent. In the context of fixed foreign exchange management, exporters were obliged to convert their foreign exchange earnings into domestic currency and this was used to cover the foreign exchange demand of authorised imports. Fixed foreign exchange management was in force until up to the end of 1925 (and was subsequently reintroduced in 1932). With the dissolution of the Austro-Hungarian Bank performing central bank functions, the successor states had to mark the common currency, the korona, in circulation by overstamping it and then to replace it with their own currency. However, before the introduction of the new currency, the pengő, it was necessary to stop the increasingly rapid inflation. After remaining stable for many years until 1914, the korona lost value during the war due to the accelerating inflation. As the Reparation Committee had seized all the state’s — 34 —

1 The reviving economy of the truncated country: the 1920s

revenues and assets until the reparation agreement was signed, the state was unable to obtain foreign credit for years. Therefore, in 1920, the authorities first tried to stop inflation by restoring a balanced budget and encouraging savings. The first stabilisation programme failed, partly because not even the increased tax revenues could cover the budget expenditures, and partly because – due to the artificially generated cash shortage – the korona appreciated and this further undermined the profitability of exports. Finally, at the beginning of 1924, Hungary managed to obtain a significant amount of loans from the League of Nations, albeit under quite unfavourable financial conditions. The conditions for lending also included the establishment of a central bank independent of the state and with an issuing monopoly, as well as the need to achieve budgetary balance within two years. In 1924, the Magyar Nemzeti Bank was founded. To improve the budgetary situation, direct taxes, income and property taxes, and excise taxes and customs duties were first significantly increased. Balance was already restored in the 1924-1925 fiscal year. As the demand for financing current budget expenditures was thus reduced, part of the loan was reallocated to investment purposes. In addition, having the League of Nations loan also facilitated access to foreign private loans. Capital was urgently needed to transform the structure of production. The national economy began to recover from the chaos following the Treaty of Trianon and the rapid inflation slowed, although prices still fluctuated significantly until mid-1926. The new currency, the pengő, was introduced on 1 January 1927. During the first half of the decade, accelerating inflation had opposite effects on the economy. On the one hand, it significantly rearranged the distribution of wealth and income, but, on the other hand, it helped stimulate the economic recovery. It benefited large landowners and industrial interests because, in fact, it depreciated their pre-war debts. The banks were financed by the state through unvalorised credits. The burden of inflation was borne by wage and salary earners and pensioners:2 it is estimated that, 2

I n the first half of the 1920s, the state’s pension expenditures still increased sharply, as the Hungarian state took over the remuneration of state employees repatriated from the detached areas.

— 35 —

1 The reviving economy of the truncated country: the 1920s

from the start of the war until 1924, the real value of household incomes fell by more than one half. At the same time, due to the inflation and restrictions on imports of finished products, production recovered from its low point, and the sectoral structure of production adapted to changing demand: new industries emerged. For example, the previously missing textile industry emerged, whereas excess industrial capacities declined. Stabilising inflation boosted investment sentiment. As a result, a significant economic recovery unfolded in the second half of the decade.

1.2 Population, employment, wages According to statistics, the economic activity of the population decreased by around one and a half percentage points over the decade. However, this is largely due to the fact that many people, mostly elderly, had resettled from the detached parts of the country, including many state employees. The sectoral structure of employment changed substantially, as the share of people working in agriculture fell by more than 5 percentage points. Table 1-1: Active earners by economic sector (thousand persons) Agriculture

1920

1930

2,127

2,030

Industry, construction industry

563

755

Other sectors of economy

875

953

3,565

3,738

Total of active earners Total population

7,990

8,688

Proportion of active earners

44.6%

43.0%

Source: HCSO (1996).

— 36 —

1 The reviving economy of the truncated country: the 1920s

In the 1920s, until the peak of the economic recovery in 1929, the number of factory workers increased by more than 73 per cent. Real wage growth was much more modest. It is estimated that in 1921, the wages of factory workers reached only 64 per cent of the 1913 wages in real terms. Over the decade, real wages in the manufacturing industry increased by just 14 per cent, and thus, at the end of the decade – even at the peak of the economic recovery – they still remained below the pre-war level. This was partly explained by the transformation in the structure of employment. Mechanisation allowed many phases of work to be carried out by workers with lower qualifications, instead of skilled workers. According to contemporary estimates, the rise in production value and wage costs in the manufacturing industry occurred roughly in parallel, i.e. labour’s share in the income generated did not decrease. Chart 1-2: Number of workers and real wages in the manufacturing industry 250

Thousand persons

Per cent

120 100

200

150

60 100

Number of workers, thousand

Source: Magyar Statisztikai Szemle (1938).

— 37 —

1930

1929

1928

1927

1926

1925

1924

1923

1922

1921

Real wages per capita, 1921=100

1 The reviving economy of the truncated country: the 1920s

Although orders regulated the maximum daily working time, statistics show that in the manufacturing industry less than half of the workers worked no more than 8 hours a day (48 hours a week) and 10 per cent of them worked more than 10 hours a day. These ratios had not essentially improved over the decade. Table 1-2: Working time in the manufacturing industry Proportion of the number of workers who worked less than 7

Year 1925

8–10

10–11

more than 12

6.7

5.2

hours a day (%). 2.5

46.1

39.5

1926

0.3

45.3

41.7

7.1

5.6

1927

0.4

46.2

40.1

7.6

5.7

1928

0.7

44.3

42.5

7.5

5.0

1929

4.2

40.8

43.1

7.7

4.2

1930

11.0

36.6

42.3

6.6

3.5

Source: Magyar Statisztikai Szemle (1938).

Thus, the economic recovery mainly boosted industrial employment and increased average real wages to a lesser degree. The workload continued to exceed what was usual in developed countries.

1.3 Development of prices In the first half of the 1920s, the value of money declined sharply, and under these circumstances it was almost impossible to measures the changes in prices. The rate of inflation can only be characterised by the depreciation of the korona. Between 1921 and 1924, the value of the Hungarian korona relative to the Swiss franc fell to less than three thousandths of its original value. — 38 —

1 The reviving economy of the truncated country: the 1920s

Table 1-3: Changes in the value of the korona (1921–1924) Mid-1921

Mid-1922

Mid-1923

Mid-1924

2.3400

0.5600

0.0800

0.0065

Swiss franc / 100 Hungarian korona Source: Berend – Ránki (1972).

Prices then stabilised from mid-1924 onwards, albeit with large fluctuations at first. In the second half of the decade, the level of wholesale prices can be considered stable for the whole decade, with significant fluctuations in the short run. Although, compared to the pre-war period, the price level of industrial products was higher than the price of agricultural products every year, the gap between agrarian prices and industrial prices did not widen significantly until the end of the decade, during the global economic crisis. Chart 1-3: Wholesale price indices (1913 = 100)

120

110

100

Agricultural products

Industrial products

Source: Magyar Statisztikai Szemle (1938).

— 39 —

1929

130

1928

130

1927

140

1926

140

1925

150

1924

150

1 The reviving economy of the truncated country: the 1920s

1.4 National product As rapid inflation in the years before 1924 confused the value and financial records, it is difficult to present a comprehensive picture of the situation of the national economy for this period, with statistical accuracy. According to expert estimates, it can only be presumed when the national economy as a whole reached the level of the last pre-war year of peace, 1913, with regard to post-Trianon Hungary. According to Romsics’s estimates, “in 1925 the gross national product per capita3 was already close to that of 1913”.4 As resettlement resulted in a significant increase in population in post-Trianon Hungary, it can be presumed that, in terms of the absolute level, Hungary’s national product reached the pre-war level in 1924-1925.5 In the second half of the decade, the strong economic growth averaged 6.2 per cent per year, and at the peak of the economic recovery, i.e. in fiscal 1929-1930, the national product was more than 35 per cent higher than the level of 1913, the last pre-war year of peace.6 This development was also remarkable by international standards. According to the estimates of Maddison (2001), in 1913 the Hungarian

he indicator of macroeconomic performance has been called gross domestic product (GDP) since the T 1960s. In the past, the term “national income” was mostly used in this sense, though with different content by era and country. In the present study, we use the term “national product” for the period before 1950. This indicator can be derived from the data provided by Hungarian statistics of the period, and at the same time, it is relatively close to the current concept of GDP.

Romsics (2017, p. 388).

I n the publication of the HSCO (1996), national product in 1924-1925 is 10 per cent lower than in 1913. However, the pre-World War I data are derived from F. Fellner’s estimates and relate only to the production of the material sectors. The proportion of personal services increased significantly between 1913 and 1925.

ccording to György Szigeti: Nemzeti jövedelem, nemzeti vagyon és fizetési mérleg (National income, national A wealth and balance of payments) in Magyar Statisztikai Szemle (1938, p. 170), between 1925 and 1929, growth amounted to 23.7 per cent. His estimate relates to national income, the growth of which was restrained by an increase in interest paid abroad. According to Berend –Ránki (1972, p. 182), “compared to 1913, the level of national income in 1929 was only 10 per cent higher”.

— 40 —

1 The reviving economy of the truncated country: the 1920s

national economy reached 60.4 per cent of the Western European level. Romsics’s estimate is approximately similar to this: according to him, Hungary’s per capita national product was 69 per cent of the European average in 1913. According to his assessment, in the 1920s, the Hungarian economy had continued to catch up in a European context, and as a result, in 1929 the per capita national income (national product) of Hungary may have reached 74 per cent of the European average. Chart 1-4: Changes in national product 8,000

Million pengős

Per cent

160

7,000

140

6,000

120

5,000

100

4,000

3,000

2,000

1,000

At current prices, million pengős

1929/30

1928/29

1927/28

1926/27

1925/26

1924/25

Volume indices 1924/25=100

Source: HCSO.

1.5 Budget Supported by the economic growth, in the second half of the 1920s, the budget ended each year with surplus. The only exception was fiscal 1929-1930, when the signs of the Great Depression had already emerged, mainly in the form of decreasing turnover tax and customs revenues. — 41 —

1 The reviving economy of the truncated country: the 1920s

Table 1-4: Budget revenues and expenditures (million pengős) Administration Year

Revenues

Public corporations

Expenditures

Revenues

Expenditures

Total balance

1924-25

736.7

644.0

338.8

361.9

69.6

1925-26

822.7

729.3

413.0

418.1

88.3

1926-27

954.8

806.5

446.3

443.5

151.1

1927-28

987.1

891.1

461.0

463.2

93.8

1928-29

983.9

974.4

499.3

498.4

10.4

1929-30

951.6

974.0

472.3

504.2

–54.3

Source: Magyar Statisztikai Szemle (1938).

As a result of budget surplus, the ratio of government debt relative to national product decreased by more than 5 percentage points between 1924-1925 and 19281929. Due to the budget deficit in fiscal 1929-1930, government debt began to rise again, increasing by more than 2.5 percentage points. Chart 1-5: Budget balance and government debt as a percentage of national product 30

Per cent

3.00 2.50

2.00 1.50

1.00

0.50

0.00 -0.50

-1.00

Government debt

Source: Magyar Statisztikai Szemle (1938).

1929/30

1928/29

1927/28

1926/27

1925/26

1924/25

-1.50

Government balance (right axis)

— 42 —

1 The reviving economy of the truncated country: the 1920s

The budget surplus was not achieved primarily by cutting expenditures, but rather by significantly raising tax revenues. In 4 years, tax revenues rose by nearly 57 per cent. Successful economic policy was able to sustain economic growth, despite the higher income taxes. Of the taxes on consumption, only the level of excise-type taxes increased substantially. Besides, municipalities increased local taxes to finance their budget deficits. Table 1-5: State tax and excise revenues (million pengős) Year

Direct tax

Turnover tax

Consumption tax

Customs duty

Tobacco excise

1924-25

95.1

223.8

59.3

111.5

91.3

1925-26

171.3

238.3

83.6

124.5

123.2

1926-27

202.2

264.5

86.1

142.1

135.2

1927-28

210.3

270.0

97.4

148.2

151.2

1928-29

226.3

265.0

102.0

124.6

154.4

Source: Magyar Statisztikai Szemle (1938).

1.6 External economy The current account exhibited a large deficit throughout the second half of the decade. This was explained, on the one hand, by the import demand of the growing economy and, on the other hand, by the debt servicing on international loans raised at high interest rates.

— 43 —

1 The reviving economy of the truncated country: the 1920s

Chart 1-6: International balance of payments 1,600

Million pengős

1,600

1,400

1,200

1,000

800

600

400

200

0 1930

1929

1928

1927

1926

Revenues total Expenditures total Export of goods Import of goods Inflow of interests and dividends Outflow of interests and dividends

Source: Magyar Statisztikai Szemle (1938).

Foreign loans allowed for a radical restructuring of the production structure, and in the event of the sustained economic recovery, it was assumed that the profitability of new investments would cover the interest on foreign debt and the repayment obligations.

1.7 Standard of living Although in the second half of the decade, real wages per capita increased in the manufacturing industry, they had still not reached 75 per cent of the pre-war wages by the end of the decade. Nevertheless, as a result of the increase in employment — 44 —

1 The reviving economy of the truncated country: the 1920s

and the extension of social security benefits, household income and consumption expenditures rose significantly. According to the estimates of Matolcsy – Varga (1938), in the second half of the decade, during the economic recovery, the increase in the volume of household consumption expenditures moved together, in some years even exceeding the growth of the national product. At the end of the decade, due to the economic crisis, there was a significant decline of nearly 7 per cent in the volume of household consumption expenditures. Chart 1-7: Household consumption expenditures 7,000

Million pengős

Per cent

140

6,000

120

5,000

100

4,000

3,000

2,000

1,000

At current prices, million pengős

1929/30

1928/29

1927/28

1926/27

1925/26

1924/25

Volume indices, 1924=100 (right axis)

Source: Matolcsy – Varga (1938).

Contemporary statistics estimated the volume of consumption on the basis of the costof-living index. The cost-of-living index measured how much the purchase costs of the theoretically determined representative weekly expenses of a working-class family of four people changed. In the first half of the 1920s, the index, i.e. the consumer price level, was about 50 per cent above the level from 1913. Subsequently, in the

— 45 —

1 The reviving economy of the truncated country: the 1920s

second half of the decade, consumer prices showed a slight downward trend, albeit with fluctuations. There was relatively little change in the costs of food. In 1925-1926, high protective customs duties significantly increased clothing costs, and then the development of domestic textile industry reduced the price level. In 1928-1929, raising the price of wood and coal increased heating costs. In Hungary, many achievements of modern social policy were implemented in the second half of the 1920s. From then on, 80-90 per cent of the urban working class received sickness and accident insurance, and in 1928 compulsory old-age, disability, widowhood and orphanage insurance for urban workers was introduced. Old-age benefit entitlement began at age 65, and it was a condition that the employer had paid the contribution of up to 3.5 per cent on daily wages for at least seven and a half years. Contemporary social security did not cover agricultural workers. However, the living conditions of the rural population were greatly improved by the fact that they had received building plots during the land reform. Partly as a result of this, the number of residential properties expanded significantly. Over the decade, the number of dwellings increased by nearly 20 per cent, significantly relieving housing congestion. In 1930, there were only 5.9 inhabitants per house and 4 inhabitants per flat. One of the outstanding achievements of the 1920s was the reform of Hungarian education, linked to Kunó Klebelsberg. In the first half of the decade, due to scarce financial resources, they focused on the less cost-intensive area, the modernisation of higher education. In addition to the development of the university of Pest and that of Debrecen founded during the war, universities were also opened in Pécs and Szeged, the former as the successor of the university in Pozsony (present-day Bratislava) and the latter as that of in Kolozsvár (present-day Cluj-Napoca). The system of scientific

— 46 —

1 The reviving economy of the truncated country: the 1920s

scholarships was extended and the establishment of Hungarian institutes in Vienna, Berlin and Rome served this purpose. Public education was restructured in the second half of the decade. In 1924, secondary school reform, in addition to real schools, distinguished two types within gymnasiums, strengthening scientific knowledge and modern language teaching. A significant innovation was that it was possible to apply to any university from any type of school. The standard of secondary education in Hungary was recognised as world-class. In effect, the realisation of general compulsory education – already enacted in 1868 – took place through the implementation of the 1926 Public Schools Act. Not only did the number of students enrolled increase, illiteracy was also essentially eradicated by improving the conditions of education. Nearly 5,000 new classrooms and teacher apartments were built. According to contemporary estimates, only 1–2.5 per cent of those subject to compulsory schooling dropped out of school. While in 1910, 67 per cent of the population was able to read and write, in 1930 the literacy rate was 90 per cent, which is an outstanding result compared to the surrounding Eastern European countries. Public health reform began in the 1920s. It started from a relatively advantageous position as about five sixths of the doctors remained in the truncated part of the country. Between the two World Wars, the number of doctors per 100,000 inhabitants continued to rise, from 56 in 1921 to nearly 90 in 1929. The number of hospital beds also increased: in 1921, there were 330 beds per 100,000 inhabitants, and in 1929 there were 440. In addition to the overall improvement in hygiene conditions (healthy housing, sanitation, etc.), the development of supply networks also played a significant role in reducing the number of deaths caused by tuberculosis, an endemic disease, and by other infectious diseases, by more than one third in the 1920s.

— 47 —

1 The reviving economy of the truncated country: the 1920s

References Berend, T. I. – Ránki, Gy. (1972): A magyar gazdaság száz éve. (100 years of Hungarian economy), Közgazdasági és Jogi Könyvkiadó. Hungarian Central Statistical Office (1996): Magyarország népessége és gazdasága. (The population and economy of Hungary). Honvári, J. (2013): XX. századi magyar gazdaságtörténet. (The economic history of Hungary in the 20th century), UniversitasGyőr Nonprofit Kft., Győr. Maddison, A. (2001): The World Economy: A Millennial Perspective, OECD. Magyar Statisztikai Szemle (1938): Hungaria, Szent István király emlékezetére. (Hungary; a memorial to King Stephen the Saint), M. Kir. Központi Statisztikai Hivatal. Matolcsy, M. – Varga, I. (1938): The National Income of Hungary. London, P.S. King and Son Ltd. Romsics, I. (2017): A Horthy-korszak. (The Horthy era), Helikon. Szakács, S. (2000): Gazdaságtörténet II. (Economic history II), SZÁMALK Kiadó.

— 48 —

2 Global crisis and stabilisation: the 1930s Antónia Hüttl – Pál Pozsonyi Main economic indicators 1930-1939 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 GDP growth *

1.3

-1.8

-5.3

-4.8

8.8

0.9

4.4

6.1

-2.2

4.6

Change in consumer price index

-9.0

-5.5

-3.5

-7.2

-1.3

2.6

5.1

6.1

1.1

-2.3

Government debt as percentage of GDP

24.6 32.7 41.1 44.8 43.0 42.9 41.2 35.7

Current account balance as percentage of GDP

-2.1

-3.9

-0.5

0.6

0.2

0.6

The rapid economic recovery in the second half of the 1920s was interrupted by the global economic crisis at the end of the decade. The primary reason for the global economic crisis of 1929-1933 was the exhaustion of the growth that had been fuelled by the USA government with cheap loans. The surplus money created by credit expansion generated inflation. This was done deliberately, because in this way politics did not have to face the consequence that productivity gains could lead not only to lower prices but also to lower nominal wages, which was difficult for the public to understand. Cheap loans boosted investment sentiment, but the expansion of production could not keep up with households’ rising purchasing power. The New York stock market crash in the autumn of 1929 escalated to an international level due to the increasing inter-linkages in the world economy.

— 49 —

2 Global crisis and stabilisation: the 1930s

2.1 Impact of the Great Depression, and economic policy measures In Hungary, in the second half of the 1920s, the economic recovery only lasted a few short years, and thus overproduction was not the root of the problem. Furthermore, interest rates on loans were particularly high, ranging around 7–8 per cent in the 1920s. The crisis spread to the Hungarian economy through external economic relations. It caused two major problems. On the one hand, agricultural export opportunities narrowed significantly. Traditional importer countries of Hungarian grain became more and more closed and supported their own agricultural production with protectionist measures. In addition, American and Argentinian grain produced at much lower cost appeared on the world market as competition. At the same time, the wave of international bank failures had an intense impact on the indebted country, as lending banks withdrew cancellable loans one after the other, even though the interest rates were high and thus benefited them. The Magyar Nemzeti Bank was forced to use most of its foreign exchange and then gold reserves to repay its debts. The gold and foreign exchange reserves of 225 million pengős available at the end of 1928 had shrunk to 91 million pengős by the end of 1933. At the end of 1931, the Hungarian government ordered a transfer moratorium, suspending the payment of interest and repayment on loans abroad, which also temporarily relieved private companies of the burden of debt. Hungarian agriculture was severely affected by Czechoslovakia becoming increasingly self-sufficient in agricultural products. This was the main reason why Hungarian exports to Czechoslovakia fell to a fraction of their previous value, dropping by about 150 million pengős between 1929 and 1931. In return, imports of Czech manufactured goods fell to a similar extent. Currency devaluation is a usual method of export subsidy, and it also dampens import demand. However, Hungarian economic policy

— 50 —

2 Global crisis and stabilisation: the 1930s

could not use this instrument because it would also have further inflated the debt denominated in Hungarian currency. Thus, it was forced to return to the foreign exchange controls used in the early 1920s: foreign exchange received for exports had to be converted into pengős, and the foreign exchange received could only be used to meet proven import needs. Exports were supported by premiums. When foreign exchange received for exports was submitted, conversion rates were differentiated by commodity group and type of currency. Grain tickets (boletta) supported the profitability of large-scale agricultural exports by serving as the means of paying a supplement depending on the stock market price per quintal during the sale of grain on the stock market. Grain prices not only fluctuated from year to year depending on crop yields, they also showed very strong fluctuations within a given year. The global economic crisis of 1929-1933 affected industrial and agricultural activity differently. In manufacturing, it was mainly the volume of production that fell, chiefly due to waning domestic purchasing power, while prices declined less. In agriculture, the size of production was largely given and varied depending on the weather and other external conditions. Prices, however, reacted sensitively to the decline in world market demand. At the low point of the crisis, manufacturing output fell to 68 per cent of the previous peak, but was still 38 per cent higher than in 1921.7 Measured in terms of value added, the rate of decline was as follows: in industry, the current price value fell by 33 per cent and volume by roughly 20 per cent. In agriculture, during the crisis, the volume of value added remained essentially unchanged (98 per cent), but the value at current prices fell by 54 per cent. The crisis was largely reflected in the deterioration in the terms of trade and to a lesser extent in the volume of production.

Sándor Farkasfalvi: Ipar. (Industry), Magyar Statisztikai Szemle (1938).

— 51 —

2 Global crisis and stabilisation: the 1930s

At the beginning of 1934, the Hungarian government achieved significant economic diplomacy success by concluding an agreement with Germany and Italy on the export of millions of quintals of crops and tens of thousands of live animals, on a clearing basis, at a price more favourable than on the world market. As a result, agriculture gradually recovered from the crisis and the profitability of production improved. However, productivity in agriculture did not improve substantially. Hungarian yield averages increasingly lagged behind the level achieved in the leading European countries. The stable value of the pengő helped reduce foreign debts. During the crisis, the currencies of the countries (France, England) lending to Hungary in the 1920s depreciated significantly, and thus Hungary’s pengő-denominated debt to the rest of the world decreased. According to F. Fellner’s estimates, between 1912 and the period after the 1930 crisis, Hungary’s debt to the rest of the world shrank by more than half: from 5.8 billion pengős to 2.6 billion pengős. This was largely explained not by repayments but by exchange rate changes. Following the downturn, economic growth resumed in the second half of the 1930s, but at a more subdued pace than in the latter half of the 1920s. In the early 1930s, significant natural gas fields were discovered, and production started at oil wells in Transdanubia in 1936-1938. In 1925, a bauxite deposit was discovered in the vicinity of Veszprém. The first alumina refinery started production in 1934 in Magyaróvár and the first aluminium smelter was commissioned in Csepel in 1935. Under the so-called Győr Programme, announced in 1938, more than 1 billion pengős were earmarked in the following years (actually 1.6 billion pengős were spent), partly for armaments and partly to develop the country’s infrastructure. The capacity of several heavy industry plants was expanded, and the Hungarian State Railways, and telephone and telegraph networks were developed. This stimulated growth and reduced unemployment. At the same time, however, inflation and the depreciation of the pengő began. — 52 —

2 Global crisis and stabilisation: the 1930s

2.2 Employment, wages As for labour management in the 1930s, there are often conflicting views. One opinion highlights the decline in real wages, whereas the other emphasises the expansion of employment. Together, these two factors changed the labour market. For the decade as a whole, the expansion of the population was a significant change, due to the largely peaceful revision of the borders. Following re-annexation of the southern strip of Upper Hungary (1938), Subcarpathia (1939) and Northern Transylvania (1940), the population of the country increased almost one and a half times. It was mostly agricultural regions that were returned. In the former, truncated part of the country, however, the proportion of those employed in industry had grown substantially over the decade, at the expense of those employed in agriculture, similar to what had been seen in the 1920s. Despite the structural change, at the end of the decade, slightly more than half of those employed still earned their income in agriculture. With the ratio constantly increasing, almost twice as many farmed independently at the end of the decade, and the proportion of – mostly seasonal – wage workers was declining. Table 2-1: Active earners by economic sectors (1930–1941) (Thousand persons) Agriculture

1930

1941

2,030

2,165

Industry, construction industry

755

919

Other sectors of economy

953

1,117

Total

3,738

4,201

Population

8,688

9,316

Proportion of active earners

43.0%

45.1%

Source: HCSO (1996).

— 53 —

2 Global crisis and stabilisation: the 1930s

At the start of the decade, the manufacturing industry8 responded to the first signs of the crisis with layoffs. Initially, workers deemed dispensable were dismissed, and real wages per capita actually increased. Real wage developments followed the economic cycle with a delay: real wages started to decline later, but the correction was also delayed, if it even occurred at all. In 1936, real wages per capita in the manufacturing industry still did not exceed the level from 1921. Contemporary analyses explained this by the fact that the structure of employment in the industry had changed because of mechanisation. It was not the qualifications that decreased, but in mechanised work processes, skilled workers were also mostly employed in trained jobs and were paid accordingly. According to some opinions, the number of unemployed rose to around a million during the economic crisis of the early 1930s. Full-scale unemployment data are only available from the 1930 census. According to this, the number of unemployed was 224,000, which was barely 6 per cent of the employed. Until the low point in 1932, the number of workers in the manufacturing industry fell by a total of 60,000. The majority of the hundreds of thousands of unemployed may have been seasonal agricultural workers who were unable to make a living from the income of seasonal work due to the fall in agricultural prices.

I ndustry as a whole was well represented by the contemporary manufacturing industry: Based on the 1938 data, manufacturing industry production accounted for 89 per cent of industrial output.

— 54 —

2 Global crisis and stabilisation: the 1930s

Chart 2-1: Number of workers and real wages in the manufacturing industry 300

Number of workers

Real wages per capita 120

100

Number of workers, thousand

1936

100

1935

105

1934

150

1933

110

1932

200

1931

115

1930

250

Real wages per capita, 1921=100 (RHS)

Source: Magyar Statisztikai Szemle (1938).

In the 1930s, several new mineral deposits were discovered in Hungary. With the commencement of extraction, mining settlements were established, where those who had previously lived mostly on seasonal work in agriculture earned significantly higher wages. It is true, though, that later on, with the mechanisation of extraction, the number of miners gradually decreased. In the latter half of the decade, the situation in industrial employment improved, on the one hand, because agricultural export prices rose and the resulting increase in domestic income also boosted demand for industrial products. On the other hand, towards the end of the decade, armaments, military development and the construction of the air fleet and air defence led to the creation of new industries and new jobs. There are no representative statistics on contemporary wage ratios. Partial data from administrative – social security and wages representation – data sources can provide an informative picture. On this basis, contemporary wage differences do not appear to be greater than those observed today. — 55 —

2 Global crisis and stabilisation: the 1930s

Table 2-2: Per capita annual earnings in industry (1936) in pengős Managers Manufacturing supervisors Compulsorily Supervisors insured Factory employees Small-scale employees

Pengő

In proportion to the earnings of small-scale employees

6,779 3,307 1,455 939 457

1,483 724 318 205 100

Source: Magyar Statisztikai Szemle (1938).

2.3 Development of prices As a whole, the 1930s were characterised by strong price volatility without a trend. In the first half of the decade, during the sales crisis, prices fell, mainly for agricultural products. Due to the steep decline in the prices of agricultural products, the agricultural price scissors opened up significantly during the crisis. In 1933, the wholesale price of agricultural products barely reached 60 per cent of the 1913 prices. Chart 2-2: Wholesale price indices (1929–1938) 120

Per cent

80 70

100

40 30

1929=100

Agricultural price scissors (RHS)

Source: Magyar Statisztikai Szemle (1938).

— 56 —

1938

1937

1936

1935

1934

1933

1932

1931

1930

1929

2 Global crisis and stabilisation: the 1930s

In the second half of the decade, the economic recovery pushed up prices of industrial products. Foreign trade agreements with Italy and Germany helped to normalise agricultural prices, although the price level of agricultural products did not reach the pre-war value even in 1938. The following table clearly illustrates the contemporary relationship between currency exchange rates and inflation. During the crisis, several countries left the gold standard and sharply devalued their currencies: Great Britain in 1931, the USA in 1933 and France in 1936. This brought prices up to pre-crisis levels. Highly indebted Germany and Hungary maintained currency stability and tolerated deflation instead. Table 2-3: International wholesale price indices Hungary

Germany

France

Great Britain

USA

1928

111.6

102.0

102.9

102.8

101.5

1929

100.0

1931

79.3

90.8

88.4

87.5

90.7

1931

78.5

80.8

80.0

76.8

76.6

1932

76.0

70.3

68.2

74.9

68.0

1933

62.7

68.0

63.6

75.0

69.3

1934

65.3

71.7

60.0

77.1

78.7

1935

74.1

74.2

54.0

77.9

83.9

1936

73.6

75.9

65.5

82.7

84.8

1937

78.0

77.2

92.7

95.2

90.6

Source: Magyar Statisztikai Szemle (1938).

â&#x20AC;&#x201D; 57 â&#x20AC;&#x201D;

2 Global crisis and stabilisation: the 1930s

2.4 National product9 Between fiscal 1929-1930 and 1938-1939, Hungary’s national product grew by a total of 10.1 per cent. For a period of 9 years, this seems like a modest performance. However, it should be taken into account that during the first one third of the decade the economy contracted by 11.5 per cent during the 3 years of the global economic crisis. Starting from this level, the volume growth is more spectacular, amounting to 3.7 per cent annually. If we add to this how much the standard of public education and public health rose over the decade, then progress can be judged even more positively. In accordance with the economic principles of the era, government nonmarket services were not yet part of the national product, and therefore, the impact of the spectacular improvement in the quality of public services is not included in the growth rate. In contemporary professional circles, the performance of the Hungarian economy was judged relatively favourably. Colin Clark, a renowned economist and statistician of the era, set up the following ranking in terms of international comparison of development. National product per employee actually expresses labour productivity:10

uoted by Gyula Szigeti: Nemzeti jövedelem, nemzeti vagyon és fizetési mérleg. (National income, national Q wealth and balance of payments), Magyar Statisztikai Szemle (1938).

— 58 —

2 Global crisis and stabilisation: the 1930s

Table 2-4: Productivity in an international comparison (National product / Number of employees, in dollars) France

694

Germany

646

Austria

511

Czecho-Slovakia

455

Hungary

359

Poland

352

Italy

338

Romania

243

Note: Average of 1925–1934. Source: Magyar Statisztikai Szemle (1938).

According to the analysis, Hungary ranked 16th out of the 23 European countries examined. A better basis of comparison than the ranking is to consider the fact that during the decade Hungary’s labour productivity reached 70 per cent of Austria’s level and 56 per cent of Germany’s level.11

2.5 Budget Declining tax revenues as well as export subsidies reversed the surplus budgets from the latter half of the 1920s. Between 1930 and 1932, the annual budget deficit approached 4 per cent of the national product. As a result, the ratio of government debt relative to national product rose to around 40 per cent. Due to the economic crisis, budget revenues declined. Consumption-type taxes fell due to weakening domestic demand and customs revenues decreased due to import

uring that period, no purchasing power parity comparison was made. At the same time, the levels of D development were less distorted by the currency exchange rate, as non-tradable services were much less important in the value of the national product (if they were included in the national product at all).

— 59 —

2 Global crisis and stabilisation: the 1930s

restrictions. Although income and property taxes were raised, this was unable to compensate for the additional expenditures. One significant expenditure item was the retirement allowance for state employees: pensions paid accounted for more than one third (36.4 per cent) of all personnel payments, including the personnel expenses of state-owned corporations. Contemporary budgets were prepared on a gross basis in the sense that they included the revenues and expenditures of state-owned enterprises (Hungarian State Railways, Hungarian Post, Iron and Steel Works, Postal Savings Bank), even if the actual subsidies were insignificant compared to the operating costs. The losses of the companies, in particular the Hungarian State Railways (MÁV), were caused by the pensions paid to MÁV employees who had resettled from the detached parts of the country. The revenues and expenditures of compulsory social security, which was gradually extended to private employees, were not included in the budget, but were managed in separate funds. Chart 2-3: Budget balance and government debt as a ratio of national product 50

Per cent

0.5

-3.0

-3.5

-4.0

-4.5

Government debt

Government balance (right axis)

Source: Magyar Statisztikai Szemle (1938).

— 60 —

1937/38

-2.5

1936/37

1935/36

-2.0

1934/35

-1.5

1933/34

1932/33

-1.0

1931/32

-0.5

1930/31

1929/30

0.0

1928/29

2 Global crisis and stabilisation: the 1930s

2.6 External economy Since the beginning of the 1920s, the product structure of Hungarian exports had not changed significantly. Over the whole period, agricultural products accounted for more than half (57.5 per cent) of exports, and taken together with flour and other processed products, this ratio rose to almost three quarters of exports. What had changed significantly was the direction of relations, i.e. the group of main partner countries. At the start of the decade in 1931, Austria was Hungary’s most important foreign market (accounting for 29 per cent of exports), however by 1937 Austria’s share had dropped to 17 per cent. Germany’s share nearly doubled, rising from 13 per cent to 24 per cent. Italy became the third most important market, with more than 12 per cent. In the meantime, Hungary was excluded from the Czechoslovak market to a large degree. In 1930, Czechoslovakia received over 17 per cent of Hungarian exports, but by 1931 this ratio had shrunk to 4.1 per cent. Chart 2-4: Main destination countries of Hungarian exports 100

Per cent

100

10 0

0 1931 Others Austria

1937

Czechoslovakia

Source: Magyar Statisztikai Szemle (1938).

— 61 —

Italy

Germany

2 Global crisis and stabilisation: the 1930s

On the import side, the change in product composition clearly reflects the effects of domestic industrial development. During the 1920s in particular, the import structure shifted radically from finished industrial products to raw materials. In 1920, only 22 per cent of imports were raw materials and semi-finished products, while nearly 78 per cent were finished products. In 1930, the proportions of imported raw materials, semi-finished products and finished products were almost equal. This trend continued in the 1930s, albeit at a slower pace, with imports of raw materials and semi-finished products rising to 74 per cent, while the ratio of finished products fell to 26 per cent. In order to preserve its international solvency, the Hungarian government returned to foreign exchange controls at the end of 1931. Between 1926 and 1931, it had managed to avoid this, as new loans taken from abroad covered the balance of payments deficit. As the collapse of the international financial system made it impossible to take out new loans, the balance of payments necessarily had to be balanced. During the crisis, imports were reduced to about one quarter of the previous level. In this way, and by suspending the repayment of credit debts, the balance of payments was balanced by 1932-1933.

2.7 Standard of living Based on partial data, we get a contradictory picture of living standards in the 1930s. In industry, real wages per capita declined, while employment expanded. Until 1938-1939, the cost-of-living index (i.e. the cost of obtaining consumer utility of a constant amount) remained essentially at the level of the early 1920s, as a result of consumer price changes varying by product group. Inflation only accelerated in 1940, after the outbreak of World War II. The range of social benefits in cash further

— 62 —

2 Global crisis and stabilisation: the 1930s

expanded. In 1937, paid leave was introduced for longer continuous employment, and in 1938, the child-raising allowance was introduced. In 1938, old-age insurance was extended to agricultural workers from the age of 65, provided they had been employed for at least 15 years. As far as insurance against unemployment was concerned, the problem remained unsolved. Due to the fluctuations in industrial and especially agricultural employment, the budget was not in a position to aid all of the unemployed. Instead, a system of care for the poor was developed. According to certain criteria, a distinction was made between the unemployed and those who avoided work by choice. The former could receive ad-hoc aid, if they did relief work. The national income accounts compiled by Matolcsy – Varga contain estimates of household consumption expenditures. From these it can be concluded that although in the 1930s it was not possible to increase consumption at the rate achieved in the latter half of the 1920s, after a temporary decline during the crisis, by 1937 the volume of household consumption expenditure increased by a further 6.2 per cent compared to the peak in 1929. As the country’s population grew in the meantime, per capita consumption essentially stagnated between 1929 and 1937 (rising by just 1 per cent). In the 12 years from the mid-1920s, the volume of consumption increased by a total of 31.9 per cent and per capita consumption rose by 21.1 per cent.

— 63 —

2 Global crisis and stabilisation: the 1930s

Chart 2-5: Volume of household consumption 110

Per cent

110

1928/29=100

1936/37

1934/35

1933/34

1932/33

1931/32

100

1930/31

100

1929/30

105

1928/29

105

Previous year=100

Source: Magyar Statisztikai Szemle (1938).

Social benefits in kind contributed greatly to raising living standards. The eradication of illiteracy was the major achievement of public education: in 1940, 92 per cent of the population over the age of 6 could read and write. A law passed in 1940 provided for the gradual introduction of the 8-grade elementary school. The standard of contemporary secondary education was recognised as high, and at the same time, the number of secondary school graduates grew: in 1938, nearly 6 per cent of the adult population had completed secondary school. This ratio was slightly lower than in Germany and slightly higher than in France. Public health developed spectacularly, with 56 doctors per 100,000 inhabitants in 1921, 90 in 1929, and 117 in 1938. The socalled Green Cross Service took care of the health of the rural population. In 1938, it cared for one and aÂ half million people, mainly in small settlements.

â&#x20AC;&#x201D; 64 â&#x20AC;&#x201D;

2 Global crisis and stabilisation: the 1930s

The number of settlements with electricity, mostly towns and large villages, increased significantly. Before the war, about 300 settlements had electricity supply, and by 1938, their number had risen to nearly 1,200. 71 per cent of the population lived in these settlements. *** In summary, we can assess the performance of the Hungarian economy between the two World Wars as follows: “Despite the difficult initial conditions, it maintained its – historically established – position between the Balkan countries and the CzechMoravian territories.”12 The average annual growth of 2.9 per cent achieved between 1924 and 1938 can be divided into two economic cycles and a crisis period in between. Hungary managed to consolidate the economy which was shattered by Trianon and to achieve an exceptionally high annual growth rate of 6.2 per cent in the second half of the 1920s, for 5 years. The global economic crisis only temporarily set the economy back, mainly due to the narrowing of export markets. As a result of the crisis, the volume of the national product fell by 4 per cent per year for three years. At the low point of the crisis, it was 11.5 per cent lower compared to the peak of the economic recovery. Due to the deterioration in the terms of trade, the decline in current prices, in terms of loss of incomes, was much higher, at around 30–40 per cent. From the second third of the 1930s, the economic recovery resumed, although the national product only grew at a more moderate rate of 3.7 per cent per year. In the three cycles combined, in the period between fiscal 1924-1925 and 1938-1939, the national product increased by 49.5 per cent.

Romsics (2017, p. 388).

— 65 —

2 Global crisis and stabilisation: the 1930s

Looking to the longer term, if we accept the view that economy reached the preWorld War I level in 1925, the average annual growth rate between 1913 and 1938 may have been around 1.5 per cent. For this period, this rate is just slightly higher than the estimate made by Maddison for the years 1913 to 1950, relying on an international comparison of development. According to this study published by the OECD, the Hungarian economy grew by 0.93 per cent per year, including the fact that between 1938 and 1950 the economy as a whole did not develop. In addition to the macroeconomic data, the merit of the era lies in that, in an unfavourable international environment, despite the lost war and other impositions, many conditions were created for modern economy and social policy. Perhaps the biggest shortcoming was that in the meantime agriculture was not modernised.

References Berend, T. I. – Ránki, Gy. (1972): A magyar gazdaság száz éve. (100 years of Hungarian economy), Közgazdasági és Jogi Könyvkiadó. Honvári, J. (2013): XX. századi magyar gazdaságtörténet. (The economic history of Hungary in the 20th century), UniversitasGyőr Nonprofit Kft., Győr. Hungarian Central Statistical Office (1996): Magyarország népessége és gazdasága. (The population and economy of Hungary). Maddison, A. (2001): The World Economy: A Millennial Perspective. OECD. Magyar Statisztikai Szemle (1938): Hungaria, Szent István király emlékezetére. (Hungary; a memorial to King Stephen the Saint), M. Kir. Központi Statisztikai Hivatal. Matolcsy, M. – Varga, I. (1938): The National Income of Hungary. London, P.S. King and Son Ltd. Romsics, I. (2017): A Horthy-korszak. (The Horthy era), Helikon. Szakács, S. (2000): Gazdaságtörténet II. (Economic history II), SZÁMALK Kiadó.

— 66 —

3 Global conflagration and reconstruction: the 1940s Antónia Hüttl – Pál Pozsonyi Main economic indicators 1940-1949 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 GDP growth

6.0

-3.5

-2.6

5.7

Change in consumer price index

14.9 20.6

8.7

44.1 23.2

Government debt as percentage of GDP

-4.7

-50.6 24.4 14.0 15.0 13.2 11.1

In the 1940s, the main factors included preparing for war and supplying the military, and – when the front line was passing through the country – mitigating the damage and ensuring living conditions and repairing war damages, and then after the war, the establishment of the totalitarian regime. During this period, the economy and economic rationality played a subordinated role. Mostly, only fragmentary statistics were preserved, of varying content and quality. Highlighting the institutional and structural changes that defined the overall system of the economy and the impact of these changes on macroeconomic developments, we analyse the decade in three stages: – Military economy – War losses and recovery – Start of centralised planning

— 67 —

3 Global conflagration and reconstruction: the 1940s

3.1 Military economy: the economy during World War II The Győr Programme was announced in March 1938 and gave new impetus to the economy, which had started to expand again after the global crisis of 1929-1933. The programme was originally aimed at developing defence forces. In the wake of the armaments programme, large orders were received primarily by large companies capable of mass production based on their size and technical standards, such as the Manfred Weiss Works, the Győr Wagon Factory, the Hungarian Optical Works, the Hungarian Royal State Railroads’ Machine Factory, Danuvia and Gamma. Consumergoods producing companies also participated in the programme. For example, production in the textile and leather industries was significantly expanded to meet military demands. In addition, there was remarkable development of the country’s infrastructure, mainly in the areas of communication and transportation. In the early 1940s, the increase in production was aided by the territorial re-annexations between 1939 and 1941 and, in particular, by the military and agricultural contracts with Germany. According to estimates from 1947,13 in fiscal 1939-1940, the national product grew by 6 per cent. In the following years, growth was interrupted, with agricultural production falling in particular.

agyarország nemzeti jövedelme. (The national income of Hungary), Magyar Gazdaságkutató Intézet KözM leményei (31 March 1947). This is the only calculation of national economic indicators for the 1940s which was performed on the basis of contemporary data collections.

— 68 —

3 Global conflagration and reconstruction: the 1940s

Table 3-1: Volume index of the national product (1938–1944), previous year = 100 Financial year

Total national economy

1938–1939 1939–1940

Of which: Manufacturing

Agriculture

100.0

106.0

116.8

97.9

1940–1941

96.5

106.9

85.2

1941–1942

97.4

95.8

1942–1943

105.7

117.1

96.5

1943–1944

95.3

90.7

98.2

Source: Magyar Gazdaságkutató Intézet (1947).

The detailed volume indices by industries illustrate how the structure of production changed in line with the demands of the military economy. The extremely high dynamics of mining and metallurgy are explained, on the one hand, by the rise in domestic ore and oil mining and, on the other hand, by the processing of ore from the re-annexed areas. Within the manufacturing industry, the military boom initially extended to all industries. After 1941, the decline was due to the fact that the production of military goods companies expanded unilaterally, while the production of consumer goods fell. Craft and home industries partially filled this gap. Because of the lack of chemical fertiliser, manpower (due to military conscriptions) and equipment, the volume of agricultural production decreased. At the same time, however, production became more intensive. Orders from the government and requisition obligations played a role in this.

— 69 —

3 Global conflagration and reconstruction: the 1940s

Chart 3-1: Volume indices of production by industries,1938–1944 200

Per cent

200

120

100

Agriculture Trade Manufacturing Others

1943/44

140

1942/43

140

1941/42

160

1940/41

160

1939/40

180

1938/39

180

Mining and metallurgy Dwellings Handicrafts and cottage industry Total

Source: Magyar Gazdaságkutató Intézet (1947).

In 1938, the share of agriculture was still nearly 10 percentage points higher than that of manufacturing, while by the end of the war, the share of manufacturing was 5 percentage points higher than that of the agriculture. The change in the ratio was also due to the fact that the price index of industrial products rose more dynamically than the agricultural price index. As for the composition of the national product, while the ratio of agricultural production declined steadily during the war years, there was a significant increase in the output ratio of mining, metallurgy and manufacturing (workers in military factories were exempted from conscription) and foreign trade to meet military demands. — 70 —

3 Global conflagration and reconstruction: the 1940s

Chart 3-2: Composition of the national product by industries (1938–1944) in per cent 100

Per cent

100

0 1943/44

1942/43

1941/42

1940/41

1939/40

1938/39

Others Dwellings Trade Handicrafts and cottage industry Manufacturing Mining and metallurgy Agriculture

Source: Magyar Gazdaságkutató Intézet (1947).

Industrial production began to pick up with the Győr Programme. With Hungary’s entry into the war, the upturn gained additional momentum, especially in the field of mechanical engineering and the production of metal industry and light industry products. There was a remarkable increase in bauxite and mineral oil extraction as well as in the output of semi-finished products (aluminium and petroleum products) produced from these raw materials. At the same time, the share of consumer goods production decreased. Agricultural production declined steadily during the war years; labour losses due to military service played a significant role in this, but there was also a shortage — 71 —

3 Global conflagration and reconstruction: the 1940s

of chemical fertiliser. The introduction of requisitioning also restrained interest in production, especially at subsistence farms, where people had little opportunity to produce excess over their obligations. Despite the downturn, food supplies to the army and the population were ensured almost throughout the war. This and the curbing of inflation were supported by the voucher system, which thus also allowed lower-income families to have access to basic consumer goods at regulated prices. In the field of foreign trade, the orientation towards Germany was dominant even before the war. In 1938, 28 per cent of exports went to and 30 per cent of imports came from Germany. Between 1938 and 1944, Germany-related exports increased 4.9 times, while imports rose 4.6 times, and by 1944, 74 per cent of Hungarian exports went there, and 70 per cent of imports originated there. During the war years, Hungary sold agricultural and machinery industry exports mainly on credit, which was not paid by the German side during the war. The amount of the resulting German debt reached one fifth of Hungary’s national income in 1944.14 Among the surrounding countries, Hungary’s other major foreign trade partners were Austria, Romania and Italy. Budget The war years and military expenditures put a serious strain on the country’s budget. Budget expenditures accounted for an increasing share of the national product, more than doubling as a percentage of the national product during World War II.15 14

Ligeti: Magyarország külkereskedelmi kapcsolatai a második világháború alatt. (Hungary’s foreign trade relations during the Second World War), Statisztikai Szemle (1947). No. 3–4. pp. 90–99, and Honvári: XX. századi magyar gazdaságtörténet. (The economic history of Hungary in the 20th century), Universitas-Győr Nonprofit Kft., Győr (2013).

erend – Ránki, quoted by Honvári: XX. századi magyar gazdaságtörténet. (The economic history of Hungary in B the 20th century), Universitas-Győr Nonprofit Kft., Győr (2013).

— 72 —

3 Global conflagration and reconstruction: the 1940s

Table 3-2: Budget expenditures as a percentage of the national product (1938–1944) 1938-39

1939-40

1941

1942

1943

1944

33.1%

43.3%

50.5%

61.5%

67.4%

71.7%

Source: Honvári (2013).

As the expenditures increasingly exceeded the revenues, government debt rose, reaching 6.9 billion pengős by 1943, i.e. 50 per cent of the year’s national product. The budget deficit could not be financed by external borrowing. Thus, the main source of indebtedness was the budget loan taken from the MNB (National Bank of Hungary), which was covered by the MNB’s money issuance, and as a result, the previously stable price level began to rise. The rate of inflation indicated by the cost-of-living index accelerated from year to year, and in 1944, it reached twice the level of 1940.

3.2 War losses and recovery World War II had serious human, economic and social consequences. During the war, about 6 per cent of the population living in the Trianon area lost their lives due to the fighting and deportations. The most accepted estimates suggest that the number of Hungarian victims was 600,000–700,000. In addition to those who died in the war, the labour shortage was further exacerbated by the huge numbers of people who were taken prisoner of war and those who were transported for forced labour to the Soviet Union (malenkij robot). To the best of our knowledge, about 600,000 people were taken prisoner by the Soviets and another 300,000 in the West. The number of victims in the prisoner-of-war camps is estimated at about 80,000–120,000, and about 80,000 people in Western captivity did not return home either. Because of various deportations and the population change, the population of Hungary decreased by about another 200,000.16 16

Honvári: XX. századi magyar gazdaságtörténet. (The economic history of Hungary in the 20th century), Universitas-Győr Nonprofit Kft., Győr (2013).

— 73 —

3 Global conflagration and reconstruction: the 1940s

Hungary also suffered substantial damages, amounting to 22 billion in 1938 pengős, which represents more than four times the national product from 1938–1939. Calculated in forints – using the price multiplier applied at the time of the introduction of the forint – this amounted to about HUF 80 billion. It is estimated that 40 per cent of the country’s national wealth was destroyed. The biggest losses were suffered by the manufacturing industry, transportation and agriculture – more than half of the livestock perished or was depleted by armies passing through. In the two years after the end of the war, agriculture was then hit by drought. Industry also suffered serious damage. Ninety per cent of industrial companies suffered some kind of war damage. There was damage not only to the buildings, machinery and equipment used for production purposes, but also to raw material stocks, and thus restarting production was difficult and very slow. By the end of the war, transportation was almost completely paralysed. The main Danube and Tisza bridges were blown up, one third of the railway track and two thirds of the railway equipment was destroyed, and much of the railway rolling stock was taken by the Soviet troops. Table 3-3: Hungary’s war damages Sector Agriculture Mining, metallurgy

Amount (in 1938 pengős)

By industries (%)

As a percentage of 1944 national wealth

3,682

16.8

21.4

0.3

3.6

Manufacturing industry

2,042

9.3

54.2

Transportation

3,689

16.8

59.0

Residential buildings

1,854

8.4

18.0

Other

10,619

48.4

69.5

Total

21,951

100.0

40.2

Source: Kaposi (2010).

— 74 —

3 Global conflagration and reconstruction: the 1940s

Towards the end of the war, the Germans took a vast amount of means of transport, equipment from decommissioned factories, gold reserves of the MNB, etc. out of the country to Germany and to the territory of the Czechoslovak successor state. The value of these was estimated at $60 million at the time, and only a small portion was recovered after the war. According to estimates, the damage Germany caused to the country amounted to $900 million. After the war, as a reparation measure, Hungary was ordered to pay compensation in the amount of $300 million – payable between 1945 and 1951; the Soviet Union was entitled to two thirds of this. The compensation had to be paid in the form of delivery of machinery, equipment, ships and agricultural products (in the 1950s, one third of the Soviet compensation was cancelled by the Soviet Union as a “reward” for policy changes). Added to this was the obligation to supply food and fuel to about 500,000–700,000 Soviet soldiers stationed in Hungary and, furthermore, the means of transport necessary for military transport had to be provided free of charge. As for the Hungarian claim of $280 million against Germany, which it had accumulated in foreign trade during the war, Germany had to pay this sum not to Hungary but for the benefit of the Soviet Union after the war. Under the Potsdam Agreement, German properties in the territories of the occupied Eastern European countries also became the property of the Soviet Union. In Hungary, this meant that the German property in about 400 companies and hundreds of other properties had to be handed over to the Soviet Union (these were later repurchased by the Hungarian state). According to some estimates, in addition to the war damage equalling the approximate value of 4 years of national product, Hungarian society had to hand over at least another amount equal to 2.5 times the national product due to war compensation and requisition claims.

— 75 —

3 Global conflagration and reconstruction: the 1940s

When fighting took place in the territory of the country in 1944-1945, production declined to half the level reached in 1938-1939. Data for fiscal year 1945-1946 show that, compared to the level of 1938-1939, agricultural production fell to 50 per cent, mining to 65.1 per cent, manufacturing industry to 37.2 per cent and trade to 47.9 per cent. The drastic decline was mainly caused by war damage, destruction or expropriation of industrial capacities, and lack of labour and raw materials. In 1946-1947, the disruption of economy declined, but with an increase of about 25 per cent in the national product, it reached only 61.7 per cent of the level of 19381939. In the most important areas of the national economy, only 10–20 per cent of the wartime recession was recovered.17 Foreign capital, credit or aid would have greatly facilitated the relaunch and modernisation of the economy. However, with the exception of a small amount of USA loans, this was not possible, primarily for political reasons. Due to Soviet pressure, the Marshall aid offered to European countries by the USA government in 1947 could not be accepted by any Central European state, including Hungary. Reconstruction conducted on the basis of own resources could necessarily only be partially successful. It was successful in tackling unemployment. Between 1946 and 1948, about 150,000 workers were additionally employed in manufacturing (including mining), an increase of 80 per cent (at the same time, the 1949 census still recorded 126,000 unemployed, four fifths of whom could be considered industrial unemployed). Although the increase in the employment use of surplus labour was a spectacular result, it also created in-house unemployment. Moreover, reconstruction largely meant restoring the previous technical standard and not replacing lost

agyarország nemzeti jövedelme. (The national income of Hungary), Magyar Gazdaságkutató Intézet KözleM ményei (1947) p. 8.

— 76 —

3 Global conflagration and reconstruction: the 1940s

capacities with new assets of higher technical standards. The textile industry is a clear example of this: destroyed equipment was replaced by purchasing from abroad and re-commissioning decades-old, obsolete machines.18 Foreign trade relations had to be reorganised. Although customs offices – often in ruined premises – set to work, detailed foreign trade statistics for the period 19451947 were not compiled. In US dollars, by 1948 both imports and exports exceeded the level of 1938. While before 1945, German and Italian relations were dominant in both exports and imports, after the war, European countries belonging to the Soviet sphere of interest became dominant as Hungary’s foreign trade partners. Land reform Pursuant to the land reform announced on 17 March 1945, all estates of more than 1,000 cadastral (hereinafter cad.) holds (1 cad. hold = 0.575 hectare) were expropriated, as well as corporate and church estates. For estates of less than 1,000 cad. holds, if it was peasant-owned, then 200 remained with the original owner, if it was lordowned, then 100 cad. holds. The land reform applied to 34.6 per cent of the country’s territory, but only 60 per cent of it was distributed among 642,000 eligible peasant families. The rest, mainly forests and pastures, went to state farms and cooperatives. From a social point of view, land reform was certainly justified, but at the same time, it created non-viable, dwarf estates. The average size of the new estates was 5 cad. holds, and this foreshadowed the impossibility of realising modern, high-productivity farming. The lack of work equipment and draft livestock made production even more difficult.

Berend – Ránki (1972, p. 240).

— 77 —

3 Global conflagration and reconstruction: the 1940s

Table 3-4: Composition of individual farms by size (in 1935 and 1949) Farm size groups (cadastral holds) 1–5

Number of farms in 1935

Number of farms in 1949

484,160

664,700

5–10

198,559

458,000

10–20

160,275

240,300

20–50

86,354

66,600

50–100

16,318

7,000

100–

12,863

4,200

Total

958,529

1,440,800

Source: Kaposi (2010).

The land reform transformed agricultural society, as the proportion of self-employed smallholders within the agricultural population almost doubled to around 80 per cent. At the same time, it exempted the state from the need to provide capital for the restoration of agriculture. The requisition system became an important tool for improving the post-war food situation. Although in May 1945, the so-called Jurcsek requisition system introduced during the war was abolished, two months later a new system was introduced. The point was that, based on the size of the arable land, the mandatory quantity of products to be delivered at the administrative price was prescribed. In fact, by restricting the free circulation of crops, this system, like all requisition systems, reduced the ability of agriculture to raise capital. This clearly hampered the consolidation of new small farms. In 1946, the catastrophic harvest due to the extreme weather further aggravated the food situation, and it was only by 1948 that it had improved somewhat, but food consumption was still well below the level of 1938.

— 78 —

3 Global conflagration and reconstruction: the 1940s

Inflation and stabilisation The war, which was largely financed by budgetary resources, necessarily accelerated inflation. In Hungary, by the beginning of 1945, the price index had doubled from the level of 1939.19 The following data series shows the changes in the value of the pengő between 1938 and 1944: Table 3-5: Cost-of-living index, including rent (1938–1944) Year

Annual price increase (%)

1938

0.57

1939

–1.48

1940

8.43

1941

18.02

1942

16.44

1943

20.17

1944*

23.18

* In 1944, the average for 11 months. Source: Botos (2016).

Up to 1944, the rise was only a fraction of the inflation that unfolded in 1945 and was accelerating. From the end of the war to the end of 1945, the Hungarian currency fell to as low as one seventh of its old value. In December 1945, the state tried to stop the depreciation of the money through a capital levy of 75 per cent, but it had little success. In January 1946, a “new” currency, the tax-pengő (adópengő, or AP), was introduced, but it was also unable to curb inflation. By June 1946, in one of the greatest episodes of hyperinflation in world history, the pengő was completely devalued. 19

onvári cites Pető Iván-Szakács Sándor: A hazai gazdaság négy évtizedének története 1945–1985 (Four decades H of Hungarian Economics 1945–1985), I., KJK, 1985, p. 305.

— 79 —

3 Global conflagration and reconstruction: the 1940s

The value of a tax-pengő, expressed in pengő: 1 January 1946

1 April 1946

1 May 1946

630

1 June 1946

160,000

1 July 1946

7,500,000,000 (7.5*109)

31 July 1946

2,000,000,000,000,000,000,000 (2*1021)

On 1 August 1946, the pengő was replaced by the forint. The forint was introduced after thorough preparatory work. Value stability was established by the accumulation of significant stocks of goods and crops, and the introduction was timed after the harvest season. The new currency was backed by some 30 tonnes of gold, as the USA Army had returned the MNB’s gold reserves to Budapest in August 1946. At the time of introduction, officially, 1 gram of gold was worth 13.2 forints, whereas 1 US dollar was worth 11.74 forints. Conversion was based on the 1938 prices and the new prices were determined by means of price multipliers. They did not use a single multiplier, but opened the agrarian scissors, setting industrial prices considerably higher than those of agricultural products. As a result, a significant portion of agricultural incomes was channelled into industry, thereby financing the recovery of industry. Agricultural prices were only raised at the end of 1946 and in early 1947, and thus the agrarian scissors closed somewhat. Since in 1946-1947 the national product of the country reached only about one half of the level of 1938, wage levels were set at no more than half the pre-war level, while the wage gaps between qualifications and occupations were reduced to one third. The state played a key role in the economy throughout the decade. Preparations for war, meeting the demands of the army, fixed management during the war, repairing war damage and reconstruction – all of these aspects made central control indispensable. Due to the fact that the level of prices and wages was set upon introduction of the forint, stabilisation further strengthened the influence of central control. — 80 —

3 Global conflagration and reconstruction: the 1940s

3.3 Start of centralised planning Nationalisation and three-year plan Because of the fragmentation and production losses and the extreme difficulties in supplying goods, the centralised control built up during the war continued even after the end of the war. Later, explanatory circumstances were increasingly used as point of reference to extend the range of companies nationalised. Citing the economic conditions and extremely serious energy situation, coalmines were put under state management at the end of 1945 and were nationalised six months later. The largest heavy industry factories were put under state management – formally for the duration of the fulfilment of the reparation obligations. The nationalisation of large banks and their capital interests took place in 1947 on the pretext of improving the transparency of the credit system and finances. At the same time, the entire metallurgy industry, 60 per cent of the iron industry and 50 per cent of the mechanical engineering industry became state-owned.20 Soon, the main power plants also fell into state hands. These ownership-related changes that were partly intended to be temporary, later became irreversible. In March 1948, all companies employing more than a hundred workers were nationalised. Table 3-6: Proportion of state ownership (1947-1949) in per cent Industries

July 1947

July 1948

Dec 1948

Dec 1949

Mining

100

Industry

100

Transportation

100

Bank

–

Wholesale

–

100

Retail

–

Source: Kaposi (2010).

Péter Gunst: Magyarország gazdaságtörténete. (Economic history of Hungary.) p. 128.

— 81 —

3 Global conflagration and reconstruction: the 1940s

Table 3-7: Composition of manufacturing ownership in 1948 Number of employees (thousand persons)

Distribution (Per cent)

State owned

278

72.5

Other public property

4.3

Soviet-Hungarian property

3.7

Cooperative property

1.2

313

81.7

5.6

Total Foreign ownership – over 100 people National private – less than 100 people Total

12.7

18.3

Source: Berend – Ránki (1972).

By 1948, wholesale companies had also been nationalised. Finally, at the end of 1949, nationalisation was also extended to companies with less than 100 people and to all foreign-owned companies. The three-year plan Along with and due to the political changes, the complete nationalisation of industry and wholesale established the most important condition for the application of an economic model which was completely different from the previous ones. From 1948 onwards, the economic policy – followed by the Hungarian Workers’ Party that had won the election – implemented economic development by adapting the until-then only known Soviet model in its unchanged form developed one or two decades earlier, under significantly different historical and social conditions. In this, the strategy of forcing the development of heavy industry in Hungary, which is poor in raw materials, contradicted all economic rationality. At the same time, agriculture in which Hungary – which may have enjoyed a comparative advantage even among the socialist countries – was pushed to the background. — 82 —

3 Global conflagration and reconstruction: the 1940s

Table 3-8: Key Charts in the three-year plan 1938 actual

1946-47 actual

Plan for 1949-50

Plan for 1949-50 (1938 = 100%)

National income

22,517

14,741

25,705

114.2

Of which domestic consumption

18,314

10,988

18,945

103.4

Manufacturing production

14,710

9,895

18,709

127.2

Agricultural production

10,434

5,942

9,430

90.4

Designation

Source: Honvári (2013).

The 3-year plan strongly increased the investment ratio of the national product. Before the war, the ratio of investment in the national product was around 5 per cent, which was raised to 20 per cent in the plan. The bulk of the investments focused on the development of heavy industry, which was closely related to preparations for another world war. The big loser was agriculture, which did not even achieve the low level of investment set out in the plan. The 3-year plan was completed by the end of 1949, in 2 years and five months. According to reports, industry was 37 per cent above the level of 1938, while agriculture reached only 85 per cent of the 1938 level. The rejection of the Marshall Plan made it clear that European states belonging to the Soviet sphere of interest would be pushed out of international trade. To make up for this, the Council for Mutual Economic Assistance (CMEA) was set up in early 1949. In principle, the CMEA set itself the task of strengthening economic cooperation between the socialist countries and helping weaker member states to catch up, mainly through division of labour and specialisation. In practice, cooperation was carried out through bilateral foreign trade agreements set out in national economic plans. In the absence of a convertible currency, no country was interested in export surpluses and this circumstance greatly hindered the exploitation of comparative advantages.

— 83 —

3 Global conflagration and reconstruction: the 1940s

*** According to general professional opinion, by 1950, the development of the Hungarian economy had reached – and in some opinions had surpassed – the level of 1938, the last pre-war year of peace. In support of this claim, some refer to data from macroeconomic time series. However, macroeconomic indicators from the late 1940s can be compared to pre-war values only with strong reservations. Before the war, market prices expressed fundamentally different preferences than centrally set prices did in the late 1940s. Since administrative prices strongly overestimated products that increased production more than average, the positive correlation between prices and volumes certainly leads to upward distortion of the growth Charts shown. In addition, it is not negligible either that after the war, in general, a technical level used more than ten years earlier was reconstructed, i.e. it was not really a reconstruction, but rather a restoration.

References Árvay, J. (1973): Nemzeti termelés, nemzeti jövedelem, nemzeti vagyon. (National product, national income, national wealth), KJK, Budapest, 1973. Berend, T. I. – Ránki, Gy. (1972): A magyar gazdaság száz éve. (100 years of Hungarian economy), Kossuth Kiadó, 1972. Bokor, B. (1955): Magyarország háborús károsodása a II. világháborúban. (The war damage of Hungary in World War II), Statisztikai Szemle, 1955. No. 2, pp. 183–189. Botos, J. (2016): A pengő megsemmisülése, a forint születése, 1938–1946. (The destruction of the pengő, the birth of the forint, 1938–1946), Quotes on page 9 (https://epa.oszk.hu/00900/00995/00045/pdf/) Gunst, P. (1996): Magyarország gazdaságtörténete (1914–1989). (Economic history of Hungary [1914–1989]), Nemzeti Tankönyvkiadó, Budapest, 1996. Honvári, J. (2013): XX. századi magyar gazdaságtörténet. (Economic history of Hungary in the 20th century), UniversitasGyőr Nonprofit Kft., Győr 2013.

— 84 —

3 Global conflagration and reconstruction: the 1940s Kaposi, Z. (2010): Magyarország gazdaságtörténete 1700–2000. (Economic history of Hungary 1700–2000), Dialog Campus Kiadó, Budapest-Pécs, 2010. HCSO (2017): Századok statisztikája – Statisztikai érdekességek a magyar történelemből. (Statistics of centuries – Statistical curios in Hungarian history), HCSO, Budapest, 2017. HCSO (1996): Magyarország népessége és gazdasága: múlt és jelen. (The population and economy of Hungary: past and present), HCSO, Budapest, 1996. Ligeti, I. (1947): Magyarország külkereskedelmi kapcsolatai a második világháború alatt. (Hungary’s foreign trade relations during the Second World War), Statisztikai Szemle, 1947. No. 3–4, pp. 90–99. Magyar Gazdaságkutató Intézet Közleményei (1947): Magyarország nemzeti jövedelme. (The national income of Hungary), 31 March 1947. Snyder, Á. (1946): Becslés Magyarországnak a második világháború következtében elszenvedett emberveszteségeiről. (Estimate of Hungary’s human losses as a result of World War II), Statisztikai Szemle, 1946. No. 1–6, pp. 1–4.

— 85 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s Béla Simon Main economic indicators 1950-1959 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 GDP growth *

21.4 16.0 -1.7 12.3 -4.7

8.2 -11.4 2.3

5.6

6.6

GDP/capita growth

5.3

8.7

2.5

0.8

2.3

7.7

9.1

6.2

3.5

Difference between the GDP/capita growth in Hungary and Austria

-7.2

1.9

2.3

-3.4

-7.8

-3.2 -12.1 3.1

2.9

1.0

Change in consumer price index

8.1

20.8 40.2 -0.4

-4.9

-0.9

0.3

-1.3

Government debt as percentage of GDP

10.4

8.9

-5.4

-1.0

2.4

10.0 12.3 14.2 16.1 22.1 21.0 19.8 16.9

Unemployment rate

0.0

Current account balance as percentage of GDP

-0.7

-1.5

-3.1

-0.7

-1.7

1.2

-1.7

-7.7

1.4

-1.1

Interest rate level*

5.9

6.0

Note: *Average interest rate level based on the decade’s reference interest rates, for more information see Madarász – Novák(2015). Source: WDI, Eurostat, Penn World table, Maddison, MNB, Madarász – Novák (2015).

4.1 Expanding population and economic activity The development appropriations in the first five-year plan (1950–1954), which were amended several times, required significant additional labour force. While the population had grown by 474,000 in five years, the number of active earners had

— 87 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

increased by 363,000. The proportion of the active in the population rose from 44 to 46 per cent. In addition to the labour surplus resulting from population growth, the employment of the previously unemployed, housewives and the young as well as the continued employment of older people met the significant labour needs in the economy. By the end of 1959, the number of active earners had increased by another 240,000, while the population had only grown by 194,000 due to declining birth rates and emigration after the 1956 revolution. By the end of the decade, in total, the number of active earners accounted for 47 per cent of the population. The number of employed men had risen by 4 per cent and that of women by 40 per cent in ten years. The higher employment rate of women contributed to the fact that, in the second half of the decade, the birth rate per woman (total fertility rate) fell sharply from 2.5–3 to 2.1. With the forced expansion of employment and the mass employment of women, the economic policy of the time used up the resources of the coming generations, through the declining birth rate. In addition to the strong expansion of the available labour force, structural reorganisation of the labour market continued. This period was characterised by a high number of employees moving from agriculture into industry and other branches of the national economy. The abandonment of land and agricultural activity became a key factor from 1949, when the organisation of cooperative farms began. As early as 1950, 180,000 agricultural earners left their original occupations due to the coercion of employees and farmers into collective farms, the farm reallocation, the creation of state farms and the drastic increase in the tax burden on the peasantry. By 1953, that number had approached 300,000. In the years that followed, the migration wave stopped, and by the end of 1956 the number of people engaged in agriculture had increased somewhat. The repeated economic policy shifts between 1953 and 1957 also fundamentally affected the burdens and living conditions of those working in agriculture. Thanks to the relaxation and then abolition of the compulsory crop delivery system, the cessation of forced collectivisation and the — 88 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

reduction of compulsory quotas faced by small farms, many returned to agricultural work. However, during another wave of collectivisation implemented between 1959 and 1961, there was again a more notable reduction in the number of employees in agriculture. Chart 4-1: Distribution of the number of active earners by economic activity 100

Per cent

100

Agriculture Trade

Manufacturing Other branches

Construction

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Transport

Source: HCSO.

In total, in the 1950s, the number of persons employed in agriculture fell by 10 per cent, i.e. by 210,000. At the start of the period, more than half of all employees worked in the branch, whereas by the end of the period the ratio had dropped to 41 per cent. At the same time, the proportion of employees in industry increased from 19 to 27 per cent, and the number of employees in other “productive” economic branches also rose strongly. — 89 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-2: Key data on agricultural cooperatives 9,000

Units, 10 ha

HUF Billions

8,000

80 70

7,000

6,000

5,000

4,000

3,000

Number of co-operatives (LHS) Size of land used (LHS)

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

1953

1952

10 1951

1,000 1950

1949

2,000

Balance sheet value (RHS)

Source: HCSO, parliamentary reports, Statisztikai Szemle (2018), MNB compilation.

4.2 Changes in the structure of the economy By the end of 1949, the liquidation of the capitalist economy and the nationalisation of the companies had essentially been completed, and thus state ownership had become exclusive in most economic activities. (some Soviet-owned companies and joint ventures could not yet be brought under state control at the time; their ownership was typically repurchased by the state between 1952 and 1954). In the 1950s, the restriction of private small-scale industry and retail continued, along with the formation of various cooperatives. Furthermore, with the creation of state farms

â&#x20AC;&#x201D; 90 â&#x20AC;&#x201D;

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

and cooperative farms, socialist forms of production also became dominant in agriculture. At the beginning of the period, 62 per cent of employees worked in the private sector as tradesmen, retailers, self-employed farmers or as employees of such. The public sector, i.e. state-owned companies and the general government, employed 36 per cent of the workforce. The size of the cooperative sector was negligible at the time. By the end of the decade, the proportion of private sector employees had fallen to 23 per cent. In that group, the number of retailers fell by 90 per cent, and the number of tradesmen and construction contractors fell by one half and one third, respectively. The number of cooperative members and employees increased in several steps in the 1950s. While the activities of industrial, construction and commercial (consumption and sales) cooperatives continued to expand, the number of employees in agricultural cooperatives fluctuated significantly. During the first wave of collectivisation, the agricultural workforce swelled to 370,000 by the end of 1952, and then – because of the policy shift in 1953-1954 – it fell to 231,000. In 1955, due to another policy shift, it rose to 306,000 employees, and then, by the end of 1956, it dropped drastically to 119,000. Finally, after a slow rise, during the second wave of collectivisation, this workforce surged to 725,000 by the end of 1959. In the first half of the period, these shifts typically took place in relation to the private sector, while state farms continued to develop. From the middle of the period, however, employment in the public sector of agriculture also declined and then stagnated. In total, at the end of 1959, 56 per cent of employees worked in the public sector. The number of people working in public administration was essentially unchanged, and the number of employees in state-owned companies increased over the decade.

— 91 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-3: Distribution of the number of active earners by sector 100

Per cent

100

Private producers

Co-operatives

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Public sector

Source: HCSO, MNB compilation.

In terms of production (now known as “output”), the dominance of socialist institutional forms in the domestic economy was even more pronounced in that period. In 1949, the private sector produced 32 per cent of economic output: following several economic policy changes, that proportion had dwindled to 17 per cent by the end of the period. By 1959, the state- or public-owned sectors already produced 83 per cent of the new output, and within this group, the production of state-owned companies contributed 67 per cent to the gross output of the national economy (this ratio was already at least 57 per cent in 1949).

— 92 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-4: Distribution of gross production value by sector 100

Per cent

100

0 1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Private producers Government Public corporations and co-operatives

Source: HCSO, MNB compilation.

The socialist transformation of Hungary’s economy thus had spectacular results in terms of employment in the 1950s, while production conditions had already changed fundamentally and become fixed before then. Industry already produced almost half of the national income at the start of the period. Within this, the socialist manufacturing industry was dominant. Agricultural production contributed 23 per cent to the annual gross production value at the time. These ratios remained essentially unchanged over the decade. The events of 1956 reduced industrial production the most, but during that year the expansion of the construction industry, trade and other services also came to a temporary halt. In addition, due to the multiple reorganisations and the variability in weather conditions, agricultural production exhibited extreme volatility in the 1950s.

— 93 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-5: Distribution of gross production value by activity 100

Per cent

100

Agriculture Trade

Manufacturing Other branches

Construction

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Transport

Source: HCSO, MNB compilation.

In addition to redeployment of the workforce, the significant concentration of investments also served to strengthen and further force the development of industry, including heavy industry, as quickly as possible. Between 1947 and 1949, one third of “socialist” investments occurred in the industry, with 30 per cent of total investment going to heavy industry. Between 1950 and 1953, the proportion of socialist investment spent on industry rose from 38 to 47 per cent. Due to the change in economic policy, “only” 42–43 per cent was subsequently spent on industry, within which the proportion of investment in light industry and the food industry increased somewhat. The proportion of private investment (household investment) gradually shrank from 18 per cent to less than 7 per cent by 1953, but later returned to between 16 and 21 per cent.

— 94 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-6: Distribution of socialist investments by economic activity 100

Per cent

HUF billion

40 35

70 60

Heavy industry Light industry Agriculture Trade Government Investment, total (RHS) Investment, public (RHS)

1959

1958

1957

1956

1955

1954

1953

1952

0 1951

0 1950

1949

Transport

Source: HCSO, MNB compilation.

4.3 Developments in the production and use of national income After the Second World War, Hungary’s national income21 returned to the level of 1938 in 1949 (or, according to some sources, in 1948).22 By the end of the 1950s, the

ational income is an indicator of net national production calculated according to the statistical methoN dology (MPS) of the socialist countries, which only takes into account the production and use of material goods. It was calculated by deducting depreciation. Until 1970, the HCSO used only this methodology.

See, for example, Árvay (1964).

— 95 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

volume of national income had doubled. On the production side of national income, growth was stronger than average in industry (2.4-fold), construction (2.6-fold) as well as transportation and communications (3.4-fold), but at the same time, it was below average in agriculture (1.3-fold) and trade (1.5-fold). Agricultural production during the extreme drought of 1952 reached only 83 per cent of the 1949 level, and even in 1956, it only exceeded this level by barely 6 per cent. In the 1950s, the growth of national income varied widely, due to the cyclicality caused by investments and political shifts in general, along with the variability of agricultural production. In terms of the use of national income generated, rising accumulation expenditures – including investment expenditures – was the main factor in the period. Public consumption also rose strongly, while household consumption expenditures increased only modestly. Between 1950 and 1953, household consumption expenditures remained essentially unchanged. From 1954 onwards, a steady increase in consumption took place, and thus in 1959 it was 1.8 times the level from 1949. Within accumulation expenditures, in addition to the investments put into operation, a remarkable increase in the value of unfinished investments and inventories was characteristic of the first half of the 1950s. The formation of a significant stock of unfinished investments was also due to fact that several large investments were abandoned (for example, construction of metro line 2, on which the state spent HUF 1 billion early in the decade). The increase in the proportion of unfinished investments as well as the unreasonably high level and financing needs of inventory proved to be a recurring problem for the Hungarian economy even in the decades to come.

— 96 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-7: Growth in gross value added and its individual components 260

1949=100

260

140

120

100

Household consumption Accumulation Manufacturing Agriculture

1959

140

1958

160

1957

160

1956

180

1955

180

1954

200

1953

200

1952

220

1951

220

1950

240

1949

240

GDP growth

Source: HCSO, MNB compilation.

In 1956, the volume of national income fell by 11 per cent, which – on the use side – mainly affected accumulation expenditures and did not substantially influence the increase in consumption expenditures. The decline in accumulation expenditures was mainly due to the extremely high use of inventories. The lack of (financing) investments was less typical. Subsequently, in 1957, the previously characteristic equilibrium in foreign trade was upset, as significant additional imports were needed to make up for domestic consumption. However, a realistic assessment of foreign trade developments was hampered by several factors during the 1950s. First, over time, the exchange rate of the ‘foreign — 97 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

exchange forint’ – the unit of account introduced in 1946 for the purpose of unifying external accounts – increasingly diverged from the commercial rates of exchange, and thus it was difficult to reconcile the domestic (national) accounts in HUF with the foreign trade and financing data. Second, export promotion and the extraction of import profits were undertaken through a complex price equalisation system, and therefore, prices and costs perceived by domestic and foreign partners could differ remarkably. Third, until 1956, a portion of the exports (nearly ten per cent, i.e. HUF 700–800 million per year) included reparation deliveries to the Soviet Union, Czechoslovakia and Yugoslavia, which were financed by the budget (reducing the recorded external debt). This distorted exports, but also affected imports. Chart 4-8: Components of gross domestic product use 110

Per cent

110

100

Household consumption Government consumption Accumulation External trade balance

Source: HCSO, MNB compilation.

— 98 —

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

-10 1949

-10

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

4.4 Foreign trade reorganisation, external balance After the Second World War, Hungary’s foreign market relations were fundamentally reorganised. In parallel with the communist takeover, isolation from developed countries and dependence on socialist economies became characteristic. Germany’s dominant role was taken over by the Soviet Union, and foreign trade mainly occurred with the surrounding socialist countries. The Soviet Union’s share of goods exports increased from 29 to 31 per cent, while that of other surrounding socialist countries changed from 39 to 36 per cent in the 1950s. As for the change in goods exports to socialist economies, it should be noted that, at the beginning of the period, war reparation deliveries were still taking place, which may also have required capitalist imports. In the area of goods imports, the share of the Soviet Union increased more markedly, growing from 25 to 32 per cent, while that of the other surrounding socialist countries rose from 32 to 36 per cent. By contrast, the share of exports to the largest Western European partners decreased from 17 to 12 per cent, while the corresponding share of imports fell from 22 to 13 per cent in the same period. Thus, the 1950s was a period of stronger integration into the socialist economic system. The reorganisation and slow recovery of relations with the developed countries began much later. In terms of the product structure of foreign trade, in addition to imports of raw materials and energy resources, rapid industrialisation required increased imports of machinery and equipment, and thus the share of the value of the latter product group jumped from 22 to 29 per cent during the period. The share of the value of machinery and equipment in exports also increased notably, while the proportion of products of agricultural origin fell by one half. At the same time, exports of agricultural and food products steadily grew in volume. These were the products whose exports could be increased even at the expense of domestic consumption if there was a need to increase exports.

— 99 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-9: Value of foreign trade turnover in USD million and as a percentage of GDP 800

USD millions

As percentage of GDP

700 21

600 500

400 300 200

100 0

Exports, m USD (LHS) Exports, GDP% (RHS)

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Imports, m USD (LHS) Imports, GDP% (RHS)

Source: HCSO.

In total, the volume of foreign trade from the late 1940s increased steadily and remarkably. This growth came to a temporary halt in 1956. Aside from 1957, the values of imports and exports were generally in balance in the decade under review. Socialist-related (or rouble-denominated) foreign trade was easier to balance. Foreign trade with the Western countries (or dollar-denominated foreign trade) was often in deficit due to the persistent export problems. In 1957, even the export volumes undertaken vis-à-vis the socialist countries were not met, and therefore, the aid and loans received from them covered the significant import surplus.

— 100 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

The estimated balance of payments follows the trend of the foreign trade turnover balance, but due to the negative income balance and transfer balance, it shows a more unfavourable picture in comparison. It is important to emphasise that the balance of payments Charts compiled in foreign exchange forints in accordance with the methodology prevailing at that time cannot correspond exactly to later statistics. However, it can be stated that in the period under review, the country’s balance of payments typically showed a deficit of between 1 and 2 per cent of GDP, and in 1957, an extraordinary deficit of close to 10 per cent arose. The domestic economy, therefore, had hardly managed to overcome the obligations due to World War II losses and reparations, when – as a result of excessive industrial development, the damage of 1956 and the measures taken to legitimise the system – another indebtedness process began in the 1950s. Table 4-1: Balance of payments in HUF billion and as a percentage of GDP Balance

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

HUF billion

–0.4

–1.2

–2.7

–0.7

–1.8

1.4

–1.8

–10.3

1.9

–1.8

GDP%

–0.7

–1.5

–3.1

–0.7

–1.7

1.2

–1.7

–7.7

1.4

–1.1

Source: HCSO, MNB.

4.5 General government finances From the end of the 1940s, the role of the state in the economy changed fundamentally, and with it, the structure of the state budget changed and the extent of state redistribution became substantially higher. From then on, budget revenues were mainly provided by payments from state-owned companies and cooperatives in the form of turnover tax, profit contribution, social security payments and, from 1959, wage tax. In the initial period, the state extracted in full the portion of — 101 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

income generated by companies that had not been used for wage payment and other expenses (bank charges, insurance). In return, investments and various subsidies were financed from a central budget. Small payments from households basically served the taxation of the remaining private sector (farmers, tradesmen, building craftsmen, hauliers and retailers). Of course, supply and service fees and – between 1950 and 1956 – the amounts received from the subscription of state loans (plan loans) also appeared here. On the expenditure side of the socialist budget, investment expenses became important, but subsidies to companies also comprised a significant proportion. These included foreign trade price differentials, compensation for losses and dotation. In addition, the expenditures of budgetary units increased sharply because in the course of nationalisation some social, health and cultural institutions and activities previously under church or private control became part of the budget, and the perceived threat of war prompted the government to boost military spending. The content and structure of the state budget also changed at the turn of the 1940s and 1950s. In 1948, the budget year, which traditionally lasted from 1 August to 31 July of the following year, was extended to last until the end of the calendar year. Thus, from 1949 onwards the budget year corresponded to the calendar year. In 1949, most state-owned factories were removed from the budget and continued to operate as state-owned companies (such state-owned factories included the Hungarian State Railways, the Hungarian Post and the Postal Savings Bank, which was replaced by the National Savings Bank (OTP) in March 1949 as a state-owned company). In the same year, the presentation of budget was simplified considerably and the range of publicly available general government information was reduced to a minimum. In 1950, additional state-owned factories were excluded from the scope of the budget, after which only the business revenues and expenditures of the State Agricultural Machine Station (ÁMG) were included in the general government statements. At the same time, local governments and pension insurance institutions – the National Social Security Institute (OTI) renamed as the Social Security Centre of Trade Unions (SzTK)

— 102 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

– and other funds were included in the state budget. From 1952 onwards, the sectoral breakdown of budget revenues (corporate, cooperative and retail revenues) and the gross accounting of employers’ contributions paid by budgetary bodies appeared. There are also minor changes in 1959 and 1961 in the presentation of certain budgetary items. The last general government balance sheet was compiled for the end of 1948, as part of the budgetary final accounts. This balance sheet was not complete either, because after World War II and financial stabilisation the inventory of fixed assets was not yet finished in 1949. After that, however, until the regime change, no information was available on the assets and liabilities of the general government and their stock. In the first years, the Minister of Finance explained why the balance sheet had been left out of the final accounts, but later no explanation was given at all. “I do not provide an asset report, as the socialist methods of recording state assets have not yet been developed, and therefore, the accounting data would not provide Charts suitable for analysis.”23 From then on, the presentation of stock data was not hindered by the shortcomings of the fixed assets register – as the national economic fixed assets survey had been properly completed in the early 1950s – but by the fear of displaying the growing debts, i.e. government debt. Consolidated general government revenues and expenditures (excluding intra-sector connections) ranged at around 40 per cent of the GDP during the period. Taking into account the data of social security organisations and local governments that had become part of the general government, the rate of income centralisation by the state increased from 40 per cent in 1950 to 47 per cent in the following years. Revenue growth during this period was mainly driven by the reduction of the private sector, price regulation at the end of 1951 and the extraction of an increasing share of corporate incomes. From 1954, new turnover tax rates were established, companies became more independent financially and a significant proportion of investments could be financed from own

Report on the implementation of the 1951 state budget.

— 103 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

resources, and thus the share of income running through the general government declined. After a temporary reversal, because of the producer pricing and the abolition of dotation, the corporation-related expenditures of the budget fell substantially again in 1959. At the same time, on the revenue side, the role of turnover taxes declined sharply. From then on, more than half of companies’ payments came from profit contribution. Chart 4-10: Total general government revenue as a share of GDP and revenue composition 100

Per cent

As percentage of GDP

60 50

80 70

60 50

30 20

10 0

Revenues from corporations Revenues of budgetary units Total revenues, GDP% (RHS)

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Revenues from households Other revenues

Source: Parliamentary reports, final accounts, Statisztikai Szemle (2018), MNB compilation.

Accumulation expenditures and corporate subsidies accounted for around one half of the state budget expenditures during the 1950s. Most of the accumulation expenses were related to state investments. In addition, investment lending to companies and cooperatives through the Lending Fund placed with the MNB and the Hungarian Investment Bank was continuous. From 1957 onwards, support for companies jumped, mainly due to the significant foreign trade price equalisation, but in 1957, — 104 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

the reimbursement of the previous year’s corporate losses was also a major expense. Between 1949 and 1952, the expenditures of the budgetary units increased one and a half times annually at current prices, basically due to the expanding performance of tasks and the price and wage reform implemented in December 1951. After that, between 1953 and 1958, the expenditures of these institutions remained essentially unchanged (HUF 21–23 billion per year). Another marked increase took place in 1959, as a result of the January price determination. The increase in tasks is shown by the fact that in ten years the number of students in primary, secondary and higher education increased by 350,000 (27 per cent), the number of hospital beds increased by 20,000 (nearly 40 per cent), the number of medical working hours in outpatient care almost tripled and the number of recipients of social security benefits doubled. Chart 4-11: Total general government expenditure as a share of GDP and expenditure composition 100

Per cent

As percentage of GDP

60 50

80 70

60 50

30 20

10 0 1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Capital expenditures Current transfers Expenditures of budgetary units Other expenditures Total expenditures, GDP% (RHS)

Source: Parliamentary reports, final accounts, Statisztikai Szemle (2018), MNB compilation.

— 105 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

In 1950, social security benefits accounted for 14 per cent of the expenditures of the budgetary units, whereas defence expenditures amounted to nearly 35 per cent. Expenditures on public security, law enforcement and national defence rose steadily to 40 per cent until 1953, and then declined remarkably to 19 per cent among the expenditures of the budgetary units, while social security benefits accounted for one quarter of the expenditures at the end of the period. General government personnel expenses rose from HUF 2.6 billion to HUF 6 billion, and the number of employees swelled from 210,000 to 298,000 people in ten years. In 1959, there were 90,000 employees at central budgetary institutions and 208,000 at local council offices and their institutions. Chart 4-12: Expenditures of budgetary units by function 30

HUF Billions

General administration Education, culture Social security

Economic affairs Health and welfare

1959

0 1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Defence

Source: Parliamentary reports, final accounts, Statisztikai Szemle (2018), MNB compilation.

â&#x20AC;&#x201D; 106 â&#x20AC;&#x201D;

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

4.6 Household income, consumption, living conditions World War II was followed by hard times. It was not until 1949-1950 that the production results of agriculture once again approached the pre-war values, and by that time, the population’s food consumption had also reached the pre-war level. In 1950, the real income and consumption of the population, in total, exceeded the 1938 level by 8 per cent. The expansion of social benefits and in-kind social consumption contributed strongly to the rise in consumption expenditures, partly compensating for the modest wage growth. However, thereafter, the structure of consumption did not change much in the 1950s. Half of the expenditures – with a slight decrease at the end of the period, 46 per cent of them – were for the purchase of food, beverages and luxury goods, while households spent 26–28 per cent of expenditures on the purchase of manufactured goods. Among consumption expenditures, the share of use of various services increased from 12 to 18 per cent. During the period under review, the disposable income and consumption expenditures of households moved closely together, and therefore, only very small savings were generated for the sector, mainly from the middle of the period (1–2 per cent of GDP). Within household income, the share of cash incomes rose from 65 per cent to 70 per cent between 1949 and 1959, mostly due to the declining proportion of in-kind incomes from agriculture. The proportion of various social benefits increased from 12 to 19 per cent, at the expense of incomes from labour.

— 107 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-13: Components of disposable income and consumption 120

HUF Billions

120

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

100

1949

100

Social benefits Compensation of employees Consumption expenditures

Source: HCSO, MNB compilation.

Within household income, the nominal increase in wages was continuous during the decade, and the impact of the wage setting implemented at the turn of 19511952 and in 1954 and 1957 stood out. At the same time, essentially immediately after the introduction of the forint, inflation of 12–15 per cent per year occurred, and as a result of the significant price rises at the turn of 1951-1952, the consumer price level rose by 40 per cent in one year, i.e. on the whole, it was 76 per cent higher than the price level prevailing in 1949. Thus, real wages fell by 20 per cent between 1949 and 1952, and consumption stagnated. The three-year decline in living standards ended with the political turnaround announced in mid-1953, after which the income and consumption of the population increased again. The upward trend in living standards was not broken by another political shift in 1954-1955, and the expansion also continued in 1956, despite a temporary decline in national income. — 108 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-14: Consumer price index, nominal wage index and real wage index 260

1949=100

260

140

120

100

Nominal wage index

Consumer price index

1959

140

1958

160

1957

160

1956

180

1955

180

1954

200

1953

200

1952

220

1951

220

1950

240

1949

240

Real wage index

Source: HCSO.

4.7 Housing conditions, housing investments After repairing the damage caused by the war, housing construction developed slowly in the 1950s. Between 1945 and 1953, the number of dwellings built increased by only nearly twenty thousand units per year. From 1954, the pace of housing construction accelerated somewhat, and in the final years of the decade, 40,000–50,000 new dwellings were built each year. Between 1950 and 1959, more than 300,000 dwellings were completed, and the housing stock expanded from 2,480,000 to 2,758,000. Thus, the population number per 100 dwellings decreased minimally, from 360 to 343 people, and the average number of rooms per dwelling increased from 1.41 to 1.47. After the communist takeover in 1948, housing became goods of the state. Access to housing and the provision of housing conditions became part of the state — 109 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

redistribution system and welfare policy. Instead of market mechanisms, the state planning system became dominant in this area as well. In the period before 1954, the state attempted to fully control the housing market, but then, from 1954 and 1956, it gradually recognised that this was not feasible in the absence of resources, and thus, private initiatives received more support. Until 1953, mainly restrictive housing policy instruments prevailed. Through the nationalisations, forced relocations, subdividing of flats and development of a co-tenancy system, the increase in the number of dwellings was mostly achieved within the existing housing stock. Therefore, the modest increase in the number of dwellings was also largely due to the fragmentation of the housing stock, rather than actual new investments. In the following period, however, investments that also increased the housing stock gradually prevailed in the housing growth, i.e. the construction of new units played a more important role in increasing the number of dwellings. Chart 4-15: Annual increase in the number of dwellings in Budapest and the proportion of its individual components 16,000

Number of dwellings

Per cent

14,000

12,000

10,000

8,000

6,000

4,000

2,000

10 0

Share of new dwellings (RHS) Number of constructions (LHS)

Source: Preisich (1998).

— 110 —

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

Share of private constructions (RHS)

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Productive investments left little resources for state housing investments until 1953. After 1956, however, notable changes took place in the housing policy, while the distribution mechanism and the system itself remained unchanged in terms of fundamentals. Significant state resources were reallocated to housing construction, quality was improved and the engagement of private resources was put on the agenda. Thus, retail savings were successfully committed. From 1957, the support of private and family house construction and the promotion of cooperative housing construction were brought to the fore. OTP offered both freehold flats to be built with private investment and state-subsidised housing loans, but only became a key player in housing policy from the early 1960s onwards. Chart 4-16: Housing stock expansion by builder and the amount spent on housing investments 9

HUF Billions

Thousands

60 50

7 6

4 3

1 0 1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

Number of government const. (RHS) Number of subsidized const. (RHS) Number of private const. (RHS) Government investment (LHS) Private investment (LHS)

Source: HCSO, MNB calculation.

— 111 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

With the nationalisation of tenements, larger dwellings and family houses in the late 1940s, ownership relations changed significantly, and state housing ownership in cities grew dynamically. Subsequently, state investments, and especially state subsidies, accounted for an increasing proportion of the amounts spent on housing construction, but the majority of dwellings built were private homes, and therefore, state ownership rose minimally, from 20 to 22 per cent in the 1950s.

4.8 Financing developments, financial savings and indebtedness Households’ net lending (also known as financial savings) amounted to around 2 per cent of GDP in the 1950s. In 1951 and 1952, because of the economic austerity measures, savings declined temporarily, and in the latter half of the decade, in spite of the increase in savings, financial investments declined due to a surge in housing investments. At the end of 1949, the household sector had HUF 5.9 billion in financial assets (13 per cent of GDP), 45 per cent of which was cash and 5 per cent bank deposits. Of the HUF 1.2 billion in liabilities (3 per cent of GDP), bank loans represented only 12 per cent. By the end of 1959, the stock of financial assets had risen to 25 per cent of GDP, while the liabilities remained at 3 per cent. Until 1956, the most important form of investment was the subscription for the state loans (peace loans, plan loans), from which a claim of nearly HUF 8 billion was accumulated by households against the state. As for savings in savings deposits, they became significant thereafter (from 1957 onwards), and additionally, the equity of households expanded in several steps due to membership in various cooperatives.

— 112 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-17: Annual net lending/borrowing of the economy and individual sectors 4

As percentage of GDP

-2

-3

-4

-5

-6

Households Government

Corporations

1959

-1

1958

-1

1957

1956

1955

1954

1953

1952

1951

1950

Total economy

Source: MNB.

The state budget was mostly in a close-to-balance position during the period under review, with a major deficit appearing only in the year of the 1956 Revolution. However, during this period, the economic management of the corporate sectors and the general government became so intertwined that it is not possible to precisely determine the financing needs or investments of each sector separately. For the decade on average, the combined net borrowing of the general government and the corporate sector accounted for about 3 per cent of GDP, nearly 2 per cent of which was financed by household financial savings, i.e. the country’s external financing needs amounted

— 113 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

to around 1 per cent of GDP. Starting from a close-to-balance position, the needs for external financing gradually rose to close to 2 per cent by the middle of the decade, and then returned to the close-to-balance position with several fluctuations. At the end of 1949, general government liabilities accounted for only 16 per cent of GDP, of which the stock of credit-type debts – the government debt in the narrower sense – accounted for 11 per cent. The remainder were other liabilities related to taxes, subsidies, wages and material expenditures. Most of the debt was owed to foreigners and mainly included payment obligations with regard to reparations as compensation for war damage. In addition, the debt stock comprised a small amount of central bank loan and currency (cash) debt. Until 1967, the issuer of forint coins was not the MNB but the state. This is why the value of coins in circulation was listed among the debts of the state. From 1950 onwards, the state borrowed from households and the central bank to finance budget expenditures, but in 1956 and 1957, significant foreign borrowing also took place. The government debt-to-GDP ratio reached its maximum in 1956 (22 per cent) and then declined to 17 per cent by the end of the period, owing to robust GDP growth. The total stock of general government liabilities was close to 20 per cent at the time. It is worth mentioning that the financial assets of the general government at the time exceeded the value of its liabilities approximately ten-fold. In addition to significant corporate ownership (equity), bank deposits, loans for foreign borrowers and other receivables were among the assets.

— 114 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Chart 4-18: General government gross debt by component 22

As percentage of GDP

Loans from MNB Loans from banks

Loans from households Loans from abroad

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

Currency

Source: MNB.

In total, the claims of the national economy against the rest of the world amounted to HUF 4.7 billion at the end of 1949 (11 per cent of GDP), half of which represented the MNB’s international reserves. By the end of 1959, foreign assets had changed to 7 per cent of GDP, within which the share of the government and corporate claims had risen, and the MNB’s reserves represented 37 per cent. The trend in the country’s external debts was similar to that of the liabilities of the general government during the period under review, as the state basically used foreign funds either directly or through the MNB. Between 1949 and the end of 1959, foreign debt fell from 19 per cent of GDP to 16 per cent of GDP, but at the end of 1956 gross debt temporarily rose to 23 per cent of GDP. At the beginning of the period, half of the external debt stock was accounted for by the direct foreign credit debts of the general government, — 115 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

and the other half was shared by the MNB and non-financial corporations. Later, the MNB’s external liabilities expanded the most, as the state relied more and more heavily on the central bank to meet its financing needs. At the same time, the direct foreign debts of companies decreased because the state repurchased the shares of companies that had become Soviet-owned. Chart 4-19: Hungary’s external debts by component 24

As percentage of GDP

Trade credits MNB debt

Government debt

Source: MNB.

— 116 —

Corporations

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

Box 4-1 The 1956 Revolution and the economic consequences of retaliation

The armed struggles of the October 1956 Revolution, the subsequent retaliations and a protracted political crisis shattered the economy. About 200,000 people left the country. The volume of national income decreased by 11 per cent compared to the previous year. Material damages, the losses to companies and the state and lost revenues exceeded HUF 14.5 billion. Across the country, a total of 20,000 homes and 2,700 stores and catering establishments were damaged or rendered unusable. In Budapest, damage was caused to nearly 16,000 properties and more than 2,000 dwellings were destroyed. Additionally, 280 stores and catering units and 430 hotel rooms needed to be restored. For the first three quarters of 1956, despite the extraordinary difficulties (Danube flooding, earthquake, extraordinary weather in February), economic management met the expectations. The three-quarter balance of the state budget ended with a surplus of HUF 0.91 billion, and both household and corporate tax payments developed according to plan. However, already at that time, further indebtedness was expected to arise by the end of the year in relation to Western countries as foreign trade and payment difficulties had emerged. In the fourth quarter, the armed conflict caused severe economic and financial damage. Production and turnover – with the exception of retail turnover – fell to a minimum. Even in December, it reached only 20–25 per cent of the September rate. In terms of the retail supply of goods, however, retail turnover between 1 October and 15 December was 21 per cent higher than it was in the same period in 1955. Inventories of trade goods decreased by about HUF 5.5 billion due to the extremely high sales turnover, damage to goods, lack of industrial production and transportation difficulties. Industrial production and transportation came to a halt for two months, but at the same time companies paid more wages than necessary. Due to the wages and material costs paid without production, an extraordinary loss of HUF 5 billion was recorded in 1956. Damage amounted to HUF 1 billion in current assets and HUF 0.2 billion in

— 117 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

fixed assets. In state farms, work discipline became looser, significant amounts of crops remained in the fields and thefts multiplied. The annual production value remained 22 per cent below the appropriation. Taking advantage of the favourable transitional rules, by the end of 1956, more than 60 per cent of the cooperative farms had disbanded; 224,000 members had resigned and taken with them more than half of the land (829,000 hectares). In the fourth quarter, investment activity was scarce. After the start of production, in December, it was mainly the repair of building damages that was initiated. Compared to the fourth quarter of the previous year, foreign trade turnover was 56 per cent lower for imports and 78 per cent lower for exports. In the state budget, instead of the HUF 1.2 billion surplus planned for 1956, a deficit of HUF 1.1 billion was recorded. Revenues of HUF 7.7 billion and expenditures of HUF 5.4 billion were not realised. For the first time since the financial stabilisation of 1946, budget expenditures significantly exceeded revenues. State-owned companies paid HUF 7.6 billion less in taxes and profits, and retail tax payments were HUF 1.1 billion, or 20 per cent lower than the appropriation. At the same time, wages and other benefits were paid in full by the budgetary bodies. On the other hand, HUF 1.5 billion less was spent on state investments, and loan repayments of HUF 0.6 billion were not made. In 1957, the budget paid an additional HUF 1.6 billion in connection with corporate losses. Compared to the beginning of the year, the volume of banknotes increased by 35 per cent, by HUF 1.8 billion, and there was a risk of inflation. The short-term corporate loan portfolio did not increase, but collateral for loans amounting to HUF 7 billion was destroyed, and thus these loans served as collateral for extraordinary corporate losses. Foreign government debt and foreign currency liabilities increased significantly. State aid and long-term loans provided by socialist countries were a major help. The Soviet Union and China provided loans equivalent to about $300 million. In addition, the MNB was forced to sell $10 million worth of gold reserves.

— 118 —

4 The liquidation of private economy and the trauma of the Revolution: the 1950s

References Árvay, J. (1964): A nemzeti jövedelem alakulása 1938–1963 között. (The trend of national income between 1938 and 1963), Statisztikai Szemle, Vol. 42. No. 6. pp. 638–703. Botos, J. (2004): A Magyar Nemzeti Bank története III. (History of the Magyar Nemzeti Bank III), Tarsoly Kiadó. HCSO (1950–1960): Statisztikai Évkönyv, 1948–1959. (Statistical yearbook, 1948–1959), Hungarian Central Statistics Office. HCSO (1952): Magyarország nemzeti vagyona. (Hungary’s national wealth), Hungarian Central Statistics Office. HCSO (1956): Kereskedelmi és devizahelyzetünk átalakulása 1955-ben és az 1949–1955 időszakban. (The transformation of Hungary’s trade and foreign exchange situation in 1955 and in the period of 1949–1955), Hungarian Central Statistics Office. HCSO (1989): Népgazdasági mérlegek, 1949–1987. (National accounts, 1949–1987), Hungarian Central Statistics Office. HCSO (1996): Magyarország népessége és gazdasága. Múlt és jelen. (The population and economy of Hungary: past and present), Hungarian Central Statistics Office. Kornai, J. (1980): A hiány. (The Deficit), Közgazdasági és Jogi Könyvkiadó. Ministry of Agriculture (1960): Jelentés a Minisztertanácsnak a mezőgazdasági termelőszövetkezetek 1959. évi zárszámadásáról. (Report to the Council of Ministers on the 1959 final accounts of agricultural cooperatives) Ministry of Finance (1950–1960): Jelentés az állami költségvetés végrehajtásáról, 1949–1959. (Report on the implementation of the state budget, 1949–1959). MNB (1994): Árfolyamrendszer és árfolyampolitika Magyarországon 1946–1993. (Exchange rate system and exchange rate policy in Hungary, 1946–1993), MNB Műhelytanulmányok 7. MNB (2016): A forint 70 éve: Út a hiperinflációtól az árak stabilitásáig. (70 years of the forint: Road from hyperinflation to price stability), Magyar Nemzeti Bank. Pető, I, – Szakács, S. (1985): A hazai gazdaság négy évtizedének története 1945–1985. (The history of four decades of Hungarian economy, 1945–1985), Közgazdasági és Jogi Könyvkiadó. Preisich, G. (1998): Budapest városépítésének története, 1945–1990. (History of urban construction in Budapest, 1945–1990), Műszaki Könyvkiadó. Simon, B. (2018): Még húsz év a pénzügyi számlákból – Magyarország pénzügyi mutatói 1949 és 1969 között. (Twenty more years of financial accounts – Hungary’s financial indicators between 1949 and 1969), Statisztikai Szemle, Vol. 96. No. 11–12. pp. 1129–1168.

— 119 —

5 The evolution of goulash communism: the 1960s Béla Simon Main economic indicators 1960-1969 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 GDP growth *

9.3

5.0

5.7

5.4

5.1

0.8

7.3

7.5

4.9

7.3

GDP/capita growth

4.7

4.6

3.8

5.2

5.3

0.5

5.4

5.3

0.8

2.6

Difference between the GDP/capita growth in Hungary and Austria

-3.0

-0.1

2.0

1.8

0.0

-1.7

0.5

3.1

-3.1

-3.3

Change in consumer price index

0.7

0.9

0.5

-0.6

0.4

0.7

1.2

0.4

-0.3

1.4

Government debt as percentage of GDP

17.2 16.7 17.0 17.9 16.9 17.2 16.0 18.2 21.5 22.4

Unemployment rate

0.0

Current account balance as percentage of GDP

-2.5

0.0

-1.1

-2.2

-3.0

-1.1

0.8

-1.7

-0.5

2.1

Interest rate level*

5.7

5.5

5.7

From 1957 onwards, the economic management approach changed significantly in Hungary, and this change also had a lasting effect in the 1960s. The change in approach was evident from the fact that, in contrast to the sudden policy shifts characteristic of the period of 1950 to 1956, calm continuity was considered a priority by the leadership at the time. During these years, the only contradictory, shock-like change was another collectivisation of agriculture between 1959 and 1961, which was accompanied by a shock that lasted until the mid-1960s. Addressing issues related to the living standards and lifestyle of the population became a central element of consolidation — 121 —

5 The evolution of goulash communism: the 1960s

policy. In economic policy, the necessary, continuous improvement of living standards became a basic requirement. In contrast to the previous approach based on cuts and austerity measures, which sought to maintain balance by constraining both income and supply, the economic policy of consolidation provided more opportunities for both increasing incomes and using them wisely. It had become accepted that extra work comes with extra income, and there was also a wider choice to spend the income on. Economic policymakers recognised that the increasing consumption by the population and their financial savings could also be harnessed for growth. The relative calm of world politics also helped to maintain a domestic political situation that was more balanced than before. Tensions between the two great powers (the USA and the Soviet Union) eased and the détente process began. Cooperation within the CMEA became closer. Instead of preparing for war and confrontation, socialist countries joined forces to reduce the gap to developed countries, striving to catch up and surpass them. In addition to the economic catching-up measured by production results, this included the elimination of differences in living standards, and thus, the domestic objectives were supported. Regarding the development plans and especially their implementation, however, the old schemas were followed. The reform ideas formulated in 1956 were set aside or rejected, and were not brought out again until 1964, when preparations began for a new system of economic management, which was introduced later, in 1968. After the cautious economic policy of 1956 and 1957, the acceleration of growth came to the fore again from 1958 onwards. The periods of the three-year plan between 1958 and 1960 and the second five-year plan between 1961 and 1965 were characterised by runaway investments, plan increases and excessive industrial development. Meanwhile, no attention was paid to maintaining balance, productivity did not improve, the import demand of the economy increased and living standards did not rise as planned. Despite the extraordinary efforts, the results of the planned economy as a whole were not encouraging in any of the socialist countries, and the gap to the advanced economies was widening. — 122 —

5 The evolution of goulash communism: the 1960s

5.1 Slower population growth and economic activity In the 1960s, population growth slowed down and the expansion of the labour force was far more subdued compared to the previous decade. After the end of the total abortion ban which had come into force in 1953 (the so-called Ratkó era), the number of births began to decline from 1957. The measures taken in the 1960s were also unable to substantially change this adverse development, and the number of births per woman (the total fertility rate) continued to decrease (from 2.1 to 2). The increase in the number of active earners by 288,000 was clearly due to the further increase in the employment of women, while the number of employed men fell by nearly 100,000 due to the higher number of people retiring and those pursuing higher education. The number of women in employment increased by 23 per cent over the span of ten years, and thus 39 per cent of women (63 per cent of those aged 15–59) worked at the end of 1969. Within the total population, the proportion of employees rose from 47 to 48 per cent in the 1960s. The number of pensioners was around 600,000 in the 1950s. In the first half of that decade, this number fell somewhat due to the rising labour demand in the economy, but later it gradually increased, mainly because of the unified pension scheme introduced in 1952. In the 1960s, the number of pensioners rose sharply, more than doubling, and by 1969 an average of 1.35 million people received retirement benefits. In addition to the wage and length-of-service based pension scheme, measures to encourage childbearing also contributed to a more modest increase in the number of active earners. After maternity leave, which was extended to 20 weeks from 1962, the childcare allowance (GYES) was introduced in 1967. By 1969, 144,000 parents were receiving this allowance and – uniquely in Europe at the time – it provided stay-at-home pay until the child reached the age of three.

— 123 —

5 The evolution of goulash communism: the 1960s

Chart 5-1: Number of pensioners and amount of pensions paid 1,600

Thousands

As percentage of GDP

4.0

Number of Pensioners (LHS)

1969

1968

1967

1966

1965

1964

0.0 1963

0 1962

0.5

1961

200

1960

1.0

1959

400

1958

1.5

1957

600

1956

2.0

1955

800

1954

2.5

1953

1,000

1952

3.0

1951

1,200

1950

3.5

1949

1,400

Total amount of pensions (RHS)

Source: HCSO.

As for the distribution of active earners by branches of economic activity, the most striking change during the period was that the flow of agricultural workers to other branches continued at an accelerating pace. In ten years, the number of employees in agriculture fell by 32 per cent (610,000). In terms of its scale and proportion, this was the largest ever decline in this sector’s human resources, not counting the 1990s. At the beginning of the period, 41 per cent of employees lived from agriculture. By the end of 1969, this proportion had fallen to 26 per cent. At the same time, the proportion of people employed in manufacturing rose from 27 per cent to 36 per cent. The construction industry increased its share of employment from 5 to 7 per cent, while the share of employees in the transport and communications industry rose from 5 to 6 per cent and grew from 6 to 8 per cent in trade and catering services. It should be noted that the number of employees in other service activities also increased significantly, in contrast to the stagnation seen in the previous decade. The higher — 124 —

5 The evolution of goulash communism: the 1960s

number of employees was noticeable in public administration and other areas of general government, as well as in other service provider sectors. Migration from agriculture intensified in particular during the second wave of forming cooperative farms. Between 1959 and 1963, more than half a million earners left agriculture. In view of transforming work organisations at that time and the low level of equipment supply, this represented a very serious loss. In addition, almost one third of the earners were over the age of 60, i.e. they had already passed the retirement age that applied to men in general at the time, except for the peasants. During harvest periods, the government sought to make up for recurrent labour shortages with the help of seasonal work by the military, students and plant organisations. Chart 5-2: Distribution of the number of active earners by economic sector 100

Per cent

100

Agriculture Trade

Manufacturing Other branches

Source: HCSO, MNB compilation.

— 125 —

Construction

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Transport

5 The evolution of goulash communism: the 1960s

The reduction of agricultural activities, the disappearance of traditional peasant society and the strengthening of industrial and service activities led to the acceleration of urbanisation. At the end of 1949, more than 63 per cent of the population lived in villages (község), ten years later this proportion changed to 60 per cent and twenty years later to 55 per cent, according to the public administration classification at that time. While the population of villages generally decreased during the 1960s, many towns faced an expansion of 20–30 per cent. The population of Budapest increased by nearly 13 per cent in the 1950s and by more than 7 per cent in the 1960s, to reach 2 million people.

5.2 Changes in the structure of the economy In the early 1960s, the number and proportion of employees in the private sector declined substantially at the level of the national economy. This was largely due to the collectivisation of agriculture, but at the same time the steady decline seen since 1957 in the number of tradesmen, building craftsmen, retailers and private hauliers continued. The membership and number of employees of agricultural cooperatives rose sharply between 1959 and 1961, and then began to decline due to the migrations. At the end of 1961, after the cooperative farm organisation campaign, 1,280,000 employees were registered, while at the end of 1969, there were only barely 970,000 working at cooperative farms. The spread of the cooperative economic form was also observed in other industries. There, however, it was not due to campaign-like, enforced government measures that the number of employees increased, as the typical growth trend seen since the early 1950s merely continued. The cooperative industry, with an expansion of nearly 50 per cent, employed 238,000 at the end of the decade, and the cooperative construction industry, which had tripled in ten years, employed 75,000. During the same period, the number of people working in cooperatives in trade nearly doubled to 120,000. Overall, at the end of 1969, the cooperative sector employed 28 per cent of the employees and the public sector – a combination of — 126 —

5 The evolution of goulash communism: the 1960s

the state-owned companies and the general government – employed two-thirds of income earners. At the end of the period, the private sector accounted for barely 5 per cent of employment, with a steady, slow decline. Chart 5-3: Distribution of the number of active earners by economic sector 100

Per cent

100

Private producers

Co-operatives

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Public sector

Source: HCSO.

However, the classification of active earners by economic sector cannot illustrate the emerging and developing private economy in the socialist sector, because in the statistics, each employee can be included in only one place, namely in the sector corresponding to their main activity. Thus, the headcount ratios do not reflect the weight of the increasingly important backyard and ancillary economic activities of the members and employees of agricultural cooperatives, while the production values broken down by organisational form do. Private farms accounted for more than

— 127 —

5 The evolution of goulash communism: the 1960s

one third of agricultural output, with backyard farms contributing 24 per cent and ancillary and individual farms contributing 10 per cent to the total sector output at the end of the period. Livestock farming in particular was an area where private farms achieved significant results. It is also due to this that, following a downturn in the first half of the decade, the economic weight of the private sector rose to 8.5 per cent by the end of the period. In addition to agriculture, private sector production increased substantially in the construction industry, where self-financed housing construction accounted for a significant proportion. Despite the remarkable shifts in workforce, the contribution of each economic sector to gross output only changed minimally for the decade as a whole. In 1959, agricultural output accounted for 20 per cent of the national product. Due to the liquidation of private farms and post-collectivisation uncertainties, this ratio fell to 16–17 per cent and then gradually rose to 18 per cent in the second half of the period. Agricultural production was much more even in the 1960s than in the previous decade. From 1958 onwards, the share of industrial production rose sharply again in line with the growth targets in the three-year plan, and then continued to expand during the five-year plan period of 1961-1965. Thus, in the first half of the 1960s, manufacturing accounted for 59 per cent of total output. However, in the second half of the decade, especially from 1968 onwards, a major correction was seen, and by 1969 manufacturing only produced 51 per cent of total national economic output. At the same time, the role of construction industry, trade and other economic activities increased.

— 128 —

5 The evolution of goulash communism: the 1960s

Chart 5-4: Distribution of gross output by economic sector 100

Per cent

100

Agriculture Trade

Manufacturing Other branches

Construction

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Transport

Source: HCSO, MNB compilation.

The advance of the manufacturing industry – known as ‘socialist large-scale industry’ at the time – and the spread of industrial production methods in other economic activities were not accompanied by a reduction in the costs of production. For example, the mechanisation of agricultural production and the replacement of live labour by machinery did not reduce production costs but rather tended to increase them instead, just as was the case with large-scale industry. Cost efficiency first decreased at state farms with more advanced in mechanisation, followed by a decline at more developed cooperatives. In general, the activity of private farms and individual producers retaining live labour and traditional skills, while less mechanised, appeared to be more effective during this period. At the national economy level, 74 per cent of the gross production value went to material and personnel expenses at the turn of the 1940s and 1950s. This ratio rose to 78 per cent in ten years, and then hovered at around — 129 —

5 The evolution of goulash communism: the 1960s

79–80 per cent for most of the 1960s and was only brought below 78 per cent again at the very end of the period. While labour costs fell from 32 to 22 per cent in terms of production value over twenty years, material expenses, calculated without depreciation, increased from 42 to 54–55 per cent in terms of output. The price reforms in 1959, 1965 and 1968 caused a particularly significant increase in production costs. The increase in the share of material expenses – i.e. of intermediate consumption – in the value of production also meant that gross value added – i.e. the value that other sectors could use – increased less than output. Thus, in the 1950s and the first half of the 1960s, the manufacturing industry and the construction industry were increasingly producing for themselves, and the production of consumer goods – products and services for final consumption – was pushed to the background. Chart 5-5: Cost intensity of production in the economy, and within this in industry and agriculture 70

Per cent

Material expenses/output, total o/w Manufacturing o/w Agriculture Wage expenses/output

Source: HCSO, MNB compilation.

— 130 —

1969

1968

20 1967

20 1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

5 The evolution of goulash communism: the 1960s

Investments also continued primarily to develop industry, including heavy industry. In terms of the socialist (i.e. state and cooperative) investments, 41–45 per cent was still spent on industry, and this proportion only dropped below 40 per cent at the very end of the period. However, the share of heavy industry steadily declined, whereas light industry and the food industry received somewhat more support. From 1959 onwards, in parallel with the reduction of private farms and the spread of the cooperative economic form, agriculture accounted for a much larger share of socialist investment resources than before. After the state farms, cooperatives were also able to buy their own machinery, and the role of agricultural machine stations set up for rent declined. From 1968 onwards, there was another substantial expansion involving agriculture-related investments, and this increase also mainly affected cooperative farms. However, due to private sector restrictions, retail investments fell at the very start of the period, and from then on they essentially only included housing construction and home purchases. The share of retail investments ranged from 8 to 11 per cent of total investment. Apart from some better years, communal investments tended to show a declining trend; in the second half of the period, only 23 per cent of socialist investment resources was spent on this area. Within this, the share of housing investments also decreased.

— 131 —

5 The evolution of goulash communism: the 1960s

Chart 5-6: Distribution of national economic investments by economic sector 100

Per cent

100

Heavy industry Light industry Agriculture Trade Government Households

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Transport

Source: HCSO, MNB compilation.

Box 5-1 Socialist reorganisation of agriculture

The second collectivisation period of agriculture took place between 1959 and 1961, under three cooperative farm organisation campaigns. During the first campaign, in early 1959, some 1,000 new cooperatives were established. In the subsequent campaigns, in the winters of 1959-1960 and 1960-1961, the number of cooperatives remained mostly unchanged, but membership increased considerably. Due to these transformations, the roles of private economy and cooperative economy in the field of agriculture switched between 1958 and 1962. Before collectivisation, in 1958, 79 per cent of those employed in agriculture worked on private farms (as sole proprietors or employees), however, by 1962, 75 per cent of them had been grouped into cooperative farms. In

â&#x20AC;&#x201D; 132 â&#x20AC;&#x201D;

5 The evolution of goulash communism: the 1960s

1958, the total land area of individual farms was 3.5 million hectares, and that of the cooperatives approached 4.1 million hectares after the transformation. Collectivisation did not formally affect land ownership. The government declared that it did not want to eradicate peasant land ownership; it was only the land use that was organised on a cooperative basis. In recognition of their ownership, farmers could claim land rent from the cooperatives. In practice, however, the land use of state farms and cooperative farms took on the character of ownership, which was finally enshrined in law in 1967. By means of mass collectivisation, the state’s plan-guided economic management system could be implemented more directly in agriculture. The cooperatives remained separate planning and management units, but were still involved in the implementation of central plans through the local councils. The cooperative farms had to take into account the central pattern when drawing up their statutes, which – like state-owned companies – narrowed the room for manoeuvre for members and cooperatives. In this system therefore, the land included in the cooperatives was also reallocated into the centrally operated means of production. The cooperative farms set up or transformed forcibly and rapidly between 1959 and 1961 proved more viable than their counterparts established a decade earlier. This was because agricultural and financial professionals had been sent and placed in senior positions in the cooperative farms, and large farmers with significant expertise and experience had also been persuaded to join the cooperatives. Moreover, after the reorganisation, from the originally envisioned, traditional, Stalinist, kolkhoz-type cooperative associations genuine production collaborations emerged, which over time became entrepreneurial-type production communities. At first, the government did not recognise the forward-looking significance of these cooperations. For example, for backyard and ancillary farms operating under them, it envisaged a transitional role, believing that with the strengthening of the cooperatives, they would no longer be needed. By the mid-1960s, however, it had become clear that backyard and other ancillary farms steadily accounted for nearly 40 per cent of agricultural production

— 133 —

5 The evolution of goulash communism: the 1960s

and made an even more significant contribution to the livelihood of the peasantry. Thus, they became a recognised form of farming linked to cooperative farms. The cooperatives themselves were also able to increase their independence. Their investment opportunities expanded and their loans related to reorganisation were remitted by the state in several stages (in 1961, 1965 and 1967). Although production results were generally still poor, it became apparent that – compared to state farms and state-owned companies – cooperatives represented a more flexible form of economic management, which were more responsive to market developments and proved to be more effective. In most cases, competent, entrepreneurial-type management was appointed to lead the cooperative farms, and the financial interest system related to profitability also worked well. Based on these results, the government changed the management system of cooperatives and replaced the plan instructions with regulators from 1966 onwards. The experience gained in this way contributed to the preparation of the new economic management system and to the development of price ratios, product distribution systems and contractual rules.

5.3 Developments in the production and use of national income Gross domestic product (GDP) grew at an rate average of nearly 6 per cent per year in the 1960s. This growth was lower than the average growth rate of the 1950s (which was 7.5 per cent), but the growth was much more balanced. In the previous decade, there were three years during which production volume declined significantly, and there also was an expansion of more than 20 per cent in several years. From 1958 onwards, this extreme economic period was replaced by a more restrained and steady period of development, which lasted all the way until the end of the 1970s. In the 1960s, growth continued to be largely supported by industry on the production side. The gross value added of that branch which accounted for more than half of — 134 —

5 The evolution of goulash communism: the 1960s

the total production value, doubled during the decade, corresponding to an average annual growth rate of 7.6 per cent. By contrast, the volume of agricultural production fell sharply in the first half of the decade, and it was not until the middle of the decade that it once again reached the level measured at the end of the 1950s. In the latter half of the period, this branch of activity grew modestly. The construction industry and the services produced average growth values. Each area was characterised by the fact that the momentum gained at the beginning of the period ran out, growth was stifled, and then in 1967-1968 growth regained some momentum. Chart 5-7: Growth in gross domestic product and its individual components 260

1959=100

260

140

120

100

Household consumption Accumulation Manufacturing Agriculture

Source: HCSO, MNB compilation.

— 135 —

1969

140

1968

160

1967

160

1966

180

1965

180

1964

200

1963

200

1962

220

1961

220

1960

240

1959

240

GDP growth

5 The evolution of goulash communism: the 1960s

As regards the use of the income generated, accumulation expenditures continued to be the area where the domestic economy achieved the strongest growth during the period. The total accumulation, and within this, the volume of investments increased 2.3-fold, which is barely below the 2.5-fold growth rate of the previous decade. As a result, in the 1960s, an average of 28 per cent of GDP was accumulated, compared to the average of 22 per cent in the 1950s. In the final years of the decade, accumulation rates were above 30 per cent, mainly due to additional investment subsidies to agriculture. The time distribution of accumulation expenditures over the 1960s was more even than before, as the drastic political shifts of the 1950s were not repeated during this decade. The decline in accumulation expenses in 1965 was mainly due to the remission of the loans of agricultural cooperatives, and the sharp increase in 1967 was caused by corporate reserve formation (stockpiling) before introduction of the new economic mechanism. Because of the rising share of accumulation expenditures, household consumption expenditures accounted for 63 per cent of GDP in the 1960s, in contrast to the earlier ratio of 67 per cent. What was new, however, was that consumption expenditures increased in a predictable, steady manner over the entire period, with average annual expansion of more than 4 per cent. In addition to household consumption expenditures, a slightly smaller proportion of the income generated was used for collective (government) consumption in the decade under review, compared to the previous one.

— 136 —

5 The evolution of goulash communism: the 1960s

Chart 5-8: Components of gross domestic product use 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 -20

1969

1968

1967

1966

1965

1964

1963

1962

HUF Billions

1961

1960

HUF Billions

1959

320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 -20

Household consumption Government consumption Accumulation External trade balance

Source: HCSO, MNB compilation.

Due to the remarkable increase in investment expenditures, production did not cover domestic consumption for most of the period, and thus the missing goods had to be obtained through additional imports. Consequently, external balance was not maintained, and – despite the forced investments – the expansion of economy as well as the recovery in consumption fell short of the previous and expected results. The same phenomena were observed in the other CMEA member states, i.e. despite the continuous expansion of labour force and high investment rates, by the 1960s the growth rate of national income had declined everywhere. By contrast, after an average increase of 4 per cent in the 1950s, the gross domestic product of developed countries

— 137 —

5 The evolution of goulash communism: the 1960s

expanded by more than 5 per cent annually in the 1960s, which was achieved with an increase in employment. Therefore, the socialist countries lagged even further behind the developed countries in the 1960s.

5.4 Development of foreign trade turnover and external balance Foreign trade turnover increased steadily during this period, within which the proportion of turnover with the socialist countries and the capitalist Western countries changed minimally, in favour of the latter countries. The share of the Soviet Union in exports increased from 31 to 36 per cent and in imports from 32 to 34 per cent, while the share of other socialist countries decreased or remained unchanged. The three-year plan launched in 1958 assumed that the balance of payments would be balanced by the end of the cycle. From 1959 onwards, however, forced industrialisation and forced increases in living standards made the deficit of the foreign trade balance and the balance of payments continuous. The extent of the deficit depended on the results of the attempts to establish financial balance and of the restraint of investments and on the extent to which the supply of the population necessitated the import of basic foodstuffs in the given year. Imports of light industrial and consumer goods increased sharply at the beginning of the period, and due to the rapid collectivisation of agriculture, the country had to import agricultural products, which it had previously typically exported. Overall, the commodity structure of exports changed little in the 1960s, but in imports the share of machinery, equipment, means of transport, consumer goods and foodstuffs increased, while imports of raw materials and energy carriers decreased.

â&#x20AC;&#x201D; 138 â&#x20AC;&#x201D;

5 The evolution of goulash communism: the 1960s

Chart 5-9: Value of foreign trade turnover in USD million and as a percentage of GDP 2,000

USD Millions

As percentage of GDP

1,800 25

1,600 1,400

1,200 15

1,000 800

600 400

200 0

Exports, m USD (LHS) Exports, GDP% (RHS)

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Imports, m USD (LHS) Imports, GDP% (RHS)

Source: HCSO, MNB compilation.

In the 1960s, the development of world market prices was uniquely favourable for Hungarian foreign trade, which relied mainly on raw material imports and finished goods exports. In Hungarian foreign trade, for the first time in the 20th century, a period occurred, during which price ratios improved. However, even in this favourable global trade situation, the country experienced external financing problems, which in the middle of the decade clearly highlighted the internal tensions and fundamental shortcomings of the economic management system. The deficit in the foreign trade balance was also evident in rising external debts. In the 1950s, debts owed to socialist countries (or from another perspective, rouble-denominated debts) — 139 —

5 The evolution of goulash communism: the 1960s

exceeded debts owed to Western capitalist countries (or dollar-denominated debts). After 1956, the dollar-denominated debts were substantially reduced, and the rouble debt taken out in 1956 and 1957 did not increase further in the following years. Thus, by the end of 1959, it appeared that the looming debt problems had been overcome. From 1960 onwards, however, dollar-related debts grew unstoppably and as early as 1962, they predominated within the external debt. Until 1964, during a period of accelerating credit expansion, 75–86 per cent of the dollar-denominated loan portfolio was short-term, which was reduced to 50 per cent by the end of the decade. Chart 5-10: External debt denominated in roubles and dollars 70

HUF Billions

USD Millions

1,600 1,400

1,200

1,000

800 30

600

400

200

Debt in Rouble relation

Debt in USD relation

Source: HCSO, MNB.

— 140 —

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

Total debt

5 The evolution of goulash communism: the 1960s

5.5 General government finances In the 1950s, the consolidated revenues and expenditures of the state budget (in relation to non-government actors) were highly volatile, accounting for around 40 per cent of GDP overall. By contrast, between 1960 and 1967, budget revenues and expenditures remained stable at 41–42 per cent of GDP throughout, before jumping to close to 50 per cent from 1968 onwards. Within the revenues, the share of tax-like revenues collected from companies and cooperatives increased further, from the previous 75–83 per cent to 85–86 per cent, and at the same time, that of the payments from private individuals fell from 11–12 per cent to 6–7 per cent. This was clearly related to the liquidation of private farms and the expansion of the cooperative economic form. Among companies’ payments, the asset engagement charge appeared as a new item in 1964, which was extended in 1967, and from 1968 onwards, it became the most significant income category in addition to profit contribution. The social security contribution rate also rose in 1968, from 11 to 17 per cent, and the advance contribution was introduced. Until 1967, all state (investment, development) loans and paybacks had been transferred in the budget, but from 1968 onwards these lending operations appeared only to the MNB or OTP (from then on, they did not lend as state agents). From 1957 onwards, borrowing became a permanent item of the general government’s other revenues. This initially meant foreign borrowing and later borrowing from the MNB. The amounts recorded in this budget line were HUF 7.4 billion in 1968 and HUF 9.3 billion in 1969, whereas in previous years it was enough for the state to raise sums of less than HUF 1 billion. In 1959, the considerable amount of other revenues was due to the fact that, in order to ensure the balance of the budget, the state took out HUF 3.9 billion from the monies it had previously paid into the Lending Fund (deposit placed with the MNB; segregated funds transferred for on-lending).

— 141 —

5 The evolution of goulash communism: the 1960s

Chart 5-11: Annual general government revenues as a share of GDP and revenue composition 100

As percentage of GDP

60 50

80 70

60 50

30 20

Revenues from corporations Revenues of budgetary units Total revenues, GDP% (RHS)

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Revenues from households Other revenues

Source: Ministry of Finance, Parliamentary reports.

As in the previous period, accumulation expenditures and corporate subsidies accounted for nearly half of the general government expenditures. In the first half of the decade, accumulation expenditures predominated. Subsidies came to the fore again with the introduction of economic reform in 1968. Between 1958 and 1967, nearly 70 per cent of the accumulation expenditures was composed of state investments and stockpiling, with the remainder being corporate, cooperative and retail lending. From 1968 onwards, the state loan was discontinued, and from then on companies received a minimal revolving fund supplement (it may have played a role similar to that of the capital increase). The bulk of the accumulation expenditures went to state investments. The surge in corporate subsidies was due to the high amounts of loss compensation and dotation. The other expenditures for the most part reflect the evolution of international payment obligations. — 142 —

5 The evolution of goulash communism: the 1960s

Chart 5-12: Annual general government expenditures as a share of GDP and expenditure composition 100

Per cent

As percentage of GDP

60 50

80 70

60 50

30 20

10 0 1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Capital expenditures Current transfers Expenditures of budgetary units Other expenditures Total expenditures, GDP% (RHS)

Source: Ministry of Finance, Parliamentary reports.

The expenditure structure of budgetary bodies changed slightly in the 1960s. The share of military and defence expenditures grew until 1963 and then returned to the previous level. For the period as a whole, a steady decline in the share of administrative expenditures was achieved, while the weight of social security benefits increased within payments. The number of general government employees increased significantly, rising by around 100,000 over the decade, while the central bodies and the local council bodies expanded their workforces by 40,000 and 60,000, respectively. Until 1967, the official balance of the state budget showed a steady modest surplus (0.2 per cent of GDP on average), but from 1968 onwards, the budget became deficit as a result of the changed corporate support system. The deficit may have ranged from 2.3 to 2.7 per cent of GDP, excluding budgeted lending operations. — 143 —

5 The evolution of goulash communism: the 1960s

Chart 5-13: Expenditures of budgetary bodies by function 100

Per cent

100

General administration Education, culture Social security

Economic affairs Health and welfare

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Defence

Source: Ministry of Finance, Parliamentary reports.

5.6 Household incomes, consumption, living conditions The aim of the new leadership established after 1956 was to continuously raise living standards in order to preserve the stability of the political system. This led to the revision of existing principles and methods and to the implementation of the consolidation policy for 1957-1958. Abolition of the requisitioning system, the growth of industrial and agricultural production, and the improvement in income and supply conditions by the end of the 1950s led to an improvement in public sentiment without any particular institutional reforms. Of course, in the meantime, economic policy did not give up on forced-pace economic development, which â&#x20AC;&#x201C; in addition to more â&#x20AC;&#x201D; 144 â&#x20AC;&#x201D;

5 The evolution of goulash communism: the 1960s

modest growth in national income – generally limited the increase in consumption. At the same time, one fundamental change compared to the previous operations was that holding back living standards or postponing the raising of such could no longer be the tool to eliminate economic problems. Instead, the government alleviated tensions by abandoning external balance and tapping external resources. In addition to the formulation and enforcement of general goals, no uniform standard of living, income and social policy was developed in Hungary until the mid-1960s. During this period, the various social or welfare measures were taken incidentally and in an uncoordinated manner. The whole period is characterised by the fact that social benefits increased faster than incomes from work. The share of the latter in disposable income decreased from 81.5 to 78.6 per cent between 1959 and 1969. As a result, the possibilities of performance differentiation did not expand, and at the same time income differences remained modest. Chart 5-14: Index of real wages, real income and consumption per capita 160

1959=100

160

100

Real income index

Consumption index

Source: HCSO, MNB compilation.

— 145 —

1969

100 1968

110

1967

110

1966

120

1965

120

1964

130

1963

130

1962

140

1961

140

1960

150

1959

150

Real wage index

5 The evolution of goulash communism: the 1960s

Overall, real per capita incomes increased by 57 per cent, within which real wages advanced by 25 per cent in the 1960s. The volume of per capita consumption rose by 49 per cent over the same period. Households were able to save an increasing proportion of disposable income, rising steadily from 2.6 per cent to 6.2 per cent between 1960 and 1969 (corresponding to 1.7 and 3.9 per cent of GDP, respectively). Initially, households spent most of the amount saved (90 per cent) on housing accumulation, while financial investments accounted for only 10 per cent. At the end of the period, the share of housing investments in accumulation decreased to 60 per cent, while financial savings (investments deposits, cash and other financial assets) increased to 40 per cent, according to the data of national accounts. Chart 5-15: Disposable income, its components and consumption 200

HUF Billions

As percentage of GDP

180

70 60

160

140 120

100 80

Social benefits Compensation of employees Income/GDP (RHS) Household consumption

Source: HCSO, MNB compilation.

— 146 —

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

5 The evolution of goulash communism: the 1960s

The structure of household consumption expenditures changed according to the trends outlined in the previous decade. The share of expenditures on food, clothing and household energy decreased, and proportionately more was spent on the purchase of household goods, consumer durables and the use of various services. Of course, despite the shift in proportions, the amounts consumed from food and clothing also increased notably in the 1960s, especially in the second half of the decade. Table 5-1: Individual living standard characteristics of households between 1950 and 1980 Living standard characteristics of households

Measured in

1950

1960

1970

1980

Share of dwellings with electricity

per cent

47.0

74.6

91.7

99.9

Share of dwellings with bathroom

per cent

10.5

17.5

31.9

59.7

Share of people with tertiary education

per cent

1.0

1.6

2.6

4.2

Number of radio subscriptions

thousand pcs

620

2,224

2,530

2,620

Number of television subscriptions

thousand pcs

–

104

1,769

2,766

Number of telephone lines

thousand pcs

110

243

399

617

Number of passenger cars

thousand pcs

239

1,013

million pcs

0.5

3.4

9.1

13.5

kilogram

283

438

617

759

Number of domestic guest nights Amount of bread that could be bought with a month’s wages Source: HCSO, MNB compilation.

5.7 Housing conditions, housing investments In the 1960s, the housing stock increased by 364,000 units to 3,122,000 units, reducing the population number per 100 dwellings from 343 to 327. 588,000 dwellings were built over the decade at a relatively steady pace, of which 212,000 were public (council) rental flats, 235,000 were private dwellings built or purchased with bank loans or state support, and 141,000 were privately built or purchased private dwellings. The number of state-owned dwellings was 600,000 at the beginning of the — 147 —

5 The evolution of goulash communism: the 1960s

period and 719,000 at the end of the period (22 and 23 per cent of the total housing stock, respectively). The average floor area of state-built dwellings was 48 square metres at the beginning of the period, and it gradually rose to 51 square metres. Overall, in the 1960s, 20 per cent more homes were built than in the previous decade. Yet the housing shortage was still one of the most acute social problems in Hungary at the end of the decade. Assuming one apartment per household, the number of missing dwellings was estimated at over 400,000: 100,000 were still needed in Budapest, more than 100,000 in other cities and more than 200,000 in the villages. At the beginning of 1960, 173,000 people lived in sublet apartments and 47,000 in rent-bythe-bed apartments. By the end of 1969, these numbers had risen to 260,000 and 119,000, respectively. At the same time, nearly two thirds of the population lived in dwellings with no lavatory or bath, and nearly ten per cent in dwellings with a lavatory only. Chart 5-16: Increase in the number of dwellings by builder and amounts spent on housing investments by source 14

HUF Billions

Thousands

Number of government const. (RHS) Number of private const. (RHS) Government investment (LHS)

1969

2 1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Number of subsidized const. (RHS) Private investment (LHS)

Source: HCSO, MNB compilation.

— 148 —

5 The evolution of goulash communism: the 1960s

5.8 Financing processes, financial savings and indebtedness Households’ net lending (financial savings) ranged from 1 to 2 per cent of GDP in the 1960s. This was slightly lower than the average from the previous decade. The general government and the corporate sectors together had an average financing need of more than 2 per cent during this period, and therefore the country’s net external financing needs were around 1 per cent of GDP. The financial situation of the general government had steadily deteriorated over the decade, while that of the companies had improved due to the expanding subsidies. Chart 5-17: Net lending of the national economy and economic sectors 6

As percentage of GDP

-6

Households Government

Corporations

Source: MNB.

— 149 —

Total economy

1969

-4

1968

-4

1967

-2

1966

-2

1965

1964

1963

1962

1961

1960

5 The evolution of goulash communism: the 1960s

As a result of continued financial savings and the growth of cooperative property, household financial assets expanded strongly during the period. At the end of 1969, financial assets accounted for 47 per cent of GDP, half of which consisted of cooperative business shares. Household deposits – in parallel with the repayment of state loans and at the expense of cash accumulation – also increased dynamically in the first half of the 1960s, after which the accumulation of various financial assets became proportional. At the end of 1969, deposits exceeded HUF 34 billion, the major part of which consisted of term deposits (savings deposits). At that time, current accounts amounted to only HUF 0.7 billion. Due to the surge in credit debts, household liabilities rose from 3 per cent to 8 per cent of GDP by the end of the period. Thus, the sector’s net financial wealth approached 39 per cent of GDP. Household credit debts consisted mainly of dwelling purchase and building loans from OTP, amounting to HUF 18.2 billion at end-1969. Consumption and production-related loans totalled HUF 3 billion, whereas employer housing loans represented only HUF 0.4 billion. Chart 5-18: Financial assets of households by component and net financial wealth of the sector 100

Per cent

As percentage of GDP

Currency (LHS) Insurance (LHS)

Deposits (LHS) Other (LHS)

Source: MNB.

— 150 —

Loans (LHS) Total (RHS)

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Equity (LHS) Net fin. W. (RHS)

5 The evolution of goulash communism: the 1960s

General government liabilities were kept low (20 per cent of GDP) until the introduction of the new economic mechanism in 1968, but thereafter debts grew unstoppably (to 26 per cent of GDP at the end of 1969). Within this, the credit debts representing the nominal debt rose from the prevailing level of 16–18 per cent of GDP to more than 22 per cent by the end of the decade. While at the beginning of the period half of the government debts were owed to foreigners, at the end of the period almost 70 per cent of them were MNB-related debts. Government debt due to households’ subscriptions for the state loan fell to HUF 4 billion, and the local councils’ credit debt owed to OTP was still barely above HUF 0.3 billion at the end of 1969. The bank accounts of state bodies – including the accounts of local councils and their institutions – were managed by the MNB at the time. The amount of bank accounts was HUF 14.6 billion at the end of the period, and the councils’ deposits with OTP amounted to HUF 2.3 billion. Chart 5-19: General government gross debt by component 24

As percentage of GDP

Loans from MNB Loans from banks

Loans from households Loans from abroad

Source: MNB.

— 151 —

1969

1968

1967

1966

1965

1964

1963

1962

1961

1960

1959

Currency

5 The evolution of goulash communism: the 1960s

In the 1960s, the country’s gross external debt rose from 16 to 26 per cent of GDP, and in 1965 it was close to 29 per cent. Within debts, the general government’s direct foreign debts did not increase; the necessary foreign funds were involved exclusively by the MNB during this period. As a result, the balance sheet of the central bank changed fundamentally; foreign debts rose from 18 to 34 per cent of the balance sheet total. The country’s claims on the rest of the world (foreign financial assets) increased from 7.5 to 15 per cent of GDP between the end of 1959 and the end of 1969, with the MNB’s reserve assets accounting for a proportion of claims rising from 37 to 49 per cent. The share of foreign assets within the MNB’s balance sheet rose from 9 to 15 per cent. Chart 5-20: Total external claims of the country and its debts by component 30

As percentage of GDP

Trade credits Total claims

Government debt

Source: MNB.

— 152 —

MNB debt

1959

0 1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

5 The evolution of goulash communism: the 1960s

Box 5-2 The 1968 economic reform

By 1964, the contradictions of the second five-year planning period had become clear. Consumption expanded strongly, the country’s import demand increased, and external debt grew at an accelerating pace. It was then that preparations began for a comprehensive review of the economic policy pursued from the end of 1956. By March 1965, the critical analysis of the economic management system was completed by the invited experts, and a preliminary concept of the principles of the reform was ready by October. In 1966, a decision was made to introduce the comprehensive economic reform, and in the spring of 1967, with the reshuffle of the government, the political leadership also wanted to send a signal that new times were coming. The New Economic Mechanism introduced on 1 January 1968, which operated for more than two decades, abolished the prevailing system of plan-guided economic management, but did not represent a transition to a market economy. Annual and medium-term plans were still drawn up, but they included regulations at the level of ministries and other governing bodies; they were not broken down into companies in the form of plan instructions. The central will was then enforced at the lower levels usually through indirect regulatory instruments, i.e. through the setting of prices, incomes, taxes, other levies, subsidies, loans, interest rates or foreign exchange multipliers. However, in certain areas, such as the authorisation of imports and exports or the allocation of development resources and credits, mandatory instructions were maintained. Some of the investment decisions were left to the companies, but major investments were definitely decided upon by the state. Prior to the reform of the economic system, companies had to pay almost the entire amount of their gross results into the state budget. From 1968 onwards, an important change occurred: part of the after-tax profit could be managed by the companies themselves, from which they formed development, profit-sharing and reserve funds

— 153 —

5 The evolution of goulash communism: the 1960s

and could pay profit-sharing to their employees. Most of the rules restricting the free movement of labour were also abolished, after which fluctuation increased significantly. Another lasting step forward was the creation of a limited market for consumer goods and means of production. The systematic diversion of producer and consumer prices from costs was at least partly eliminated; some of the thousands of tax rates and types of taxes aimed at this were abolished. The prices of about 30 per cent of the products were not regulated. The price of basic foodstuffs, raw materials and services continued to be set by the state. Consequently, the new mechanism introduced in 1968 did not affect the foundations of socialism and the system of political and economic institutions, but the rigid system of plan instructions was replaced by a more flexible planning approach, the expectations of which the state communicated to economic units primarily through financial regulators and regulations that were more general. The preparation and introduction of the reform improved Hungary’s image in the Western countries, and opened up new opportunities in trade and financing relations.

References Árvay, J. (1971): A nemzeti jövedelem és a nettó nemzeti termelés új idősorai 1960–1970. (The new time series of the national income and the net national product, 1960–1970), Statisztikai Szemle, Vol. 49. No. 6. pp. 563–573. Botos, J. (2004): A Magyar Nemzeti Bank története III. (History of the Magyar Nemzeti Bank III.), Tarsoly Kiadó. HCSO (1960–1970): Statisztikai Évkönyv, 1959–1969. (Statistical yearbook, 1959–1969), Hungarian Central Statistical Office. HCSO (1966): Nemzetközi pénzügyi helyzetünk, 1961–1965. (Our international financial situation, 1961–1965), Hungarian Central Statistical Office. HCSO (1973): Nemzetközi pénzügyi helyzetünk, 1961–1972. (Our international financial situation, 1961–1972), Hungarian Central Statistical Office.

— 154 —

5 The evolution of goulash communism: the 1960s HCSO (1989): Népgazdasági mérlegek, 1949–1987. (National economic balances, 1949–1987), Hungarian Central Statistical Office. HCSO (1996): Magyarország népessége és gazdasága. Múlt és jelen. (The population and economy of Hungary: past and present), Hungarian Central Statistical Office. HCSO (2017): Századok statisztikája. (Statistics of centuries), Hungarian Central Statistical Office. Kornai, J. (1980): A hiány. (The Deficit), Közgazdasági és Jogi Könyvkiadó. Ministry of Finance (1960–1970): Jelentés az állami költségvetés végrehajtásáról, 1959–1969. (Report on the implementation of the state budget, 1959–1969). MNB (1994): Árfolyamrendszer és árfolyampolitika Magyarországon 1946–1993. (Exchange rate system and exchange rate policy in Hungary, 1946–1993), MNB Műhelytanulmányok 7. MNB (2016): A forint 70 éve: Út a hiperinflációtól az árak stabilitásáig. (70 years of the forint: Road from hyperinflation to price stability), Magyar Nemzeti Bank. Mong, A. (2012): Kádár hitele. (Kádár’s credit), Libri Kiadó. OTP (1970): A lakosság takarékossági szokásai. (Savings habits of the population), Országos Takarékpénztár. Pető, I. – Szakács, S. (1985): A hazai gazdaság négy évtizedének története 1945–1985. (The history of four decades of Hungarian economy, 1945–1985), Közgazdasági és Jogi Könyvkiadó. Simon, B. (2018): Még húsz év a pénzügyi számlákból – Magyarország pénzügyi mutatói 1949 és 1969 között. (Twenty more years of financial accounts – Hungary’s financial indicators between 1949 and 1969), Statisztikai Szemle, Vol. 96. No. 11–12. pp. 1129–1168.

— 155 —

6 Oil price shock and indebtedness: the 1970s Béla Simon Main economic indicators 1970-1979 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 GDP growth *

4.3

6.5

6.1

6.8

5.9

6.0

3.5

7.6

4.3

3.0

GDP/capita growth

-0.7

4.2

1.9

4.9

2.2

1.6

-0.2

5.8

2.1

0.0

Difference between the GDP/capita growth in Hungary and Austria

-7.4

-0.5

-3.7

0.6

-1.6

1.7

-5.0

1.2

2.4

-5.7

Change in consumer price index

1.3

2.0

2.9

3.3

1.8

3.8

5.0

3.9

4.6

8.9

Government debt as percentage of GDP

30.5 35.9 36.8 37.6 41.1 49.6 54.8 62.1 68.3 71.0

Unemployment rate

0.0

Current account balance as percentage of GDP

-2.8

-4.4

1.3

4.9

-3.9

-6.1

-5.3

-6.2 -11.3 -5.9

Interest rate level*

5.5

8.7

8.2

8.7

In the early years, the results of the economic reform introduced in 1968 were encouraging. The balance of payments was temporarily balanced, as tourism boomed and interest expenditures on foreign loans decreased, due to long-term loans featuring better terms. Under limited market conditions, economic operators were forced to adapt to the market to some extent. Hungarian reforms garnered recognition abroad, even among Western countries; the success of political consolidation and “goulash

— 157 —

6 Oil price shock and indebtedness: the 1970s

communism”, permeated the Western press. Since the late 1960s, economic relations with developed countries had been steadily expanding, and isolation had slowly declined. The new economic mechanism had been designed to take further reform steps after a few years, such as the introduction of single exchange rates, the expansion of corporate autonomy, and the deregulation of a wider range of prices. However, tensions in the CMEA member states and criticism from the Soviet Union reinforced the camp of those opposed to reform in Hungary, which eventually led to a halt in the reform process in 1972. Subsequently, the politicians who had designed and implemented the reforms were removed from their positions, and from the middle of the decade, there was a clear reversal in the methods of economic management. The autonomy of companies eroded, the degree of income centralisation increased, and some investment decisions were taken away from companies. In addition, the restriction of the private sector and the strangulation of the activities of small-scale entrepreneurs, retailers, backyard farmers and moonlighting workers came to the fore again. The implementation of the policy, which began in 1957 and promoted an increase in living standards, was fundamentally facilitated by external conditions until 1973. Extensive economic growth could rely on relatively cheap imports of raw materials and energy. In addition, foreign borrowing became easier and easier for the country, giving the impression that indebtedness was not so much to be feared, because later strong growth would generate the surplus needed to repay the debt. Due to the first explosion in world market oil and raw material prices in 1973 and the subsequent general decline, imports became significantly more expensive. Moreover, the domestic economy was not able to adapt to the changed circumstances in the longer run. Due to the maintenance of an outdated production structure, the pursuit of growth at all costs and domestic consumption exceeding production results, foreign debt increased at an accelerating pace. Taking advantage of external borrowing opportunities, the

— 158 —

6 Oil price shock and indebtedness: the 1970s

political leadership chose the way of forward escape, and lent on some of the Western loans to other CMEA members to allow the country to take part in foreign investments providing the inputs needed for energy-intensive economic growth. The 1960s were weathered with minimal consumer price increases, but in the 1970s, stronger price increases followed. These culminated in the drastic price increase carried out in 1979, which made it clear to everyone that an economic policy based on a steady rise in living standards and growth had become unsustainable. A series of adjustments began, but it was in vain, as the problems subsequently became permanent.

6.1 Expanding population, stagnant employment In the 1970s, the domestic population increased by nearly four per cent, as in the previous decade, but the number of employees remained essentially unchanged. In the first half of the period, the still existing modest growth came to a halt, and then, in the second half of the period, the number of earners started to fall. In Hungary, 1975 marked the year with the highest number of workers, as about 5.1 million were working at the end of that year. Several factors contributed to the stagnation or decrease in the number of active earners. The childcare allowance system introduced in 1967 was completed in this decade, raising the number of people receiving the allowance from 144,000 to 264,000. The number of pensioners had risen from 1.350 million to close to 2 million persons in the span of ten years. While in 1969 barely two thirds of those of retirement age received retirement benefits, this proportion was already above 90 per cent in 1979. Due to retirements, the number of men employed continued to decline, which was offset by increased employment of women during this period. The growing employment of women was mainly demanded by the commercial, catering and other service activities, while the number of employees in industry did not rise further and in fact from the middle of the decade onwards, it declined sharply. In the latter half of the period, however, the decades-long steady — 159 —

6 Oil price shock and indebtedness: the 1970s

decline in the number of those working in agriculture came to a halt. The number of people employed in the field of state agriculture, forestry and water management had remained unchanged for a long time (275,000–280,000) and the number of those working at cooperative farms (members and employees) decreased until the middle of the decade (from 840,000 to 640,000). This resulted in a reduction in the number of employees in agriculture. The active membership of cooperatives in other branches remained essentially unchanged, and the number of those operating in the so-called private sector (self-employed farmers, tradesmen, retailers) fell slightly further (from 191,000 to 173,000), mainly due to the decline in private small-scale industry.

6.2 Developments in the production and use of national income Gross domestic product (GDP) grew at an average annual rate of 6 per cent in the 1970s, as in the previous decade, except for two years when the government was forced to implement significant price increases. In 1976, with the inflation rate at 5 per cent, growth only amounted to 3.6 per cent, and in 1979, with a price increase of 8.9 per cent, the economy expanded by only 2.6 per cent. By the end of the 1970s, the era of cautious price increases and strong economic growth was clearly over, followed by years of cautious growth and strong price increases. The unbroken development of the manufacturing and construction industries continued in the 1970s. On the production side, these two branches of the economy continued to pull up the performance of the economy. The value added of these branches nearly doubled again in ten years, corresponding to an annual increase of 7 per cent for most of the period. By contrast, the performance of agriculture was fluctuating, with gross value added expanding by only 15 per cent over the course of ten years. Thus, the extensively developed industry had so far felt little of the decline in the labour force.

— 160 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-1: Growth in gross domestic product and its individual components 220

1969=100

220

100

Household consumption Accumulation Industry growth Agriculture growth

1979

100

1978

120

1977

120

1976

140

1975

140

1974

160

1973

160

1972

180

1971

180

1970

200

1969

200

GDP growth

Source: HCSO, MNB compilation.

From a production point of view, the structure of economy was characterised throughout the decade by the proportions that emerged after the 1968 economic reform. Industry accounted for 51 per cent of gross output. The construction industry contributed 8–9 per cent, agriculture 17–18 per cent, transport 5 per cent, trade 7–8 per cent and non-material branches about 10 per cent to the value of national economic production. The structure of industry also did not change appreciably: almost 60 per cent of industrial employees were employed all along by heavy industry and a somewhat increasing share of the gross production value (59–64 per cent) also came from this field.

— 161 —

6 Oil price shock and indebtedness: the 1970s

The development of the allocation of investment spending also does not show any restructuring. According to the proportions of the late 1960s, nearly 40 per cent of investments continued to be spent on industry. Within this, however, the share of heavy industry declined from 80 to 74 per cent by the end of the period. In the first half of the period, the share of industry shrank somewhat, and more resources were allocated to communal investments. Subsequently, however, a reversal took place and a number of communal investments received additional resources only due to agriculture’s steadily declining share (from 21 to 17 per cent). In the field of heavy industry, opposite effects prevailed during the 1970s. From the second half of the 1960s, a period of downsizing in coal mining was announced, aiming at a partial transition from almost exclusively coal-based energy production to a hydrocarbon base. Even so, to offset the effects of the first oil price explosion, from 1975 onwards, under the so-called Eocene Programme, and later with the announcement of the Liász Programme, the country embarked on large-scale state investments, once again building coal mines (Márkushegy, Mány, Nagyegyháza, Lencsehegy) and coal-fired power stations (however, for example, development of the Transdanubian Thermal Power Plant for Bicske and that of the surrounding coal mines was interrupted). In 1974, investment in the Paks Nuclear Power Plant began, and its first block was connected to the grid in 1982. After a long planning process, Hungary and Czechoslovakia signed the intergovernmental treaty concerning the construction and operation of the Bős-Nagymaros System of Locks in 1977, but on the grounds of difficult economic conditions, the investment was not started until much later. However, one of the biggest investments of the decade was the hydrocarbon-fired Tisza Power Plant built between 1972 and 1978. Major investments at the Tisza Chemical Plant and the Tisza Oil Company also took place in Tiszaújváros (then called Leninváros) during this period. The Borsod Chemical Plant, founded in 1949, was expanded with a new PVC plant in Kazincbarcika. All this shows that, despite the rise in energy prices, the hydrocarbon-based investments that had already — 162 —

6 Oil price shock and indebtedness: the 1970s

begun were generally realised in 1970s, and therefore, in 1980, the use of coal and hydrocarbons already accounted for the same share in energy production. Chart 6-2: Distribution of national economic investments by branch of activity 100

Per cent

100

0 1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Heavy industry Light industry Agriculture Transport Trade Government Construction Households

Source: HCSO, MNB compilation.

Regarding the use of income generated, it can be said that household consumption expenditures remained stable at 57–59 per cent, and collective consumption was around 10 per cent. At the same time, accumulation expenditures fluctuated more strongly (between 30 and 37 per cent of GDP), and this fundamentally determined the extent of the external trade deficit. For most of the period, the foreign trade balance was in deficit, averaging 3.5 per cent of GDP. In the 1970s, 1973 was the only year that saw a substantial export surplus. Compared to the previous decades, the share of consumption expenses in GDP declined further, while the rate of accumulation

— 163 —

6 Oil price shock and indebtedness: the 1970s

increased. Within accumulation expenditures, in fact, unfinished investments and changes in inventories became worrying in the 1970s. Corporate stocks rose from 68 per cent of GDP (HUF 203 billion) to 75 per cent of GDP in ten years, while unfinished corporate investments increased from 15 per cent (HUF 48 billion) to 20 per cent. Unfinished investments and unsellable stocks of goods tied up funding sources unnecessarily. In the 1980s, the value of both unfinished investments and stocks declined significantly. Chart 6-3: Components of gross domestic product use 120

Per cent

120

100

0 -20

Household consumption Government consumption Accumulation External trade balance

Source: HCSO.

— 164 —

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

-20

6 Oil price shock and indebtedness: the 1970s

6.3 Foreign trade turnover and external balance In the 1970s, the country’s foreign trade turnover continued to expand, and in the second half of the period, exports accounted for about 40 per cent of GDP, while imports approached 50 per cent of GDP. From 1974 onwards, due to the unfavourable change in export and import prices, i.e. the deteriorating terms of trade, the soaring import expenses could not be followed by the export revenues, and the foreign trade balance showed a significant deficit each year. In terms of the structure of imports, the share of energy almost doubled while that of machinery, equipment, consumer goods and foodstuffs decreased during the period. However, the composition of exports did not change substantially. The country’s coal production hit its highest level in the 1960s (28 million tonnes per year) and imports also peaked at that time (above 2 million tonnes). In parallel with the slowly rising and then stagnant oil production (2 million tonnes per year), the volume of imports increased sharply: in 1970, it doubled, and in 1980, it already amounted to three and a half times the domestic production. Domestic natural gas production doubled in the 1970s and thereafter similar quantities of imports were needed to meet demand. In part to address the energy concerns, lignite production had been doubled since the mid-1970s, but this only offered temporary relief. In addition, the import volume of hydrocarbons remained persistently high. Import prices of energy nearly tripled during the decade. Price increases were particularly strong in 1974 and 1975 and then from 1977 onwards. Overall (for all products), import prices rose by 60 per cent, while export prices were only 29 per cent higher in 1979 than in 1969. Thus, the country suffered a 19-per cent deterioration of terms of trade.

— 165 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-4: Value of foreign trade turnover in USD million and as a percentage of GDP 9,000

USD Millions

As percentage of GDP

8,000 40

7,000 6,000

5,000 4,000

3,000 2,000

1,000 0

Exports, m USD (LHS) Exports, GDP% (RHS)

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Imports, m USD (LHS) Imports, GDP% (RHS)

Source: HCSO, MNB compilation.

In the 1970s, the opening-up of foreign trade to Western countries continued. In 1969, 72 per cent of imports came from socialist countries. Ten years later, the rate was only 53 per cent. Socialist exports also fell from 72 to 60 per cent over the same period. Among the developed countries, the Federal Republic of Germany was the country with which foreign trade turnover picked up the most. At the end of the period, the FRG accounted for 12 per cent of imports (up from 5 per cent), and 10 per cent of exports (up from 6 per cent).

— 166 —

6 Oil price shock and indebtedness: the 1970s

The balance of current account followed the development of the foreign trade balance, but due to the different approach, the effect of some transactions was time-shifted (the balance of payments was cashflow-based at the time). Despite the methodological differences, it can be concluded that in the latter half of the period the balance of payments deficit was much larger than the foreign trade deficit, which is explained by the negative income balance. In the early 1980s, foreign trade turnover was gradually rebalanced, and thus the balance-of-payments liabilities temporarily declined. Table 6-1: Annual balance of payments in HUF billion and as a percentage of GDP Balance

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

HUF bn

6.7

–9.4

–16.0

5.1

21.3

–17.9

–29.9

–28.2

–35.8

–71.4

–40.3

GDP%

2.1

–2.8

–4.4

1.3

4.9

–3.9

–6.1

–5.3

–6.2

–11.3

–5.9

Because of the persistent balance-of-payments deficit, the stock of loan debt owed to the rest of the world rose strongly in the period under review. At the end of 1969, the country’s foreign loan debt may have amounted to $1.5 billion (HUF 68 billion, 22 per cent of GDP), while at the end of 1979, the debt stock approached $12 billion (HUF 400 billion, 59 per cent of GDP). At the very beginning and at the very end of the period, 39 per cent of the debts were short-term, but in the middle of the period the ratio of debts with original maturities of no more than one year (bank accounts, bank deposits and corporate loans) was above 50 per cent.

— 167 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-5: External loan debts denominated in roubles and dollars 450

HUF Billions

USD Millions

12,000

400 10,000

350 300

8,000

250 6,000

200 150

4,000

100

2,000

50 0

Debt in Rouble relation

Debt in USD relation

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Total debt (RHS)

Source: MNB.

6.4 Financial situation of the general government At the beginning of the period, both revenues and expenditures of the state budget were around 50 per cent of GDP, but in 1974 they jumped to above 60 per cent of GDP and remained relatively high for the rest of the decade. The expansion was due to an increase in subsidies to companies on the expenditure side and to an increase in borrowings included in other revenues on the revenue side. As a result, the share of revenues from companies fell from 85 per cent to less than 80 per cent. In fact, corporate contributions also rose sharply (from 42 to 49 per cent of GDP), but from 1974 onwards this was not sufficient to finance the sudden increase in corporate subsidies (mainly price supplements). From 1960 onwards, the weightiest — 168 —

6 Oil price shock and indebtedness: the 1970s

item in corporate payments was the profit contribution. Also during the decade under review, this accounted for 28–33 per cent of levies. Another nearly 20 per cent was represented by the production tax. In addition, the asset engagement charge, social security contribution, turnover tax as well as customs and import tax were also included in the revenues from companies, each at around 10 per cent. Chart 6-6: Annual general government revenues as a share of GDP and revenue composition 100

Per cent

As percentage of GDP

70 60

80 70

50 40

10 0

Revenues from corporations Revenues of budgetary units

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Revenues from households Total revenues (RHS) Other revenues

Source: Ministry of Finance, Parliamentary reports.

On the expenditure side of the state budget, accumulation expenditures accounted for a slightly decreasing share. In reality, however, this was a stable expenditure group accounting for 12–13 per cent of GDP. Most of it was represented by state and local council investments, and subsidies for private housing construction and supplements for corporate development funds were included here with annual amounts of HUF 2–3 billion. The expenditures of the budgetary bodies generally accounted for 41 per — 169 —

6 Oil price shock and indebtedness: the 1970s

cent of the expenditures. The only exception was the few years when the combination of accumulation expenditures and corporate subsidies exceeded half of the budget expenditures. As a share of GDP, the expenditures of the budgetary bodies grew steadily, from 21 to 25 per cent over the decade. Within this, the weight of social security benefits and education expenditures continued to rise, while that of defence and policing expenses declined. Chart 6-7: Annual general government expenditures as a share of GDP and expenditure composition 100

Per cent

As percentage of GDP

70 60

80 70

50 40

10 0 1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Capital expenditures Current transfers Expenditures of budgetary units Other expenditures Total expenditures, GDP% (RHS)

Source: Ministry of Finance, Parliamentary reports.

The state budget was consistently in deficit in the 1970s. According to the official records, the annual deficit ranged between HUF 2 billion and HUF 4 billion. However, with the exclusion of budgeted credit operations, higher deficit Charts are obtained, — 170 —

6 Oil price shock and indebtedness: the 1970s

especially from 1974 onwards. In the period under review (in fact, already from 1968 onwards), the state budget was planned to be in deficit, and the planned deficit was generally maintained during implementation. The budget documents made very brief statements on the financing of the deficit. They mentioned the use of the existing deposits, but there was no mention of borrowing or an increase in government debt. In the planning and final accounts documents and reports, the pursuit of balance appeared as a fundamental goal, but the measures taken by the government to restore balance (curbing imports, domestic consumption and especially accumulation; and increasing the capitalist exports) proved to be insufficient.

6.5 Household income, consumption and living conditions As regards household income conditions and use of income, the trends characterising the entire period from 1957 to 1979 continued during the period. In household disposable income, the share of social benefits continued to increase, rising from 21 to 30 per cent, which was linked to the dynamic expansion of social benefits in cash, while the share of in-kind benefits remained essentially unchanged. The growing role of social benefits ensured that household income, with the moderately rising labour incomes, could keep pace with gross domestic product (accounting for 62 per cent of it over the whole period). Both pensions, accounting for the largest share of social benefits in cash, and family allowances expanded strongly. Overall, real per capita income grew by 46 per cent in ten years, within which real wages increased by 30 per cent. In 1976, during the period of the first major price increases, the otherwise steady income growth came to a halt, and after a temporary increase from 1979 onwards, real wages began to fall due to the further drastic price increases, and total per capita income also stopped expanding. The volume of per capita consumption increased by 47 per cent between 1969 and 1979. Even in periods — 171 —

6 Oil price shock and indebtedness: the 1970s

when the level of disposable income did not grow, consumption increased, albeit to a more modest extent. Up until 1978, the unspent share of household disposable income increased; savings expanded from 6.2 to 7.7 per cent of income (from 3.9 to 4.8 per cent of GDP). From 1979 onwards, however, the savings rate decreased and then stagnated, and only began to rise again in the last third of the decade of the 1980s. The household sector spent two thirds of the saved and accumulated income on housing investment and one third of it on financial savings during the period under review. From 1979 onwards, the sector spent a greater part of its more modest savings on housing accumulation and proportionately less was left over for financial investments. Chart 6-8: Components of disposable income and consumption 450

HUF Billions

450

100

Social benefits Compensation of employees Household consumption

Source: HCSO, MNB compilation.

— 172 —

1979

150

1978

150

1977

200

1976

200

1975

250

1974

250

1973

300

1972

350

300

1971

350

1970

400

1969

400

6 Oil price shock and indebtedness: the 1970s

Within household consumption expenditures, the share of spending on foodstuffs and clothing decreased a bit more, while the proportion of purchases of consumer durables, household goods and various services increased during the period under review. Prices of foodstuffs, luxury goods and clothing rose above average between 1970 and 1979, while consumers only had to pay 16 per cent more for household energy (there were price increases in 1975 and 1979), and the price of services rose by only 31 per cent on average. In terms of volume, household gas consumption doubled, fuel oil consumption quadrupled and electricity use nearly tripled in ten years. Chart 6-9: Inflation, real per capita income, real wages and consumption index 150

1969=100

Year/year, %

115

110

105

100

Real income index Inflation, Y/Y (RHS)

Consumption index

Source: HCSO.

— 173 —

1979

1978

120

1977

1976

125

1975

130

1974

1973

135

1972

1971

140

1970

1969

145

Real wage index

6 Oil price shock and indebtedness: the 1970s

6.6 Housing stock, housing conditions The housing shortage, which had become increasingly pressing since the early 1960s, was intended to be remedied in the cities primarily by Soviet-style housing estates. As part of the quantity-based housing development policy typical of the 1960s and 1970s, new housing estates were built in the suburbs, while little attention was paid to the renovation and maintenance of the existing housing stock. Buildings in inner city areas deteriorated. For example, more than 40 per cent of the tenement houses in Budapest did not undergo any renovations between 1945 and 1975. The first 15-year housing construction plan developed by the Ministry of Construction and the National Planning Office gave a boost to domestic housing construction from 1960 onwards. Nationwide, it envisaged the construction of one million homes, all while restricting private housing construction. However, the five-year national economic plans generally did not take into account the Charts included in the concept in terms of resources allocated to housing construction, and thus, time after time more private homes and less public dwellings were built than planned. The rise of public construction was also hampered by the late acquisition of panel fabrication technologies. The first housing factory was put into operation in 1966, the second in 1967 and the third in 1970 in Budapest. Due to the prefabricated panel construction system, from the late 1960s onwards, the number of homes built rose sharply, but still fell short of the plans. The second 15-year housing construction plan was launched in 1975, stressing the need for further increases in housing construction. However, due to capacity constraints and financial difficulties, the number of homes built fell again by the end of the decade, with the proportion of self-financed construction dropping to a minimum. Unpreparedness, the narrowing of economically buildable areas and the chronic shortage of materials and workforce all hindered implementation of the plans. At the end of the 1970s, the local councils still had more than 400,000 housing applications, of which more than 40 per cent were submitted in Budapest.

— 174 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-10: Increase in the number of dwellings by builder and amounts spent on housing investments by source 450

HUF Billions

Thousands

100

400

350

300

70 60

250

200

150

Number of government const. (RHS) Number of private const. (RHS) Government investment (LHS)

1979

1978

1977

1976

1975

1974

1973

0 1972

0 1971

10 1970

50 1969

100

Number of subsidized const. (RHS) Private investment (LHS)

Source: HCSO, MNB compilation.

In 1970s, 882,000 dwellings were built in Hungary, i.e. one and a half times as many as in the previous decade. As a result, the housing stock increased from 3,122,000 to 3,542,000 units. Within this, the share of state- (council-) owned dwellings increased from 23 to 24.5 per cent. The average floor area of state-built new dwellings changed from 51 to 54 square metres during the period under review. Real estate administration companies spent, on average, three times as much money on maintaining the houses than their rent-generated income. At the very beginning of the 1970s, rents rose significantly, but thereafter they changed only minimally. From the 1960s onwards, OTP played an important role in housing construction as both an investor and a lender. In the second half of the 1960s, more than 60 per cent — 175 —

6 Oil price shock and indebtedness: the 1970s

of the homes built were already completed with the help of OTP, with this proportion rising to over 80 per cent in the 1970s. The strengthening of OTP’s involvement was related to the fact that the accounts and lending of the local councils were transferred from the MNB to OTP in 1971, and thus the financing of council housing construction basically became the credit institution’s responsibility. OTP’s role also increased with regard to private construction: while in the second half of the 1960s about 40 per cent of investment amounts came from borrowing, in the 1970s the rate rose steadily and reached 70 per cent at the end of the decade. As a result, the stock of housing loans increased from HUF 18 billion to HUF 84 billion in ten years. The average interest rate was 2.1 per cent.

6.7 Financing of the national economy, financial savings, indebtedness, financial wealth In the 1970s, households’ net lending (financial savings) ranged from 1 to 2 per cent of GDP, similar to the Charts measured in the previous decade. The average general government deficit of between 2 and 3 per cent was accompanied by the corporate sectors’ financing need of over 3 per cent, and therefore, the country’s external net borrowing was slightly above 4 per cent over the decade as a whole. From 1974 onwards, general government and corporate indicators deteriorated steadily, and thus from 1975 onwards the external financing need already amounted to more than 6 per cent of GDP. In 1978, a deficit of 11 per cent emerged, a level unprecedented before or since (in 1993, 1994 and 2004, the country recorded net borrowing of 10 per cent). Rapidly deteriorating financial indicators prompted the government to take painful corrective steps from 1979 onwards, and thus, accumulation decreased, exports expanded, and the external balance was temporarily restored within a few years.

— 176 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-11: Net lending of economic sectors and the national economy 5

As percentage of GDP

-7

-9

-11

Households Government

Corporations

1979

-5

1978

-5

1977

-3

1976

-3

1975

-1

1974

-1

1973

1972

1971

1970

Total economy

Source: MNB.

Households’ financial wealth continued to grow. By the end of 1979, the stock of financial assets had increased from 47 to 62 per cent of GDP (HUF 426 billion), and at the same time, liabilities expanded from 8 to 16 per cent of GDP (HUF 109 billion). The share of cash and bank deposits increased somewhat within financial assets: the stock of deposits placed with OTP and savings cooperatives amounted to HUF 132 billion at the end of the period, of which the stock of current accounts amounted to HUF 8 billion. OTP itself accounted for 61 per cent of deposit collection, with post offices at 27 per cent and savings cooperatives at 12 per cent. From 1974 onwards, it was possible for private individuals to open foreign currency accounts at IBUSZ offices in order to place funds from abroad there, but the stock did not even reach — 177 —

6 Oil price shock and indebtedness: the 1970s

HUF 1 billion at the end of 1979. Housing loans accounted for an increasing share of household loan debts. In 1971, a housing loan with state interest subsidies and an interest-free employer loan were introduced. The stock of the latter amounted to HUF 8 billion at the end of 1979, and the combined stock of consumer (retail) and production (small business) loan debts amounted to the same sum. After 1952, the next full-scale asset valuation and wealth survey (fixed asset survey) in connection with the introduction of the new economic mechanism was carried out in 1968 at economic units in Hungary, for the end of 1967. However, it was not until 2000 that a general enumeration of fixed assets for statistical purposes was carried out again. Consequently, for the end of the 1960s, it is possible to compile a corporate or national accounts balance sheet suitable for analytical purposes. After that year, however, the value of real assets appearing in books and records gradually deviated from and fell short of the current value. At the end of 1969, the total wealth (balance sheet total) of non-financial corporations may have been about HUF 1,000 billion (320 per cent of GDP), of which 80 per cent was in real assets and 20 per cent in financial assets. Loan debts, which accounted for 10 per cent of the liabilities, were predominantly from the MNB. At the end of 1979, the corporate sector’s wealth was close to 390 per cent of GDP, the share of financial assets among assets increased (to 27 per cent) and that of loan debts among liabilities (to 14 per cent). This was because companies were increasingly financed with bank loans, and from their retained profits, they had to form a development fund, a special deposit. At the end of 1969, the balance sheet total of the MNB was HUF 154 billion (nearly 50 per cent of GDP) and that of the credit institutions was HUF 43 billion (14 per cent of GDP). Due to the increased financing of companies and the general government, the central bank’s balance sheet expanded strongly during the period (to 114 per cent of GDP). Credit institutions continued to be associated primarily with households, small businesses and local councils, and therefore the development of their balance sheet total (32 per

— 178 —

6 Oil price shock and indebtedness: the 1970s

cent of GDP at the end of 1979) was mainly determined by housing loans and the collection of savings deposits. The Hungarian Foreign Trade Bank (MKB), founded in 1950, and the Central European International Bank (CIB), established in 1979 by the MNB and foreign banks, did business with a limited group of corporate clients at the time. The general government gross consolidated debt rose from 22 to 71 per cent of GDP during the 1970s. The majority of loan debt continued to be owed to the central bank. Plan loans still outstanding at the beginning of the period were repaid by the state to households (through OTP) by 1974, and previously extended foreign loans decreased in the first half of the period. Among the general government actors, the local councils had credit institution-related loan debt, mainly from 1971 onwards, and in connection with state housing construction. In this respect, the Hungarian Investment Bank (MBB), which was then considered a financial institution, or its successor, the State Development Bank (ÁFB), is also included as part of the general government. Essentially, it acted as a state agent channelling development resources between the central bank and companies. In early 1987, at the start of the two-tier banking system, the system of distribution of development resources changed, when the State Development Bank was dissolved and the State Development Institute (ÁFI) was established. It is important to stress that the financial assets of the general government were several times higher than its stock of liabilities throughout the period under review. Government’s equity ownership may have been worth 200–220 per cent of GDP at the time, and its other financial assets can be estimated at between 20 and 40 per cent of GDP. In the 1970s, general government debt grew significantly more than was justified by the sector’s need for financing, as the government also accumulated financial assets in the form of deposits, corporate loans and equity investments. Exchange rates fluctuated little during the period, and therefore, foreign exchange revaluation did not yet increase government debt.

— 179 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-12: General government gross debt by component 80

As percentage of GDP

Loans from banks Loans from abroad

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Loans from MNB Loans from households Investment Bank loans

Source: MNB.

The country’s gross foreign liabilities expanded from 26 to 64 per cent of GDP by the end of 1979, and the stock of external claims increased from 15 to 26 per cent. Net debt was substantially reduced by 1973, but then it increased sharply until the end of 1979. The MNB remained the largest debtor, but by the end of the decade, both the MKB and the newly established CIB were also strongly involved in borrowing, contributing to the increase in external debt. The MNB first issued bonds abroad in 1971 (in London, worth $25 million). Later on, in addition to regular borrowings, there were bond issues in 1974 and 1976 as well (the latter in German marks). At the end of the period, about 32 per cent of the country’s foreign debts may have been in US dollars, 26 per cent in German marks and 8 per cent in non-convertible currencies.

— 180 —

6 Oil price shock and indebtedness: the 1970s

Chart 6-13: Hungary’s external claims and liabilities by component 70

As percentage of GDP

Trade credits Other debts

Debt of government External claims

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

1969

Debt of MNB Net external debt

Source: MNB.

Box 6-1 The 1973 oil price explosion and its “spill-over” to the domestic economy

In October 1973, the major oil-exporting countries decided to cut production, imposed an oil embargo on the USA, and raised the price of oil by 70 per cent. This was followed by further price increases, after which the oil price stabilised at around $12–13 per barrel. In 1974, the OPEC states, with the exception of Libya, lifted the oil embargo. However, the market price of oil did not fall but rose further during the second crisis of 1979. In the Western countries, raw material prices rose along with oil prices, and the significant inflation was accompanied by economic downturn and rising unemployment (stagflation). However, the capitalist countries adapted to the situation in a few years, and stabilised their economies. They searched for new energy

— 181 —

6 Oil price shock and indebtedness: the 1970s

sources, downsized their energy-intensive sectors, introduced savings measures and froze or reduced wages. At the same time, the socialist countries were not so adaptable. Moreover, they assumed that prices would return to previous levels, and that the internal price system of the CMEA and the Bucharest price principle would, in the meantime, protect the member states from harmful world market price movements. Hungary, together with the other socialist countries, covered a significant part of its oil and natural gas demand from Soviet imports, and therefore, initially, the impact of price increases was not really felt. However, as early as the beginning of 1975, the Soviet Union had the Bucharest price principle modified and switched to a sliding price strategy, calculating oil prices using the average of the previous five years. As a result, the price of Soviet oil at least quadrupled between 1976 and 1983. The crisis thus eventually “spilled over” into Hungary, as well. The 20-per cent and then 30-per cent deterioration in the terms of trade upset the foreign trade balance that had been achieved with great difficulty. However, for the Hungarian leadership insisting on full employment and raising living standards as a source of legitimacy, the restriction measures implemented in the Western countries were unacceptable. Instead, taking advantage of the abundance of money, it continued to borrow in Western financial markets and tried to finance the year-on-year recurring imbalances with loans.

References Botos, J. (2004): A Magyar Nemzeti Bank története III. (History of the Magyar Nemzeti Bank III.), Tarsoly Kiadó. HCSO (1970–1980): Statisztikai Évkönyv, 1969–1979. (Statistical yearbook, 1969–1979), Hungarian Central Statistical Office. HCSO (1971): Magyarország nemzeti vagyona 1970. január 1-jén. (Hungary’s national wealth on 1 January 1970), Hungarian Central Statistical Office. HCSO (1989): Népgazdasági mérlegek, 1949–1987. (National economic balances, 1949–1987), Hungarian Central Statistical Office.

— 182 —

6 Oil price shock and indebtedness: the 1970s HCSO (1996): Magyarország népessége és gazdasága. Múlt és jelen. (The population and economy of Hungary: past and present), Hungarian Central Statistical Office. HCSO (2017): Századok statisztikája. (Statistics of centuries), Hungarian Central Statistical Office. Ministry of Finance (1970–1980): Jelentés az állami költségvetés végrehajtásáról, 1969–1979. (Report on the implementation of the state budget, 1969–1979). Ministry of Finance (1978): A Magyar Népköztársaság költségvetése az 1979. évre. (Budget of the Hungarian People’s Republic for 1979). MNB (1993): Külső eladósodás és adósságkezelés Magyarországon. (External indebtedness and debt management in Hungary), MNB Műhelytanulmányok 2. MNB (1994): Árfolyamrendszer és árfolyampolitika Magyarországon 1946–1993. (Exchange rate system and exchange rate policy in Hungary, 1946–1993), MNB Műhelytanulmányok 7. MNB (2016): A forint 70 éve: Út a hiperinflációtól az árak stabilitásáig. (70 years of the forint: Road from hyperinflation to price stability), Magyar Nemzeti Bank. MNB (2018): Magyarország pénzügyi számlái 1970–1989. (Financial accounts of Hungary, 1970–1989), Magyar Nemzeti Bank. Mong, A. (2012): Kádár hitele. (Kádár’s credit), Libri Kiadó. OTP (1971–1981): Betétek és hitelek, 1970–1980. (Deposits and loans, 1970–1980), Országos Takarékpénztár. Simon, B. (2018): A nemzetgazdaság pénzügyi vagyona és finanszírozása – az 1970-es és 1980-as évek pénzügyi számlái. (Financial wealth and financing of the national economy – financial accounts for the 1970s and 1980s), Statisztikai Szemle, Vol. 96. No. 3. pp. 274–291.

— 183 —

7 Lack of turnaround and reform: the 1980s Gábor P. Kiss Main economic indicators 1980-1989 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 GDP growth *

0.0

2.9

2.8

0.7

2.7

-0.3

1.3

4.3

0.0

0.6

GDP/capita growth

0.9

0.7

3.7

-0.9

2.8

-2.3

2.2

1.7

3.2

-1.8

Difference between the GDP/capita growth in Hungary and Austria

-1.4

1.0

1.9

-4.0

2.5

-4.4

-0.1

0.2

0.3

-5.7

Change in consumer price index

9.1

4.6

6.9

7.3

8.3

7.0

5.3

8.6

15.5 17.0

Government debt as percentage of GDP

70.0 67.9 69.2 65.3 61.2 58.1 66.9 72.9 68.3 73.4

Unemployment rate

0.0

1.0

Current account balance as percentage of GDP

-3.2

-2.2

-1.7

-0.9

0.4

-1.7

-5.5

-3.6

-2.3

-1.9

Interest rate level*

8.5

9.0

10.0 10.9 10.5 11.3 11.3 11.3 17.7 20.3

Note: *Average interest rate level based on the decade’s reference interest rates until 1987, for more information see Madarász – Novák(2015). Source: WDI, Eurostat, Penn World table, Maddison, MNB, Madarász – Novák (2015).

At the beginning of the decade, economic policymakers recognised the need to restore external balance and rein in external indebtedness. They also identified two priorities: one was to maintain economic openness, and the other was to preserve the standard of living that had been achieved. Consequently, the 1980s were marked by alternating phases of policy tightening/loosening. In the first half of the decade, the focus was on reducing investments to improve the external balance, while the second half of the decade started with a stimulus programme that quickly

— 185 —

7 Lack of turnaround and reform: the 1980s

lost momentum and floundered. Over the course of the 1980s, the state introduced a series of regulatory tools, which were subsequently adjusted and fine-tuned. The need for more deep-reaching change became obvious in the latter half of the period: this entailed diminishing state involvement, the establishment of a modern tax regime, the beginning of the transformation of the ownership structure as private ownership appeared, the creation of a two-tier banking system and an overhaul of monetary policy. Comprehensive reform plans appeared around the middle of the decade (Turnaround and reform), but economic and political leaders did not really support these plans. Thus, although some reform measures were implemented at the end of the decade, an integrated concept behind the entire process was lacking. Chart 7-1: Average real GDP growth in some European countries (1980-1989) <1.0 1.1 - 2.0 2.1 - 3.0 >3.0

3.7 2.9 3.1 2.4

3.7

2.7

GDR 0.1 0.3 2.2 FRG 5.0 1.9 1.8 1.5 2.4 2.4 2.2

2.4 2.7

Source: IMF, Ritschl - Spoerer (FRG, GDR).

— 186 —

1.6 3.7

7 Lack of turnaround and reform: the 1980s

In this period, the gap between the CMEA countries and the Hungarian economy on the one hand and the developed countries on the other hand (where average GDP growth was over 3 per cent) widened significantly. Similar to the other countries in the socialist bloc, average annual economic growth amounted to just 1.5 per cent, reflecting the slowdown in the second half of the decade and the downturn in 1990. The temporary, debt-financed boom in response to the oil crisis of the 1970s lost momentum and was furthermore based on inefficient investments by the government and large state-owned enterprise. Chart 7-2: GDP trends (1980-1990) 120

1980=100

120

1990

1989

95 1988

95 1987

100

1986

100

1985

105

1984

105

1983

110

1982

110

1981

115

1980

115

Source: HCSO.

7.1 The share of industry and agriculture continued to shrink, benefitting services While industry remained dominant in the economy, it started to decline in the latter half of the decade. Manufacturing increasingly lagged behind its international peers, — 187 —

7 Lack of turnaround and reform: the 1980s

and the only reason why certain companies managed to maintain their viability and exports was the series of individual deals for support made with the government. Efficiency declined steadily in the energy and commodities sectors. Agriculture also lost some of its share to the tertiary sector. However, the decline in the terms of trade for agricultural commodities that appeared on the global market was offset by export subsidies, but profitability diminished. Within the shares of production, only the non-material sector increased, the largest part of which comprised public administration, healthcare and education. Within this, public administration operated with especially low efficiency. Chart 7-3: Composition of GDP production (1980-1990) 100

Per cent

100

Manufacturing Construction Agriculture Gross value added of non-material branches Other branches (transport, trade, etc.) Balance of taxes and subsidies on products

Source: HCSO.

â&#x20AC;&#x201D; 188 â&#x20AC;&#x201D;

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

7 Lack of turnaround and reform: the 1980s

Chart 7-4: Composition of GDP use (1980-1990) 110

Per cent

110

-10 1990

-10 1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

Social transfers in kind Collective consumption Investments put into operation Construction in progress and stock change Export surplus/deficit Households final consumption expenditure

Source: HCSO.

Adjusting the foreign trade deficit that appeared at the beginning of the decade would have required curbing domestic absorption. Until the middle of the decade, household and government consumption was fairly stable, even though, as we will see, there were measures that aimed to cut it. However, the largest change was observed in the contraction of investments. Investment growth at the end of the 1970s, which exceeded the economy’s capacity and was mostly seen at corporations, was inevitably corrected in the early 1980s. Investments fell, and their technical composition shifted towards construction at the expense of machinery purchases. As a result, non-rouble related machinery imports for investment purposes declined so much by 1984 that this jeopardised not only the improvement, but also the — 189 —

7 Lack of turnaround and reform: the 1980s

maintenance of the prevailing technological level (Havas, 1980). The problem was also not solved by spending cuts on certain large government projects. The 1970s saw the development of a massive investment shortfall in key state areas (healthcare, education, public roads), which then needed to be compensated for in the 1980s. The ongoing, long-lasting, large government projects, focusing mostly on energy, heavy industry and mining, could not be curbed. The reduction of energy dependency became a priority, and the Paks Nuclear Power Plant was designated as a special major project: the plant’s first block started operating in 1982 and the fourth block in 1987. By 1991, it met 46 per cent of Hungary’s electricity demand. The other special large project of the 1980s, which was later scrapped, was the construction of the Gabčíkovo–Nagymaros Dams. The Duna Ironworks and Lenin Metallurgical Works projects continued, while the depleted bauxite mines were replaced with new ones. Furthermore, detailed regulations were enacted for investments (Decree on the rules of investments of 1984), which potentially conflicted with corporate independence. Another problem was that the contractual rules were based on the premise that the parties would meet each other on the market, which assumed some kind of a market equilibrium. However, all of this was distorted by the economic effects triggered by the market imbalance and companies’ soft budget constraints (Csanádi and Halmai, 1986; Gál, 2000).

7.2 Household income In the 1980s, the population decreased by 330,000 or 3.3 per cent, while life expectancy declined marginally and the total fertility rate was around 1.9. The number of active earners fell by 350,000, similar to population decrease. The sectoral composition of employment was transformed, as the number of people

— 190 —

7 Lack of turnaround and reform: the 1980s

working in industry and agriculture dropped by 300,000 each,24 while the number of employees in other services increased by 260,000 (including employees of the general government, for example the number of healthcare workers rose considerably). Chart 7-5: Household real wage index, real consumption and the consumer price index (1980-1990) 130

1979=100

Year/year, %

1990

1989

0 1988

80 1987

1986

1985

1984

100

1983

1982

110

1981

1980

120

Consumer price index, HCSO (year-on-year, per cent) (right axis) Real wage index, per earner (1979=100) Consumption expenditure of households, per capita (volume, 1979=100)

Source: HCSO.

Households’ purchasing power income was influenced by the government not only through direct social benefits in cash, but also through business and wage controls, widespread regulatory price controls and the combined effects of turnover 24

Of this, agricultural employment shrank by 120,000 over the course of a single year in 1990.

— 191 —

7 Lack of turnaround and reform: the 1980s

taxes and price subsidies. In the early 1980s, attempts were made to eliminate the foreign trade deficit. Against the backdrop of the prevailing outdated export structure, this could mainly be achieved by restricting domestic absorption. The accelerated increase in consumer prices resulted in a slowdown in consumption. With the exception of 1981, the annual consumer price index fluctuated between 7 and 9 per cent in the first half of the decade. A broad range of society experienced a decline in their living standards until 1984. In particular, employees and those working at farm cooperatives saw their real wages fall by a total of roughly 6 per cent over five years. Nevertheless, the volume of household consumption increased by 1 per cent annually. This was partly attributable to the growing impact of rising small business income and other ancillary incomes in household income. This in turn resulted from the spread of private commercial and hospitality establishments on the one hand, and the introduction of corporate economic working communities (VGMKs) and economic working communities (GMKs) on the other25 (Laki, 1998). Many private entrepreneurs also remained state employees. Households tried to compensate for the effects of prices and relative price changes by adjusting the structure of their consumption (necessities were prioritised more stringently due to the widespread fall in real income). The mounting social tensions triggered a reversal in the consumption-reducing economic policy. In 1985-1986, the real wage was increased by 4 per cent, which lifted the volume of consumption by 5 per cent as well. There was also a temporary anti-inflationary objective in 1986, but price increases were merely postponed. Consumer price inflation dropped to 5.3 per cent in 1986, before surging to 8.6 per cent in 1987 as the temporary effects reversed, which can mostly be attributed to the 10 per cent increase in administered prices, i.e.

GMKs also appeared in large state-owned industrial companies, where they operated outside working V hours, using the companies’ equipment. The first GMKs and VGMKs started operating in 1981, and by 1986-1987 they produced 1.5 per cent of industrial output and 10 per cent of the output in construction.

— 192 —

7 Lack of turnaround and reform: the 1980s

implementation of the postponed increases (Marton, 2012). Inflation then accelerated at an unprecedented rate to reach 29 per cent in 1990 after an annual 16–17 per cent price increase in 1988-1989. In 1988, this was explained by the introduction of value added tax, which – according to contemporary estimates – boosted prices by 7–10 per cent. From a welfare perspective, this had especially devastating effects among pensioners and families with children. The former were affected due to the rise in basic food prices, while the latter due to the increase in the prices of not only food but also of clothing and furniture. The higher consumer prices were to be offset by increasing pensions and boosting the family allowance (Juhász, 2020). Nevertheless, real wages fell at an accelerating pace until 1990, dropping by 8 per cent in total, while the volume of consumption increased by 3 per cent, as a result of growing transfers. On average, 68,000 homes were built each year in the 1980s, in contrast to the 88,000 units constructed in the 1970s. The decline was composed of 4,000 homes from public investment and 16,000 homes from household investment, while household investments increased from the previous decade’s average of 3.3 per cent to reach 4 per cent of GDP. This meant that the floor area and the value of individual homes expanded. This may have been partly due to the fact that the state supported households’ housing investments with preferential long-term loans over the entire decade. The budget covered the current loss incurred by the bank (OTP) and the savings cooperatives disbursing the loans on account of the interest rates which were much lower than on the market. The subsidised interest rates lowered the actual value of the principal well below its book value, but this was not compensated. The establishment of the Housing Fund in 1989 and the assumption of the nominal stock of housing loans worth HUF 275 billion did not provide a solution, as much of the capital loss was realised only in 1991.

— 193 —

7 Lack of turnaround and reform: the 1980s

7.3 Despite attempts to achieve a balanced foreign trade position, external debt rose rapidly At the beginning of the decade, the balanced position in foreign trade had to be restored, and yet another priority was to maintain the openness of the economy; accordingly, the main instrument to be used was export incentives rather than restricting imports. To this end, a price mechanism was introduced in 1980 to allow market conditions, efficiency and approximate international relative prices to apply, thereby increasing the role of adjustment to external economic conditions in economic decisions. Firms thus made considerable efforts in 1980-1982 to achieve foreign market prices which were as favourable as possible, while striving to ensure greater efficiency with commodities and energy. This is because the slowdown in Soviet growth made it more difficult to access commodities and export to the east from Hungary. The volume of exports was to be increased at all costs, but this undermined efficiency. The so called “competitive pricing” in manufacturing eliminated the price and profitability ratio-changing effect of exchange rate shifts, in a period when the forint was steadily devalued. It was recognised that export incentives and import substitution would not be solved by the price system in itself, and therefore, as part of the liberalisation of price formation, the export profitability constraint was scrapped partly in 1984 and completely in 1985, which was followed by the elimination of competitive price formation in March 1987. Export incentives would not have been possible exclusively through the exchange rate, because this would have required a massive devaluation which would have lifted domestic prices to an intolerable extent. Still, weighted by the turnover structure, a 50-per cent nominal devaluation was observed between 1981 and 1986, coupled with the 25-per cent fall in foreign market prices (e.g. oil price drop) and a similar rise in domestic prices. In spite of the considerable price increases, domestic energy prices remained approximately 20 per cent lower than world prices until 1985. Meanwhile, development of the exchange rate regime reached an important — 194 —

7 Lack of turnaround and reform: the 1980s

milestone in 1981 when a uniform exchange rate was introduced instead of the earlier one with separate rates for trade and non-trade relations; after this, the MNB set the forint exchange rate relative to a currency basket. However, this did not mean convertibility, because FX purchases were still subject to limits, and the system of import constraints remained in place. Chart 7-6: Exports and imports (1980-1990) 45

As percentage of GDP

1990

1989

1988

1987

25 1986

25 1985

1984

1983

1982

1981

1980

export, percentage of GDP import, percentage of GDP

Source: HCSO.

Restoring the balanced position in foreign trade enjoyed temporary successes: export incentives led to steady growth relative to GDP until 1985, while the share of imports declined until 1984. The continuous improvement in the export balance ended in 1984, and exports started to fall so much in 1986 that a trade deficit emerged again in 1986-1987. In the end, the surplus was restored in 1988-1990, as the importsto-GDP ratio declined by 10 percentage points. — 195 —

7 Lack of turnaround and reform: the 1980s

Chart 7-7: Gross external debt (and the MNB’s debt within this) (1980-1990) 90

As percentage of GDP

30 1990

30 1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

Gross foreign liabilities, percentage of GDP Central bank liabilities, percentage of GDP Central bank liabilities, without revaluation, percentage of GDP

Source: MNB.

The gross external debt of the national economy increased in the early 1980s, while international sources of finance dried up. Hungary subsequently applied for membership of the International Monetary Fund (IMF) and the World Bank, paving the way for continued external borrowing. A sizeable portion of the funds comprised the MNB’s outstanding gross debt, which expanded dramatically, by 27 per cent of GDP, between 1982 and 1987, but one half of this was attributable to revaluation of the debt on account of currency depreciation. After this, the MNB’s external debt fell by 15 per cent of GDP until 1990, although in the meantime a new trend emerged, as corporate debt – which had previously been marginal – started to increase (by 6.3 per cent of GDP). In contrast to international practices, the MNB took — 196 —

7 Lack of turnaround and reform: the 1980s

out most of the FX loans of the state in its own name up until 1999, keeping these on its balance sheet. Accordingly, a significant amount of FX debt was accumulated on the liabilities side, while lending was conducted in forint. As a result of the continuous devaluation of the forint, the revaluation of the outstanding debt was realised on the MNB’s balance sheet, which was assumed by the state in 1989, therefore it was later included in government debt.

7.4 The efficiency of state-owned enterprises did not improve, despite the constant renewal of regulations Even though some reforms got under way, the Hungarian economy remained a centrally planned economy, characterised by markedly different conditions than in a market economy. State functions extended well beyond the usual scope of government responsibilities in market economies. The purview of the general government, the central bank and state-owned enterprises was not clearly distinguishable. The state used various channels to determine producer and consumer prices and companies’ profits, including their cost accounting rules, subsidies and taxes. This completely distorted allocation mechanisms, which made it impossible to ascertain each company’s contribution to actual income generation and the concrete costs incurred by them. The new price mechanism introduced in 1980 thoroughly reshuffled the distribution of responsibilities between the price system and the budget. This can be considered the first major attempt at restricting the passing-on of costs by rules simulating market prices rather than administered prices. The specific goals with this included the expansion of exports to the global market (outside the CMEA), while limiting domestic price hikes on the often monopolistic internal market isolated from

— 197 —

7 Lack of turnaround and reform: the 1980s

import competition. Initially, the operation of the new price mechanism conformed to expectations. Between 1980 and 1985, producer prices increased the most in energy, which still lagged behind the world prices by ‘merely’ 20 per cent, entailing the rationalisation of energy consumption. However, the price mechanism led to increasing inflationary pressure. Moreover, the orientating role of market-type cost changes was reduced and offset by the fact that state intervention and other regulations functioned as an income-balancing system. In early 1985, uniform cost accounting and price formation rules were introduced for firms, where the price calculation requirement was determined by the economic calculation principle, taking into account capacity utilisation, since there are fixed and variable costs. However, from 1985 there was increasing pressure to dynamise corporate income and enhance the standard of living at the same time. The postponement of price increases following this reversed the previously positive effect of the comovement between producer and consumer prices in 1986. State intervention was also employed in wage controls, which had to facilitate efficiency and income distribution, while also maintaining the so-called ‘indoor’ unemployment. Therefore, the wage bill and wage level regulation contingent on the efficiency of the companies was introduced in 1976, as well as the centralised wage bill and wage level regulation. In 1980, this was supplemented with a central wage bill and wage level regulation taking into account profitability differences. This measure proved to be unsuccessful, so it was modified again in 1982, but it still failed to achieve its objective, namely the promotion of more efficient companies. This was because the base principle continued to be applied, with a focus on growth. However, the real obstacles to wage controls were individual deals, the soft budget constraint as well as the lack of competition and the related price system, without which no cost-sensitive or profit-oriented approach could emerge (Hajdú, 1982).

— 198 —

7 Lack of turnaround and reform: the 1980s

The conditions for membership of the IMF and the World Bank included the authorisation of a form of business partnership based on private ownership. The adoption of the Act on the investments in Hungary of foreign investors (Act XXIV of 1988) provided the appropriate legal framework for FDI inflows. As foreign companies appeared, the private sector first expanded in domestic trade, while large industrial production chains were not affected yet. In the mid-1980s, self-governance was introduced for 80 per cent of state-owned enterprises, where the governance of the company was the responsibility of the general meeting, the conference of delegates and the corporate council, 50 per cent of which was elected by employees (Pongrácz, 1996-2000). In parallel with the appearance of increasingly independent corporate actors, accountability also expanded, which called for the enactment of the Act on the prohibition of the unfair conduct of business (Act IV of 1984). However, up until 1986, economic policymakers did not consider it acceptable to let large enterprises go bankrupt. There was a continuous progression from the mixed economy towards the market economy, with Act VI of 1988 on business organisations marking an important milestone in this process. After the adoption of the Transformation Act (Act XIII of 1989), some of the small enterprises that had been operating in various forms (Laky, 1998) switched to modern corporate forms. By 1990, tens of thousands of privately owned limited partnerships (‘betéti társaság’) and limited liability companies (‘korlátolt felelősségű társaság’) had been formed. The two latter acts laid the legal foundations for spontaneous privatisation, in which state-owned enterprises could initiate the transfer of operations and capital into the newly formed companies. Between 1988 and 1990, spontaneous privatisation affected roughly 250 firms and 1.5–2 per cent of the assets that could potentially be privatised. This process lasted until the establishment of the State Asset Agency in March 1990. This marked the beginning of centralised privatisation.

— 199 —

7 Lack of turnaround and reform: the 1980s

7.5 Two-tier banking system starts to operate, but the MNB retains a wide range of responsibilities The situation of the MNB, which acted as the monetary authority and within the purview of the Chairman of the Council of Ministers, was special from several aspects. Since it took out the overwhelming majority of the state’s FX loans in its own name, a significant amount of FX debt was accumulated on the liabilities side of its balance sheet, while it was lending in forint. It financed government debt and also lent to companies until 1987 when the two-tier banking system was established. Furthermore, until 1990 it refinanced the large government projects (Jamburg Agreement, Gabčíkovo–Nagymaros Dams) financed by the State Development Institute (ÁFI), the predecessor of the Hungarian Development Bank (MFB), as well as the special government capital transfers and government loans provided to companies. This refinancing loan portfolio was assumed by the budget in 1990. In the first years of the two-tier banking system, the MNB’s objective was to support economic policy, primarily using the exchange rate as the intermediate target. The central bank, acting as the government’s account-keeping entity and lender and the bank of banks, had a wide range of responsibilities. It influenced money supply and supported the government’s economic policy with the instruments of monetary policy available at that time, which mainly meant the regulation of banks’ reserve requirement and the refinancing of banks. The new banks were unable to access foreign funds, so the MNB continued to take out FX loans, which were then passed on to banks as refinancing forint loans. Competition among banks only started gradually from 1987. First, only corporate deposit and lending rates were liberalised, and the separation of corporate and retail businesses was only eliminated in 1989. After this, retail deposit and lending rates could move more freely, although the MNB capped interest rates until 1991. From 1989, banks could begin to collect FX deposits and engage in FX transactions. Based on — 200 —

7 Lack of turnaround and reform: the 1980s

market-building considerations, the MNB launched the centralised interbank money market and discount treasury bill auctions (in late 1988), where the parties interacted with the MNB, thereby avoiding default risk. The banking system’s operation faced serious problems such as insufficient competition and confidence as well as the lack of prudential rules. First, the rating of corporate debtors was impossible in the absence of an appropriate accounting law, and second there were no provisioning requirements on loans with a rating anyway.

7.6 Reduced state involvement and the establishment of a market-conform tax regime The state used various channels to determine producer and consumer prices and companies’ recognised profits, including their cost accounting rules, subsidies and taxes. Moreover, there was a myriad of individual parameters pertaining to specific companies. These cannot be used to establish the amount of state redistribution or the actual balance. As a rule of thumb, the financing requirement of the state and companies can be summarised, because at that time the share of privately owned companies was not significant. This gives us a picture of the state in a broad sense. It can be seen that most of the deficit in 1980-1982 was produced by the general government in the narrow sense, with a deficit of 2–4 per cent of GDP, however, after this, in 1983-1985, the general government was close to balance and companies had a financing requirement of approximately 2 per cent. In the stimulus years of 19861987, the general government deficit came close to 3 per cent, while the financing requirement of companies was 3–5 per cent. Between 1988 and 1990 there were some fluctuations, and the combined financing requirement of the broad state was 5–7 per cent of GDP in all years. It should be noted that this financing requirement shows the change in net financial assets due to transactions; in other words, the amount of the depletion of the real assets of the broad state due to the low amortisation keys and the shortage of funds (low investments) during that decade cannot be determined. — 201 —

7 Lack of turnaround and reform: the 1980s

Chart 7-8: Budget balance (1980-1990) 1

As percentage of GDP

-8

-9

-9 1990

-7

1989

-6

-7

1988

-5

-6

1987

-5

1986

-4

1985

-3

-4

1984

-2

-3

1983

-2

1982

-1

1981

-1

1980

Net lending, state-owned company Net lending, general government

Source: MNB.

The broad state’s financing requirement and its debt as well may be considerably larger than what the statistics show. As regards government debt, no broader category can be presented that would include corporate debt as well and be more consistent with the extensive scope of the state. This would require consolidating the assets and liabilities of the state and state-owned enterprises (including the central bank). As it has been pointed out, external indebtedness was undertaken by the MNB, however, the government debt clearly shows the revaluation, because it was assumed by the state in 1989, and it was subsequently reflected in statistics.

— 202 —

7 Lack of turnaround and reform: the 1980s

Chart 7-9: Debt-to-GDP ratio (1980-1990) 80

As percentage of GDP

50 1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

Source: MNB.

As percentage of GDP

Public debt

By the end of the decade, the Hungarian debt ratio was probably relatively high compared to the development of the country, but several countries in the region were in a less favourable position. The relative indebtedness of Poland and Bulgaria was especially serious.

— 203 —

7 Lack of turnaround and reform: the 1980s

Chart 7-10: GDP per capita (PPP) and government debt in the countries of Central and Eastern Europe (1992*) 180

Public debt, as percentage of GDP

160 BG

140

120 100 HU

80 60

SK**

20 0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

GDP per capita (PPP), USD

* No consistent earlier data are available ** Government debt (1993) Source: EBRD, World Bank.

The transformation of the subsidy system and the tax regime was implemented in several stages: • I n 1980, the bridge between producer and consumer prices, in other words the balance of taxes and subsidies on products, became positive. A normative, 11-per cent tax was introduced, covering one quarter of the retail sales volume, and the number of other turnover taxes dropped to 400. Subsidies for food and public transport dropped, which was partly offset by the increase in housing and pharmaceutical subsidies. The market-conform value added tax was introduced in 1987 (Act V of 1987). At that time, the tax rate on basic foods, newspapers, books, household energy, sewage disposal, drinking water, medications, transportation — 204 —

7 Lack of turnaround and reform: the 1980s

and telecommunication was zero, but this measure had an appreciable priceincreasing effect on the whole. An attempt was made to offset this by increasing pensions and the family allowance (Juhász, 2020). •M ost of the taxes were determined for companies, and the social security contribution was also mainly paid by employers. In accordance with Decree No. 40/1984 (XI. 5.) of the Council of Ministers, firms had to pay a 40% profit tax, a 25% accumulation tax on investments, a 10% tax on wages, a 6% income tax on business and trade and 15% of profits as a municipal contribution. Most of this was replaced by the 50% corporate income tax in 1988, considerably reducing the tax burden. The tax on the income of business entities was introduced in 1989 (Act IX of 1988). •U ntil 1987, firms paid a wage tax on the wages paid, which was replaced by the personal income tax (Act VI of 1987). The transition was implemented by grossing up the salary of wage earners, keeping net earnings unchanged. This only caused a change for those who had other sources of income as well, because their tax burden increased. These incomes expanded dynamically, offsetting the moderation of wages in the first half of the decade. Since the personal income tax law affected a large portion of households and contained several parameters, it was amended numerous times in the subsequent period. While taxes, subsidies and large government projects were determined by central decision, a decentralised system emerged for the financial management and wages, purchase of goods and services and investment expenditure of budgetary institutions. At the level of institutions, the previously constrained financial management was relaxed considerably in the early 1980s. This independence was due to the general shortage of funds, and a similar improvement in efficiency was expected from this as from the increasing independence of state-owned enterprises. Consistent with this whole process, the freedom of people to choose between doctors and schools was also deemed beneficial. — 205 —

7 Lack of turnaround and reform: the 1980s

References Antal, L. – Bokros, L. – Csillag, I. – Lengyel, L. – Matolcsy, Gy. (1987): Fordulat és reform. (Turnaround and reform), Közgazdasági Szemle, Vol. XXXIV, June 1987 (pp. 642–663). Asztalos, L.Gy. – Balogh, I. – Hagelmayer, I. – Polgár, M. – Riecke, W. (1987): Infláció és pénzügyek Magyarországon. (Inflation and Finances in Hungary), Közgazdasági és Jogi Könyvkiadó, Budapest. Csanádi, Gy. – Halmai, G. (1986): A beruházási rendszer jogi kérdései. (Legal aspects of the investment system), Egyetemi Szemle, Vol. 8, No. 4, Akadémiai Kiadó, pp. 87–92. Gál, R.I. (2000): Puha költségvetési korlát, a szerződések kezelése és a notórius megbízhatatlanság. (Soft budget constraint, the treatment of contracts and notorious unreliability), Szociológiai Szemle, pp. 3–23. Hajdú, T. (1982): A bér- és keresetszabályozás tapasztalatai és célszerű fejlesztésének irányai az iparvállalatoknál. (Experiences from wage and income controls, and sensible avenues for their development at industrial companies), Ipargazdasági Szemle, 1982/1–2. Havas, G. (1980): A VI. ötéves terv beruházáspolitikájához. (On the investment policy of the 6th five-year plan), Egyetemi Szemle, Vol. 2, No. 2, Akadémiai Kiadó, pp. 57–68. Imre, O. (1984): A Bér- és keresetszabályozás fejlődési tendenciái és aktuális kérdései. (Development trends and current issues in wage and income controls), (http://acta.bibl.u-szeged.hu/2077/1/polgazd_021_015-028.pdf) Juhász, I. (2020): Az adóreform és az azóta eltelt időszak – áfa – 1. (6. rész). (The tax reform and the period since then – VAT – 1 [Part 6]), Published at: ado.hu (https://ado.hu/ado/az-adoreform-es-az-azota-eltelt-idoszak-afa-1-6-resz/) Kaposi, Z. (2002): Magyarország gazdaságtörténete, 1700–2000. (Hungary’s economic history, 1700–2000). Kornai, J. (1982): A hiány. (The deficit), Közgazdasági és Jogi Kiadó, Budapest. Kornai, J. (2013): Központosítás és piaci reform. (Centralisation and market reform), Pesti Kalligram Kft. Laki, M. (1998): Kisvállalkozás a szocializmus után. (Small enterprises after socialism), Közgazdasági Szemle, pp. 173–182. Marton, Á. (2012): Infláció, fogyasztói árak Magyarországon a második világháború után II. (1968—2011). (Inflation and consumer prices in Hungary after World War II, Volume 2 [1968–2011]), Hungarian Statistical Review, Vol. 90, Issue 6. Hungarian Central Statistical Office (http://www.ksh.hu/statszemle_archive/2012/2012_06/2012_06_489.pdf) Matolcsy, Gy. (1991): Lábadozásunk évei – A magyar privatizáció. Trendek, tények, privatizációs példák. (The years of our recovery – Privatisation in Hungary. Trends, facts, privatisation examples), Tulajdon Alapítvány–Privatizációs Kutatóintézet, Budapest. Matolcsy, Gy. (1998): Sokk vagy kevés. (Shock or few), Kairosz, Budapest. Pongrácz, T. (1996–2000): Privatizáció és kárpótlás. (Privatisation and indemnification), Magyarország a XX. században II. kötet: Természeti környezet, népesség és társadalom, egyházak és felekezetek, gazdaság. (Hungary in the 20th century, Vol. 2: Natural environment, population and society, churches and denominations, economy), Babits Kiadó.

— 206 —

8 Free again: the 1990s Gábor P. Kiss Main economic indicators 1990-1999 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 GDP growth *

-3.5 -12.1 -3.1

-0.6

2.9

1.5

0.1

3.1

3.9

3.1

GDP/capita growth

-6.4 -11.9 -3.1

-0.5

3.0

1.6

0.2

3.5

4.5

3.5

Difference between the GDP/capita growth in Hungary and Austria

-9.7 -14.3 -4.0

-0.2

1.0

-0.9

-2.1

1.4

1.0

0.1

Change in consumer price index

28.9 35.0 23.0 22.5 18.8 28.2 23.6 18.3 14.3 10.0

Government debt as percentage of GDP

66.2 77.1 79.5 90.7 89.6 84.1 71.4 62.3 60.5 60.4

Unemployment rate

2.8

9.7

9.9

Current account balance as percentage of GDP

0.4

1.2

0.9 -10.6 -9.4

Interest rate level*

28.8 35.2 33.1 25.4 27.4 32.6 27.3 21.8 19.3 16.3

12.1 10.8 10.2 10.0 -3.4

-3.7

9.0

8.9

6.9

-4.1

-7.1

-7.9

Note: * Average interest rate level based on the decade’s reference interest rates, for more information see Madarász – Novák (2015). Source: WDI, Eurostat, Penn World table, Maddison, MNB, Madarász – Novák (2015)

In the 1990s following the political transition, which is often referred to as the transformation or transition period in the economic literature, Hungary – similar to other former Eastern bloc countries – experienced a complete political, economic and social transformation. The legal framework that paved the way for the market economy was completed, eliminating the old, unviable economic entities from the market and enabling the establishment of a huge number of Hungarian-owned small enterprises as well as large enterprises mainly owned by non-residents (entering Hungary via privatisation and greenfield investment). This was a shock transformation, which caused a lasting crisis primarily on the labour market and considerably reduced the number of people employed in the national economy. The — 207 —

8 Free again: the 1990s

high level of public sector spending mitigated the impact of the initial shock until 1994, but this came at the price of a twin deficit that emerged at the same time and ended in a severe economic policy consolidation and restrictions in 1995-1996. Chart 8-1: GDP trends (1989-2000) 105

1989=100

105

2000

1999

1998

80 1997

80 1996

1995

1994

1993

1992

1991

1990

100

1989

100

Source: HCSO.

In the early 1990s, the countries tied to the former CMEA market were hit by a massive recession, and the speed of recovery varied widely. By the end of the millennium, Hungary had become a leader in the CEE region, thanks to the growth-friendly economic policy. In the IMD Competitiveness Ranking, the country advanced 10 places between 1997 and 2000 to secure 27th position, overtaking the Czech Republic (37th) and Poland (40th). In terms of the indicator measuring economic performance within the index, Hungary fared even better: by the turn of the millennium, the country’s ranking had changed from 38th to 20th. The economy expanded dynamically in the final years of the decade, and fiscal balance also improved, but the reforms aimed at addressing certain inherited structural problems were halted or even reversed after 2002. — 208 —

8 Free again: the 1990s

Chart 8-2: Average GDP growth in 1989-1992 and 1993-2000 <1.0 1.1 - 2.0 2.1 - 3.0 >3.0

-1.0 2.4 0.4 4.6

0.7

3.2

-2.1

2.5 6.4

-9.7

-4.4 3.4 -4.5

1.8

2.5

5.3

4.1

-8.3 -7.2

1.9 3.1

1989-1992

<1.0

1993-2000

1.1 - 2.0 2.1 - 3.0 >3.0

4.2 3.8

4.6 3.1

8.3

3.2

3.6

5.4

2.4 5.0 2.3

1.9 4.7

1.5 1.7

1.9 4.4 2.6 2.4 22.5 -0.6

2.9

1.8 3.2

Source: IMF, www.klaus.cz/clanky/3666 (Czechoslovakia).

— 209 —

2.7

-7.4

0.9 -4.8

8 Free again: the 1990s

8.1 Major structural changes in GDP production Based on the events and the methodology used, the 1990s can be divided into two distinct parts.26 1991 is not a perfect benchmark, because the effects of the crisis had already appeared somewhat at that time, but there was a huge methodological change between 1990 and 1991, for example the recorded value of the production of non-material sectors (e.g. education, healthcare) increased significantly. In the first phase, an examination of the share of the individual sectors within economic performance shows that industrial production declined even more than total output. Therefore, its share also contracted, with heavy industry (especially the steel industry) sustaining the most significant losses, and the sectors that represented Hungary’s specialisation within the CMEA division of labour (e.g. bus and fertiliser production) disappearing almost completely. The share of agriculture (principally livestock farming) also diminished, never to return to its original level. This may have been partly due to the loss of the Eastern markets and the lack of economies of scale, capital and technology as well as the level of state subsidies, which was the second lowest in the OECD. The share of the so-called other material sectors, such as transportation and trade, also dropped permanently within the already declining output. Only the share of the non-material sectors (e.g. financial services, food service activities, education, healthcare, public administration) increased within output, which suggests a substantial structural transformation with a stabilising impact. Approximately half of this was linked to the general government, for example in relation to education, healthcare and public administration.

I n HCSO statistics, including the production and absorption side of GDP, significant changes occurred in 1995, and this break makes it impossible to compare the time series without splitting it in two and showing the 1995 data in the old and the new methodology as well.

— 210 —

8 Free again: the 1990s

Chart 8-3: Composition of GDP production (1991-1995) 100 90 80

Per cent

70 60

10 6

24 1995

10 6

1994

10 6

1993

11 6

1992

1991

80 60 50

90 70

100

40 30 20 10 0

Manufacturing Construction Agriculture Gross value added of non-material branches Other branches (transport, trade, etc.) Balance of taxes and subsidies on products

Source: HCSO.

The share of most industries stabilised between 1995 and 2000, which means that they contributed in proportion to their size to the output growth that had resumed in the meantime. The only exception was agriculture, the share of which continued to contract, and manufacturing, which, conversely, increased. This shows that the renewed growth was driven by the introduction of new, modern industrial capacities based on relatively cheap, skilled labour. Besides the privatisation and modernisation of state-owned enterprises, greenfield investments were also implemented. The developments were mostly carried out in export-oriented sectors whose production entered the economy gradually. While the machinery industry was one of the biggest losers at the start of the decade, the most successful transformation occurred here in the second half of the decade. The sector was effectively integrated into the international division of labour, and in 1996 its output reached the level seen at the end of the previous decade. â&#x20AC;&#x201D; 211 â&#x20AC;&#x201D;

8 Free again: the 1990s

Chart 8-4: Composition of GDP production (1995-2000) 100

Per cent

100

60 50

60 39

7 4

6 4

5 4

40 30 20 10

50 40

2000

1999

1998

1997

1996

1995

Manufacturing Construction Agriculture Gross value added of non-material branches Other branches (transport, trade, etc.) Balance of taxes and subsidies on products

Source: HCSO.

8.2 Structural transformation and laws paving the way for the operation of the market economy When the Eastern European markets were lost, the country experienced a structural shock, and thus GDP shrank because of the decline in potential output rather than cyclical developments. Yet, irrespective of whether aggregate or statistical indicators are taken into account, they cannot fully capture the qualitative features of the economy. This is because initially private assets were secondary in production, but the boundaries between the state, state-owned enterprises and the central bank — 212 —

8 Free again: the 1990s

were not in line with the usual market economy standards, for example due to the price, wage, credit and income controls. The legal framework providing the basis for the operation of the market economy had been practically non-existent, and thus its introduction had considerable short-term and long-term effects. This is because, in the absence of a bankruptcy law and bank provisioning requirements, credit supply for corporates had not tightened before the crisis hit. The introduction of modern corporate accounting, more realistic amortisation keys, the bankruptcy law and banks’ provisioning in 1991-1992 enabled the market operation of companies and eliminated the loss-making firms from the market that did not receive state subsidies. The liberalisation of price controls gathered pace in 1989-1991 as the state withdrew, which allowed relative prices to be corrected. Import constraints were gradually lifted, and customs duties also started to decrease in 1993 in accordance with international agreements. Nevertheless, this caused uneven external trade competition for Hungary, which immediately resulted in a negative foreign trade balance and current account balance. The allocation role was gradually assumed by the market as state regulation receded or took on a form that was common in market economies. The corporate sector was completely transformed, not only from an ownership and production perspective, but also in terms of the firms’ distribution by size, as a massive number of small and microenterprises were established. The complete transformation of the corporate and financial institution sector and the conditions of their continued operation, including the reduction of state intervention,27 rested on a broad range of laws: • The adoption of the Competition Act and the Price Act as well as the Labour Code (Acts LXXXVI and LXXXVII of 1990 and Act XXII of 1992).

he Public Finances Act (Act XXXVIII of 1992) determined the main rules of the operation, responsibilities T and oversight of the general government.

— 213 —

8 Free again: the 1990s

• The introduction of the corporate income tax (Act LXXIII of 1992), which enabled the losses incurred to be carried forward to subsequent years. • The Accounting Act (Act XVIII of 1991), which was not applied for years after its adoption due to the implied losses of the companies, and the Bankruptcy Act (Act XLIX of 1991), pursuant to which many businesses that had previously been artificially kept alive by the state went bankrupt. • The Act on Private Entrepreneurs (Act V of 1990), together with the Act on Cooperatives (Acts I and II of 1992), which regulated these forms of organisation. • The acts on the forced transformation of state-owned enterprises into corporations and the state-led privatisation of state-owned enterprises (Acts LIII–LIV and LV of 1992), the establishment of an organisation for public asset management and privatisation (Acts VII and VIII of 1990) and the Unified Privatisation Act (Act XXXIX of 1995). Most proceeds of privatisation were realised after the latter was adopted. An alternative was the Concession Act (Act XVI of 1991), which provides a possible way for assets owned exclusively by the state, municipalities or a municipality partnership to be operated efficiently or the activities within the exclusive purview of the state or a municipality to be performed based on a concession contract. • The Financial Institutions Act (Act LXIX of 1991) and the Central Bank Act (Act LX of 1991) regulated the operation of the two-tier banking system established in 1987. The adoption of the ‘Bank Act’ determined the legal framework for the operation of credit institutions, and over the long run this law regulated the scope of state ownership. The issues of the loss-making and terminated state-owned enterprises had a severe impact on financial institutions as well, which called for state intervention from 1993, in the form of bank, debt and debtor consolidation. • Based on the modern Securities and Stock Exchange Act (Act VI of 1990), the Budapest Stock Exchange opened in March 1990, although its significance remained limited compared to debt financing. — 214 —

8 Free again: the 1990s

8.3 Major structural changes in GDP absorption as well The divergence between production capacities and domestic demand had a negative impact on the external balance. During the initial shock, investments declined in line with output, but within that the share of public investment remained high until 1994. By contrast, the share of state absorption (collective and individual government consumption) and households’ consumption expenditure increased after 1991 and remained stable until 1995. Households sustained a significant shock on the labour market, but real wages fell only marginally. The government compensated the masses of people suddenly removed from the labour market with social benefits in cash. As a result, at the beginning, the huge contraction in economic output had a less severe impact on consumption. Chart 8-5: Composition of GDP use (1990-1995) 120

Per cent

100

100 80

20 0

56 2

1 19

-1

-4

-8

-6

14 -2

60 40

120

3 6 19 11 11

-20 1995

1994

1993

1992

1991

1990

-20

Social transfers in kind Collective consumption Investments put into operation Stock change Export surplus/deficit Household final consumption expenditure

Source: HCSO.

— 215 —

8 Free again: the 1990s

The impact of the 1995-1996 austerity measures already became evident in 1995. Even though GDP did not drop (Kornai, 1996), it was 1.5–2 per cent lower than its own trend in both 1995 and 1996 (Horváth et al, 2006), owing to decreasing consumption as well as investments. Chart 8-6: Change in the volume of GDP use at 1990 prices 30

Volume change

At 1990 reference levels

-5

-10

-15

-20

GDP

1991

Consumption Investments expenditure of households, per capita 1992

1993

Export

1994

Import

-20

1995

Source: HCSO.

GDP stabilised in a transformed structure in the latter half of the decade. State absorption (collective and individual government expenditure) fell permanently before stabilising until the end of the decade. A similar trend can be observed in the case of household’s consumption expenditure. At the same time, the share of investments rose steadily, driving growth first from the absorption side and then also from the production side. The balanced position in foreign trade was restored, and a minor deficit emerged only at the end of the decade, which offset the increase in the share of investments. — 216 —

8 Free again: the 1990s

Chart 8-7: Composition of GDP use (1995-2000) 120

Per cent

100

100 80

120

80 60

12 -2

12 -3

12 -4

2 26

2000

2 25

1999

4 24

1998

-20

1997

1996

2 23

1995

-1 22

1 3 22

-20

Social transfers in kind Government consumption Investments put into operation Stock change Export surplus/deficit Household final consumption expenditure

Source: HCSO.

Chart 8-8: Change in the volume of GDP use at 1995 prices 35

Volume change

At 1995 reference levels

-5

GDP

1996

Consumption Investments expenditure of households, per capita 1997

1998

Source: HCSO.

â&#x20AC;&#x201D; 217 â&#x20AC;&#x201D;

Export

1999

Import

2000

-5

8 Free again: the 1990s

8.4 Turnaround in foreign trade and capital inflows For Hungary, the change in export markets was crucial, as was the FDI necessary for the successful transformation of the economy’s structure and for finding new external markets, which was also coupled with technology and know-how. In the following, the foreign trade balance is discussed first, followed by capital inflows. Chart 8-9: Exports and imports (1990-2000) 80

As percentage of GDP

20 2000

20 1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

export, percentage of GDP import, percentage of GDP

Source: HCSO.

Until the end of the 1980s, the share of exports and imports in GDP was around 35–40 per cent, and this level was restored by the mid-1990s. Following a dynamic increase, a share of almost 70% was achieved by the end of the millennium, and

— 218 —

8 Free again: the 1990s

the share of imports exceeded exports for almost the entire decade. Several factors influenced the development of the foreign trade surplus and deficit, including cyclical developments in Hungary’s trade partners and the terms of trade (e.g. energy prices), as well as export subsidies and customs duties that affect competitiveness, and the change in the real effective exchange rate.28 Table 8-1: Certain dominant factors in external trade 1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Specific export subsidies (%)

3.3

2.5

2.7

3.2

2.0

1.4

0.6

0.3

Specific import duties (%)

7.3

10.3

9.1

8.1

8.8

7.3

3.0

1.9

1.5

1.1

USD exchange rate devaluation (%)

23.1

11.0

19.9

9.9

26.0

18.3

23.4

7.6

15.3

12.8

Inflation (%)

35.0

23.0

22.5

18.8

28.2

23.6

18.3

14.3

10.0

9.8

94.7

71.4

72.3

77.7

75.5

74.8

77.6

Real effective exchange rate (measured to the average of 36 countries, 1999=100%) Source: MNB, HCSO.

The loss of the CMEA markets at the beginning of the decade was not a simple cyclical shock, as the terms of trade also deteriorated considerably. The economic growth characterising Western Europe in the second half of the 1980s came to a halt due to the temporary and substantial rise in oil prices in 1990 (Iraq War) and the interest rate increase following the inflationary impact of German reunification, which triggered a recession in Western Europe right at the time when Hungarian exports started reorienting from Eastern markets towards Western ones. The negative impact of the recession was mostly felt in 1993. However, after this, Hungary successfully

he real effective exchange rate shows the change in the nominal exchange rate adjusted for inflation or T the cost of labour relative to the currency basket reflecting the structure of external trade. A rising index shows the decline in price competitiveness on export markets.

— 219 —

8 Free again: the 1990s

joined the European growth. The international financial crisis of 1997-1998 led to another change. Although the direct impact of the protracted Asian crisis that started in 1997 was minimal (the share of Asian exports was below 3 per cent), there were indirect effects as the affected countries were Hungary’s competitors on the global market and they were able to boost competitiveness with their devaluation. By contrast, the Russian crisis of 1998 had a direct impact, albeit with a more moderate negative effect: while the share of Russian exports was around 5 per cent in 1997, it had dropped to below 3 per cent by 1998. The fallout from this was offset by the drop in oil prices. A strong upturn began in the external economic environment in 1999, the positive implications of which in the foreign trade balance were moderated by the massive rise in energy prices in the second half of 1999. The reduction of customs duties and export subsidies arising from international trade agreements (GATT and later WTO) caused continuous competitiveness challenges over the short run. Customs duties as a percentage of imports fell from approximately 10 per cent to around 1 per cent by the end of the decade, and the export subsidy as percentage of exports dropped from 3 per cent to 0.3 per cent; thus, both contracted to a tenth of their value. The export subsidy was relatively low because it focused on agricultural and food products, and it was also reduced by the diminishing share of these products within exports. Export subsidies were also curtailed by the fact that they were determined by physical units in forints rather than as a percentage of the value from 1996. The customs duty reduction process began vis-à-vis the group of Visegrád countries in accordance with the Central European Free Trade Agreement concluded in 1992, and it continued with the European Communities. By 1994, the elimination of customs duties in the spirit of free trade had affected approximately 70 per cent of goods, and in certain product groups customs duties had been completely eliminated. In 1995, customs duties and fees dropped by 1 per cent each for 60 per cent of the products in total turnover. This trend was reversed in March 1995 by the measures of the Bokros Package, as imports — 220 —

8 Free again: the 1990s

for consumption (approximately 60 per cent) were subject to an additional 8-per cent customs duty, which was eliminated gradually in 1996-1997. Customs duties and fees were further reduced until the end of the decade. The competitiveness effect of the exchange rate increased in parallel with the gradual elimination of export subsidies and customs duties. In the context of double-digit inflation, double-digital nominal devaluation occurred every year, except for 1998. In the spring of 1995, before the introduction of crawling-peg devaluation, a surprise one-off 9-per cent devaluation was implemented. The pace of devaluation was decreased considerably in the second half of 1998. The structure of foreign trade changed completely owing to the export capacities created in the latter half of the decade. Machinery exports surged by 51 per cent in 1997 and 40 per cent in 1998, with vehicle exports exhibiting exceptionally dynamic expansion within that. The structure of imports also shifted in a positive direction, as capital goods imports, which were not subject to the additional customs duty, increased significantly in the latter half of the decade, and in 1998 imports of consumer durables jumped even more. The share of the 15 EU countries dominated foreign trade. By the end of the decade, it had come close to what it was at the end of the 1920s (Köves, 2003), and this phenomenon could also be observed in other small former CMEA countries (Piazolo, 2001).29 In the first half of the 1990s, Hungary received half of the FDI in the entire region. FDI per capita was also particularly high. At the same time, external indebtedness became more moderate and even contracted in a few years.

ne possible reason for this is that the factors shaping foreign trade remained similar: differences in natural O resources and production factors, production complementarities, cultural and linguistic ties and geographical proximity (Piazolo, 2001).

— 221 —

8 Free again: the 1990s

Chart 8-10: External debt and FDI (1990-2000) 15

As percentage of GDP

2000

1999

-10 1998

-10 1997

-5

1996

-5

1995

1994

1993

1992

1991

1990

Foreign direct investment (Transactions) Gross foreign liabilities (Transactions)

Source: MNB.

After the austerity measures in 1995-1996, the structure of the balance of payments changed substantially. The foreign trade balance improved considerably, but this was offset by the deterioration in the income balance. During this period, the national product (GDP) and national income (GNI) started to diverge. This can be primarily attributed to the repatriation of profits linked to increased FDI and other income outflows.

â&#x20AC;&#x201D; 222 â&#x20AC;&#x201D;

8 Free again: the 1990s

Chart 8-11: Evolution of the current account (1990-2000) 8

As percentage of GDP

−4

−6

−8

−10

−12

−12 2000

−4

1999

-2

1998

-2

1997

1996

1995

1994

1993

1992

1991

1990

Goods and services, balance Primary income, balance Secondary income, balance

Source: MNB.

8.5 One million lost jobs In the 1990s, the population decreased by 1.7 per cent, while life expectancy increased by two years. However, the total fertility rate plunged from 1.9 to 1.3, foreshadowing the gradual ageing of Hungarian society.

— 223 —

8 Free again: the 1990s

Besides these demographic changes, there was also a fundamental social realignment, as more than one million people lost their jobs in the course of a few years as a result of the shock transformation. While there were five million active earners in the early 1980s, this number had dropped to barely 3.5 million by the mid1990s. Some of the difference can be attributed to the structure of society, in other words demographic developments, but it was mostly caused by the crisis. In the socialist centrally-planned economy, the full employment objectives usually actually meant ‘indoor unemployment’, with the associated costs borne by stateowned enterprises, and this was one of the reasons for low efficiency. Many people lost their jobs as state-owned enterprises went bankrupt. As entire industries were suddenly destroyed, these people could not find other jobs, and they had no skills for other professions. This also had a regional aspect, as whole regions lost their dominant employers (e.g. mining towns). In the case of the transformed companies that remained in business, labour market developments were slower because layoffs are costly and time-consuming, and when a boom starts the additional labour requirement is covered by overtime, the number of employees increased only later. Labour market activity declined until 1996. It was reduced considerably by the shock of the transition into a market economy, and it continued to fall in parallel with GDP, which started to contract again on account of the 1995-1996 austerity measures. The number of industrial workers dropped by 30 per cent and the number of those in agriculture shrank by 62 per cent, while construction workers were reduced by 21 per cent between 1989 and 1996.

— 224 —

8 Free again: the 1990s

Chart 8-12: Number of active earners and the unemployed (1989-2000) 5,000

Thousand people

5,000

3,400

3,200

3,000

3,000 2000

3,600

1999

3,800

3,600

1998

3,800

1997

4,000

1996

4,000

1995

4,200

1994

4,400

4,200

1993

4,400

1992

4,600

1991

4,600

1990

4,800

1989

4,800

Economically active population, thousand people Number of unemployed persons, thousand people

Source: HCSO.

A major portion of the one million people who had lost their jobs left the labour market permanently. Some of them tried to take advantage of the various opportunities for retiring before reaching retirement age, such as early retirement or disability retirement. However, many people found themselves without any major source of income due to the limited nature of social benefits (unemployment benefits, municipal aid) and were unable to find employment in the absence of skills. Even among those who remained on the labour market, the number of employees dropped and the number of small entrepreneurs increased. The number of the latter increased from around 30,000 in 1989 to 750,000 in 1996. Some of them became successful entrepreneurs, while others became economically dependent workers for large enterprises via outsourcing. â&#x20AC;&#x201D; 225 â&#x20AC;&#x201D;

8 Free again: the 1990s

In the recovery period of the second half of the decade, employment improved by 250,000 relative to the trough related to the establishment of new capacities. As a result, manufacturing experienced a 24-per cent contraction in labour over the entire decade, while construction suffered an 8-per cent loss. Agricultural employment continued to deteriorate, as the number of workers shrank by 67 per cent, or half a million people, in total. However, in the context of the recovery period in the private sector, the gap between the private and the public sector in terms of efficiency and the wages of employees gradually widened, which caused tensions. Owing to these developments, the Gini coefficient, which captures income differences and was at 0.25 at the time of the transition, rose to around 0.3, which was nevertheless still low by international standards. Until 1994, household consumption did not follow the declining trend of economic output. There may have been several reasons for this. First, the social benefits in cash received from the state had a stabilising impact. The effect of the shock was also muted by the fact that the adjustment in employment and wages was drawn out over a few years. Finally, the income of the huge number of people who became small entrepreneurs was increased because they already paid preferential taxes, while tax evasion was also common (they paid minimal taxes overall). In the middle of the decade, real wages also suffered a major shock with the austerity measures. In the spring of 1995, the devaluation and the increase in administered prices caused surprise inflation of almost 10 percentage points as part of the economic policy adjustment. Since wage agreements were not adjusted and public sector spending was also not valorised, household disposable income contracted considerably in real terms.

— 226 —

8 Free again: the 1990s

8.6 Renewal of the banking system and the central bank Similar to companies and households, financial institutions and the central bank also experienced a fundamental transformation during the decade. Initially, banks were state-owned and their operation was determined by insufficient funds, low efficiency, the outstanding debt inherited from the previous system and the mounting uncertainties surrounding inflation and economic performance. Credit demand from the companies in a better position dropped, which left only the lossmaking and indebted businesses on the credit market, whose survival depended on bank loans (Ábel – Szakadát, 1997). The Financial Institutions Act required banks to make provisions for their outstanding loans and sought to solve the problem of severe undercapitalisation by prescribing a capital adequacy ratio of 8 per cent for 1994. Between 1993 and 1995, the state provided banks with government bonds amounting to 7 per cent of GDP within the framework of the debt, bank and debtor consolidation, assuming bad debt in exchange. The amount of corporate credit relative to GDP decreased from 30 per cent in 1991 to under 19 per cent in 1995. Meanwhile, creditworthy, and partly foreign-owned, companies took out loans from foreign banks. Taking this into account, their total outstanding borrowing relative to GDP was 30 per cent in 1995 (Csermely – Vincze, 1999). Overall, despite the extraordinary support, bank profitability continued to deteriorate and the loss of assets could not be stopped. A major, gradually unfolding change occurred with the emerging privatisation of state-owned financial institutions in 1994. In parallel with this, the role of borrowing from foreign banks decreased, and by 1997 Hungarian banks had practically become the main lenders once again. Nonetheless, the efficiency of financial institutions

— 227 —

8 Free again: the 1990s

remained low, and there were banks that were on the verge of bankruptcy.30 Savings were in forint, but many companies took out long-term FX loans towards the end of the decade. While earlier businesses had competed for loans, the roles were reversed in 1998, as lending to large enterprises was characterised by individual conditions and strong price competition. As a result of the lack of the additional demand in the large enterprise market, lending to small and medium-sized enterprises gathered pace in the wake of the Russian crisis in 1999, and household credit also expanded. The latter was a change because earlier the accumulation of funds had dominated among households. Hungarian household indebtedness remained low by international standards, even in the context of a continuous expansion in the supply of credit products. The steady decline in housing loans only turned around in 2000, as a consequence of the new lending scheme introduced by the government under its new housing policy on 1 February 2000. The MNB experienced fundamental changes similar to the financial institutions. It was transformed from an organisation integrated into the government’s economic policy into an independent institution, the main objective of which was set by the Central Bank Act (1991) as the safeguarding of the domestic and external purchasing power of the national currency. To this end, the forint exchange rate was fixed to a currency basket until 1995. The inflationary pressure that emerged in the transition years required regular devaluations. The unforeseeable timing and extent of the devaluations made the exchange rate path unpredictable, and therefore this was replaced by the pre-announced, crawling-peg devaluation system in 1995. This influences inflation expectations efficiently if it is credible, and in such a case the exchange rate regime can maintain its role as a strong nominal anchor. Towards

capital transfer amounting to 1.3% of GDP was necessary to rescue Postabank in 1998. This loss was reaA lised over three years, although it could be concealed on the balance sheet of the bank in the first two years.

— 228 —

8 Free again: the 1990s

the end of the decade, confidence in the economic policy and the exchange rate regime increased in parallel with the improving economic performance. Besides the disinflationary developments on the global market, this also contributed to the reduction of the consumer price index, which had been over 30 per cent in the middle of the decade, to below ten per cent by the turn of the millennium. The lack of financial markets and the insufficient competition among financial institutions hindered the establishment of the appropriate monetary policy instruments until the early 1990s. The instruments were developed gradually as competition increased and the economy opened up due to the legal framework paving the way for the market economy, growing savings and FDI inflows. At the time when the financial market was still underdeveloped, liquidity and lending activity could be heavily influenced by raising the reserve requirement ratio, which was important in the early phase of capital inflows. As financial markets matured, open-market operations, where the central bank issued or withdrew liquidity on the secondary market, became more prominent. The interbank FX market, where the forint exchange rate was determined by supply and demand, also started to operate in July 1992. On this market, monetary policymakers had a chance to influence the exchange rate with FX market intervention. After the introduction of the crawlingpeg devaluation system, the central bank toolkit changed even more. The narrow band where the exchange rate was allowed to move, the related interest rate policy and the excess liquidity to be sterilised were all key factors.

— 229 —

8 Free again: the 1990s

The relationship between the state and the central bank also had to be regulated. During the reform of the budget financing system, the previously unrestricted central bank financing was limited in 1991 and eliminated in 1996, so the budget had turn to the market to finance the budget deficit and the gradually maturing old preferential central bank financing. As a unique feature, and in contrast to international practices, the MNB took out most of the FX loans of the Hungarian state under its own name up until 1999, keeping them on its balance sheet. Prior to 1997, the central bank’s income statement only included transactions, and the effect of currency devaluation was offset on the balance sheet by the so-called zero-interest debt extended automatically by the state without maturity. In 1997, the budget offset the central bank’s FX debt against government bonds with the same conditions as part of the debt exchange, and the zero-interest debt was also transformed into FX debt provided to the budget.

8.7 Distinct cycles in fiscal policy The fundamental changes for households, companies and financial institutions also had effects on the general government’s finances. The surplus in the first year is misleading because before the transformation this should be assessed together with the 8-per cent deficit of state-owned enterprises. After this, the financing requirement fluctuated at 8–13 per cent of GDP until 1995, before dropping to 5–8 per cent of GDP in the wake of the 1995-1996 austerity measures. At the end of the decade, the budget deficit decreased to 3 per cent of GDP as a consequence of the economic policy that supported growth and equilibrium at the same time. There were largescale exceptional effects that resulted in a one-off increase in both the deficit and the debt. However, there were also developments that affected the deficit in a permanent

— 230 —

8 Free again: the 1990s

way and a contributed to an increase in government debt. These two effects are now presented separately. Chart 8-13: Budget deficit and government debt (1990-2000) 5

As percentage of GDP

2000

1999

1998

1997

1996

-15

1995

1994

-10

1993

1992

-5

1991

1990

Net lending (without special items) Extraordinary items Public debt (right axis)

Note: deficit data show the current methodology. Contemporaneous data indicated smaller deficit. The deficit seemed to be around 6 percent of GDP in 1993 and between 7 and10 percent in 1994. Source: HCSO, MNB, P. Kiss – Szapáry (2000).

Among the fiscal effects with a persistent impact, one should mention the role of the economic transformation, which would have required a sustainable fiscal adjustment. The control over revenues was lost and they fell by to unexpected extent,

— 231 —

8 Free again: the 1990s

and expenditures could not be cut due to the significance of the open-ended subsidy schemes, the traditional independence of budgetary institutions and the newly emerging independence of local governments and social security’s self-governance. Tax revenues contracted even more than GDP. But what explains the unexpected extent of the decline? Tax compliance deteriorated: for example, only one third of the levied customs duties were paid in 1991, and only 90 per cent of the declared social security contributions were received in 1991-1993.31 The tax base, which dominated the revenues paid, was linked to wages, and therefore the unprecedented decline in employment entailed a huge drop in personal income tax and contribution revenues. Revenues were further reduced by tax evasion, which became an increasingly important factor in the context of a tax regime mainly based on the self-assessment of tax returns and the large number of taxpayers (low VAT turnover threshold). A major portion of those employed in the private sector declared earning at the minimum wage or less, and in this group undeclared wages probably reduced the tax base by 2 per cent of GDP in the mid-2000s (Krekó – P. Kiss, 2008). Tax evasion was compounded by the fact that many new entrepreneurs (who were employees before) also paid the minimum taxes and contributions. Additionally, the VAT chain was broken in the case of services, because it made more sense not to claim the VAT refund than to pay all the taxes and contributions related to wages in the formal economy. According to the estimate prepared based on this aspect of tax evasion, the taxes and contributions that could be underreported by the self-employed accounted for half of the VAT tax base that was lost (Krekó – P. Kiss, 2007). In the first half of the decade, fiscal policy sought additional funds on the revenue side in vain, because cutting tax allowances (reducing the opportunities for tax 31

I mmediate customs duty payments and the security system was introduced to improve customs duty compliance.

— 232 —

8 Free again: the 1990s

optimisation) and raising the rates could not offset the mounting losses stemming from tax evasion. Prior to the transition, the corporate income tax was a major source of revenue, amounting to 4–5 per cent of GDP, partly due to the level of profits that did not reflect the actual situation. This was transformed into the corporate tax in 1991, and it steadily represented revenues amounting to 2 per cent of GDP from that year on. Initially, this was the consequence of a high tax rate and the substantial amount of losses carried forward, but then from 1995 it was achieved as a combined result of a tax rate lowered to half of its original value and a smaller amount of losses carried forward. Control over expenditures also became looser, which – partly unintentionally – led to a slight increase in the primary expenditures of the general government (without one-off items) in real terms until 1994, and contributed to GDP production directly and to GDP growth indirectly, by increasing aggregate demand. At the same time, the structure of expenditures changed significantly. Public investments were implemented around 5–6 per cent of GDP until 1994. This mitigated the economic downturn, along with the stability of the number of government employees and their real wages (P. Kiss, 1998). With the appearance of unemployment, unemployment and municipal benefits rose to 3 per cent of GDP. Half of this was offset by the fact that consumer price subsidies were reduced in 1992, as they were cut for milk products, household energy and water and sewage services. On the other hand, corporate subsidies also dropped by 1.5 per cent of GDP in 1991, mainly because the earlier export subsidy scheme had been scrapped. A massive twin deficit had emerged by 1993-1994. Revenues diverged from the high level of expenditures, entailing a deficit on the order of 10 per cent in 1994, and there was a 6–8-per cent trade deficit in 1993-1994. The mounting external debt made the country vulnerable, especially at the time of the Mexican crisis that started in the winter of 1994. — 233 —

8 Free again: the 1990s

Hungarian economic policymakers managed the disequilibrium by considerably reducing the real value of household income and curbing consumption, in other words by using austerity measures. This included surprise inflation, which substantially decreased the real wages and consumption of the private sector, as nominal wages were set at the beginning of the year. Since the basis of pension indexation was changed from the wages of the current year to a retrospective approach in 1996, the missing compensation of wages affected real pensions doubly. Currency devaluation, the introduction of the additional customs duty and the strong increase in administered prices (energy and pharmaceuticals) entailed surprise inflation of 9.1 per cent in 1995, followed by another surprise increase of 3.7 per cent in 1996. However, public sector spending was not raised in line with inflation, which reduced the deficit, but this placed a particularly large burden on the most vulnerable social groups. Furthermore, investments of the central and local governments were also cut significantly.32 The impact on households’ real income persisted, as the proportion of wages and household transfers remained practically unchanged until the end of the millennium.33 Moreover, both the central budget and local governments (that followed traditional election investment cycles) cut their investment and capital transfer expenditures considerably, by 1.5 per cent. This was more of a temporary measure, but these expenditures only returned gradually to their earlier level by the end of the decade. The package announced in 1995 had a temporary impact, and it affected

usterity measures of approximately 8.5 per cent of GDP implemented in 1995-1996. Nevertheless, the A deficit improved by less than 7 per cent on account of the lost household tax revenues.

here were also measures that exerted a sustained effect, albeit very slowly. One such example is the raiT sing of the retirement age.

— 234 —

8 Free again: the 1990s

approximately 2 per cent of GDP,34 of which 1.7 per cent was the additional customs duty, which was gradually phased out in 1996-1997. This was coupled with making family benefits means-tested (amounting to 0.3 per cent of GDP), which entered into force a year later due to constitutional concerns, and it was eliminated in 1999 under the new family policy programme. Act LXXXII of 1997 introduced a three-pillar pension system, under which some of the contributions were paid in the private pension fund system. Joining the scheme was compulsory for younger generations. This framework increased the general government deficit, and the private funds were characterised by high operational expenses and low yields rather than healthy competition.35 The budget balance first deteriorated somewhat after the phasing out of the effect of the temporary items and then improved; certain areas were characterised by stability (necessary after the continuous changes), while others exhibited a structural transformation. The new government that entered office in 1998 introduced a new economic policy approach, seeking to achieve economic growth and equilibrium at the same time. The budget deficit declined again (to 3 per cent of GDP by 2000), inflation remained moderate and economic growth accelerated. The Széchenyi Plan public investment subsidy programme was initiated, which for example enabled Hungarian small and medium-sized companies to access funds easier and at more favourable terms than before. The housing subsidy system was reformed in 2000, but of course implementation took time. Nonetheless, the number of occupancy permits doubled between 2000 and 2004. 34

or a detailed explanatory table, see P. Kiss (1998), where the interest and the items within the general F government as well as those mentioning the efficiency of tax collection should be deducted to arrive at this result.

he amount of contributions reallocated to the second pillar was larger than expected, because the scheme T was not only joined by those for whom it was worth it based on the prevailing parameters at that time to abandon a portion of the state pension, but also by those for whom it was not worth it.

— 235 —

8 Free again: the 1990s

Chart 8-14: Breakdown of the annual change in nominal government debt by factors (1991-1999) 15

As percentage of GDP

-10

-15

Primary cash balance Extraordinary items

1999

-10

1998

-5

1997

-5

1996

1995

1994

1993

1992

1991

Cash interest balance Privatization revenue

Source: P. Kiss – Szapáry (2000).

The development of the government debt ratio can be divided into two distinct phases. After the initial growth, it peaked in 1993-1994, before contracting steadily. The breakdown of the factors of the nominal change in the debt shows that the interest balance increased from 1994, and from 1995 it can be observed that the proceeds of privatisation reduced the debt. Owing to the adjustment, the primary balance was positive from 1995. Extraordinary items exerted a major debt-increasing effect mainly in 1991 and 1993. This is because in the transition years, there were some extraordinary items that were linked to the previous period, but nonetheless

— 236 —

8 Free again: the 1990s

represented a heavy burden for the budget. By the end of the decade, the government debt ratio embarked on a sustainable downward path, thanks to the low deficit and high economic growth, and by 2000 it had fallen to 64 per cent, which had been unprecedented since the transition. The deficit and the government debt were affected by major extraordinary negative effects from time to time, primarily linked to the burdens from the previous decade. First, the home construction system used by households in the 1980s had become unsustainable, and the subsidy scheme was transformed to reduce the burden assumed until then by raising the interest on the preferential loans outstanding from 3 per cent to 15 per cent, and some of the loans were changed to market interest rates at 32 per cent. In the latter case, half of the credit debt was assumed by the state in exchange for the eliminated interest subsidy, providing a one-off capital transfer in 1991. The assumed housing loans amounting to 3.4 per cent of GDP were transformed into bonds, and thus the state’s liability towards the lending bank. Second, an earlier failed large government project also added to the debt. In the 1980s, the Gabčíkovo– Nagymaros Dams were to be built partly from an Austrian loan, and the company that took it out should have made the payments by delivering electricity. In 1991, Hungary decided not to complete the dams, and therefore the company undertaking the electricity deliveries had nothing to provide for payment from 1996. Therefore, in 1995 the budget took over from the company the debt amounting to 1 per cent of GDP. Finally, banks also had to be consolidated, because they were unable to meet the market-conform requirements of the 1991 Financial Institutions Act, the Accounting Act and the Bankruptcy Act. The issues inherited from the 1980s were revealed, just like the fact that banks’ operation did not improve in the early 1990s, when the deep economic downturn hit indebted companies hard. In 1993, the government had to make a capital transfer amounting to 6 per cent of GDP, followed by smaller amounts in the subsequent years.

— 237 —

8 Free again: the 1990s

By the end of the decade, Hungary’s debt ratio was still relatively high compared to the country’s level of development, although the former had decreased steadily, while development had increased. Relative indebtedness was higher in several countries, but Hungary started to approach the more favourable position of Slovakia and Poland.36 Chart 8-15: GDP per capita (PPP) and government debt in EU countries (1999) 140

Public debt, as percentage of GDP

120

100

EL BG

LV 0

ES PT

DE IE

AT NL

RO LT

20 0

EE 5,000

10,000

15,000

20,000

25,000

30,000

35,000

GDP per capita (PPP), USD

Source: World Bank, European Commission.

hen interpreting the data, it must be taken into account that a massive debt forgiveness was implemented W in Poland in the 1990s.

— 238 —

8 Free again: the 1990s

References Ábel, I. – Szakadát, L. (1987): A bankrendszer átalakulása Magyarországon 1987–1996 között. (Development of the banking system in Hungary between 1987 and 1996), Közgazdasági Szemle. Báger, G. – Kovács, Á, (2004): Privatizáció Magyarországon. (Privatisation in Hungary), Hungarian State Audit Office, Institute for Development and Methodology, Budapest, 2004. Csermely, Á. – Vincze, J. (1999): Leverage and foreign ownership in Hungary. MNB Working Paper 1999_1, Magyar Nemzeti Bank. Horváth, Á. – Jakab, M.Z. – P. Kiss, G. – Párkányi, B. (2006): Myths and Maths: Macroeconomic Effects of Fiscal Adjustment in Hungary. MNB Occasional Paper, no 52. Jakab, M.Z. – Szapáry, Gy. (1998): A csúszó leértékelés tapasztalatai Magyarországon. (Experiences with crawling-peg devaluation in Hungary), Vol. XLV, October 1998 (pp. 877–905). Kopátsy, S. (1993): Gazdaságpolitikai úttévesztés. (Misguided economic policy), Budapest, Privatizációs Kutatóintézet. Kornai, J. (1995): Négy jellegzetesség. A magyar fejlődés politikai gazdaságtani megközelítésben. Első rész. (Four features. The Hungarian development in an economic approach. Part One), Közgazdasági Szemle Vol. XLII, December 1995 (pp. 1097–1117). Kornai, J. (1996): Kiigazítás recesszió nélkül. (Consolidation without recession), Közgazdasági Szemle, Issues 7–8. Kornai, J. (2007): Szocializmus, kapitalizmus, demokrácia és rendszerváltás. Nyolc tanulmány (Socialism, capitalism, democracy and the political transition. Eight studies), Akadémiai Kiadó, Budapest, 2007. Köves, A. (2003): A KGST-kereskedelemtől az EU-csatlakozásig, A kereskedelmi reorientáció néhány főbb kérdése a rendszerváltó országokban, különös tekintettel Magyarországra, II. Reorientáció után – a tagság küszöbén. (From Comecon trade to EU accession. Some of the main issues in connection with trade reorientation in post-Soviet countries, with a special focus on Hungary, Part II. After the reorientation – On the verge of membership), Közgazdasági Szemle Vol. L, September 2003 (pp. 765–778). Krekó, J. – P. Kiss, G. (2008): Adóelkerülés és adóváltoztatások Magyarországon. (Tax evasion and tax changes in Hungary), MNB Bulletin. Krekó, J. – P. Kiss, G. (2007): Adóelkerülés és a magyar adórendszer. (Tax evasion and the Hungarian tax system), MNB Occasional Papers 65. Matolcsy, Gy. (1991): Lábadozásunk évei – A magyar privatizáció. Trendek, tények, privatizációs példák. (The years of our recovery – Privatisation in Hungary. Trends, facts, privatisation examples), Tulajdon Alapítvány–Privatizációs Kutatóintézet, Budapest. Matolcsy, Gy. (1996): Gazdasági és társadalmi sokkterápiák 1990 és 1995 között Magyarországon. (Economic and social shock therapies in Hungary in 1990–1995), Társadalmi Szemle, 51. 1996.

— 239 —

8 Free again: the 1990s Matolcsy, Gy. (1997): Kiigazítás recesszióval – Kemény költségvetési és puha piaci korlát. (Consolidation with recession – The hard budget constraint and the soft market constraint), Közgazdasági Szemle, Vol. XLIV, September 1997 (pp. 782–798). Matolcsy, Gy. (1998): Sokk vagy kevés. (Shock or few), Kairosz, Budapest. Piazolo, D. (2001): The Integration Process between Eastern and Western Europe. Kiel Studies 310, Kiel Institute of World Economics, Springer-Verlag, pp. 178. P. Kiss, G. (1998): Az államháztartás szerepe Magyarországon. (The role of general government in Hungary), MNB Working Papers, 1998/4. P. Kiss, G. – Szapáry, Gy. (2000): Fiscal Adjustment in the Transition Process: Hungary, 1990-1999. Post-Soviet Geography and Economics, Vol 41. No. 4. Surányi, Gy. – Vincze, J. (1998): Inflation in Hungary, 1990–97, in Moderate Inflation: The Experience of Transition Economies, edited by C. Cottarelli and Gy. Szapáry, International Monetary Fund, National Bank of Hungary, Washington D.C. 1998.

— 240 —

9 From Vanguard to the Rear: the 2000s Gábor Dániel Soós – Eszter Szabó Main economic indicators 2000-2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP growth

4.5

4.1

4.7

4.1

4.8

4.2

4.0

0.2

1.1

-6.7

GDP/capita growth

4.5

4.0

4.8

4.1

5.2

4.6

4.0

0.6

1.1

-6.4

Difference between the GDP/capita growth in Hungary and Austria

1.4

3.0

3.6

3.9

3.2

3.1

1.2

-2.7

-0.2

-2.4

Change in consumer price index

9.8

9.2

5.3

4.7

6.8

3.6

3.9

8.0

6.1

4.2

Government debt as percentage of GDP

55.7 52.3 55.6 58.1 58.9 60.6 64.5 65.7 71.8 78.2

Unemployment rate

6.6

5.7

5.6

5.8

7.2

7.5

7.4

7.8

10.0

Current account balance as percentage of GDP

-8.9

-6.1

-6.4

-8.2

-9.1

-7.2

-7.1

-0.7

Interest rate level

11.5 10.9

9.1

8.5

11.4

7.2

6.7

7.8

8.7

8.6

Source: WDI, Eurostat, Penn World table, Maddison, MNB.

At the time of the millennium, with external and internal balances preserved, Hungary was characterised by strong economic growth: macroeconomic indicators improved, while government debt and the vulnerability of the country declined. The favourable economic developments then changed fundamentally from 2002. Although growth still continued for years, major imbalances evolved, resulting in an expansion in both public and private sector debt. Unsustainable convergence materialised for the rest of the decade. In addition to the undisciplined budget and the deficit, which became persistent, households’ overspending also raised Hungary’s vulnerability, and the significant external borrowing was mostly used for unproductive purposes. — 241 —

In 2006, fiscal policy made an unsuccessful adjustment attempt. The structure of the measures was mostly wrong, and thus they made the situation even worse. The measures focused primarily on adjusting the budget deficit and significantly restrained economic growth, while failing to eliminate the structural weaknesses of growth and its elements that resulted in the vulnerability of the economy. The growth rate of the Hungarian economy increasingly lagged behind the EU and Visegrad countries (Czechia, Poland and Slovakia), owing to low activity and employment, decelerating productivity growth and insufficient investment activity at the level of the national economy. The investment rate had already started to decline in the years well before the 2008-2009 crisis, and its trend deviated significantly from developments in the region. Activity and employment rates were among the lowest in the European Union. Prior to the crisis, the high tax burdens related to labour as well as the overly generous social system were obstacles to the development of the labour market on both the demand and supply sides. Against the background of excessive fiscal spending, the budget deficit was persistently high. As a result of the mounting government debt, country risk spreads also increased. In addition, the household sector also became heavily indebted. The upturn in foreign currency lending further exacerbated Hungary’s vulnerability. During this period, monetary policy was unable to achieve its inflation target: the monetary rigour reflected in the central bank base rate – which was kept at a high level – was unable to control the inflationary effects of the overspending fiscal policy, while monetary transmission tended to lose its efficiency in view of households’ increasing demand for lower-interest foreign currency loans. Moreover, from time to time economic policy also presumed that it was possible to manage the budget deficit by accelerating inflation. The existing structural problems, the incorrectly structured, unsuccessful fiscal adjustment, significant dissonance between fiscal and monetary policies as well as the global crisis resulted in a severe recession in Hungary in 2009. Hungary was — 242 —

9 From Vanguard to the Rear: the 2000s

in a weakened state when it was hit by the global crisis. As a result of the economic policy that relied upon external indebtedness, imbalances and structural problems evolved in various areas of the economy, contributing to a deterioration in Hungary’s competitiveness, the halt of convergence and rising vulnerability. Harmony between fiscal and monetary policies was also missing during the period of crisis management. Both fiscal and monetary policies attempted to manage the most serious crisis of the past decades by tightening, making the situation even worse. In managing the crisis in 2008 and 2009, both fiscal and monetary policies chose the wrong recipe, while the previously accumulated structural problems were also not solved. The gap between the level of development of the Hungarian economy and the levels of the developed European countries and countries of the region was widening. At that time, Hungary, which had previously been a front-runner, became a straggler,37 and it was only possible to restart convergence thanks to the changes in fiscal and monetary policies in 2010 and 2013, respectively.

9.1 Fiscal policy as the main cause behind the development of imbalances With its improper structure and overspending from 2002, fiscal policy was the origin of the continued deepening of Hungary’s structural problems in the first decade of the 2000s. The undisciplined surge in spending already started in 2002, when the budget deficit as a share of GDP more than doubled in a year. Lack of sustainability was a general feature of budgets during that period. The rising deficit was mainly attributable to elements of a social nature that entailed high expenditures, but the measures were not accompanied by economic policy steps supporting sustainability.

See: Matolcsy (2008b).

— 243 —

9 From Vanguard to the Rear: the 2000s

The government already spent significant amounts in the first hundred-day programme, without providing for their cover. The deficit was persistently around 7–9 per cent in the ensuing years, accompanied by a significant current account deficit (Chart 9-1). Starting from 2002, financial equilibrium was upset in Hungary: while the general government deficit was below 4 per cent in 2001, in the next year the deficit was already close to 9 per cent. The fiscal balance position also did not improve following EU accession in 2004, and in 2006 the general government deficit continued to exceed 9 per cent. As a result, starting from accession in 2004, Hungary was already subject to an excessive deficit procedure (EDP) of the European Union. Accordingly, prior to the 2008-2009 global financial crisis, imbalances of a domestic nature had already built up, indicating the presence of internal structural problems in the economy. Chart 9-1: Current account balance and general government balance-to-GDP ratios in Hungary 8

As percentage of GDP

−4

−6

−8

−10

−12

Current account balance

Source: Eurostat and MNB.

— 244 —

Government balance

2010

−4

2009

-2

2008

-2

2007

2006

2005

2004

2003

2002

2001

2000

9 From Vanguard to the Rear: the 2000s

In the period from 2002 to 2006, the growth rate of the Hungarian economy was above 4 per cent, which temporarily concealed the continuous deterioration in the structural situation. With a lack of adequate domestic savings, the expansion in GDP could only be financed through rising external indebtedness. High twin deficits emerged. Despite the large fiscal and current account deficits, Hungary’s growth was still slower than that of the other countries in the region. The high budget deficit resulted in a continuous and significant increase in government debt. If the general government continuously accumulates debt, after some time it may lose the confidence of investors, and the financeability of the government debt may become jeopardised. A rise in risk premia leads to an increase in real interest rates, making the financing of debt more difficult. A similar process took place in Hungary as well, resulting in a higher risk premium. Moreover, the government mainly financed the deficit from external sources, which contributed significantly to the growth in external debt, also entailing major roll-over and exchange rate risks (Parragh, 2017a) (Chart 9-2).

— 245 —

9 From Vanguard to the Rear: the 2000s

Chart 9-2: Net external debt-type financing by sectors 60

As percentage of GDP

0 2010

0 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Extended General Government Corporations Net external debt Banking system

Note: Excluding intercompany loans. Source: MNB.

In parallel with the high budget deficit, a large current account deficit evolved as well. Between 2002 and 2008, the average current account deficit was 7.5 per cent, indicating a continuous deterioration in the external balance. It is a frequent phenomenon in emerging economies that the current account shows a deficit. If the deficit is caused by a high level of investment, it may contribute to lasting economic growth, but one important factor is what kind of funds are involved in financing the deficit. Until 2002, non-debt liabilities – mainly FDI inflows – were typically responsible for financing the deficit, but thereafter debt liabilities became dominant (Hoffmann et al., 2013). Available domestic savings were insufficient, and thus all agents of the Hungarian economy (state, companies, households) accumulated significant amounts of external debt, a major portion of which was denominated in foreign currency. — 246 —

9 From Vanguard to the Rear: the 2000s

In the same period, households’ net savings declined, despite the high forint interest rates. Net savings as a proportion of income sank to nearly zero per cent. By comparison, when economic growth occurs in conjunction with external and internal equilibria, the rate is consistently around 9–10 per cent of household incomes. In the period after 2002, households’ borrowing increased continuously, further stimulated by irresponsible fiscal policy, generating an unfavourable spiral. The functioning of the system was supported by external financing for a while, but the external funds were not used for long-term, productive purposes. They mainly financed household consumption and investment in real estate. Dependence on external funds increased, and after some time it even became ‘selfinducing’ due to the significant spread between domestic and foreign interest rates (in view of the high central bank base rate in Hungary, households had access to foreign currency loans with much more favourable interest rate conditions compared to forint loans) (Parragh, 2017b). The situation was further exacerbated by the fact that the macroprudential rules, which have now become commonplace, did not exist at that time, and thus the longer-term persistence of excessive indebtedness was inherent in the system. The regulatory environment at that time made a fundamental contribution to the excessive indebtedness: external funding was available for customers who did not have natural exchange coverage, and thus they were completely exposed to exchange rate fluctuations. In addition, the conditions of access to loans were also loose. These developments were further strengthened by irresponsible fiscal spending and the increase in the country risk premium due to the rising government debt. As a result, the interest expected on forint assets increased further, which also channelled households towards foreign currency loans due to the aforementioned high spread between domestic and foreign interest rates.

— 247 —

9 From Vanguard to the Rear: the 2000s

9.2 Adjustment attempt in 2006: wrong structure, no success Following the parliamentary elections in 2006, perceiving the unsustainable economic policy of the previous years, the government at that time made an adjustment attempt, which materialised in an expressly inadequate structure, and thus it made the situation even worse instead of improving it. They only tried to remedy the fiscal part of the whole malfunctioning system, without terminating the systemic risk elements. Moreover, the fiscal adjustment also proved to be unsuccessful. It consisted mainly of austerity-type measures, and although it resulted in a temporary decline in the deficit compared to the record-setting levels from the previous years, economic growth stopped in Hungary well before the outbreak of the global crisis, as the structural problems remained unresolved. The fiscal adjustment attempt in 2006 was essentially a package of austerity measures, mainly relying on income elements: it contained tax and contribution increases. In addition to raising the preferential VAT rate from 15 per cent to 20 per cent, taxes and contributions on labour were also increased (for example the health insurance contribution from 4 per cent to 7 per cent). The simplified entrepreneurial tax was increased (from 15 per cent to 25 per cent), and development tax benefits were also reduced. At the same time, however, the fiscal tightening undermined itself: employment fell, and investment activity declined, thus limiting opportunities for economic growth. Households’ disposable income decreased, and the growth rate of the economy decelerated to nearly zero. Following the 2006 fiscal adjustment, the liberalised credit market, the lack of macroprudential policy and the high level of domestic interest rates also channelled households towards foreign currency loans. The domestic banking sector increased its lending in foreign currency, mainly in Swiss francs (Matolcsy, 2008a), which proved to be a major financial stability risk, as households also accumulated a significant amount of foreign currency debt. Moreover, external indebtedness further increased the vulnerability of the domestic economy. — 248 —

9 From Vanguard to the Rear: the 2000s

9.3 Structural problems and consequences In the period between 2002 and 2008, Hungarian activity and employment rates were among the lowest in the European Union (Chart 9-3). The labour market imbalance was reflected by the low levels of activity and employment, as well as by the persistently high unemployment rate. All of this resulted in a significant shortfall in the labour market compared to EU countries as well as to the countries in the region. Development of the labour market was also hindered by high taxes on labour and extremely generous social benefits, which had a negative impact on both labour supply and labour demand (Kátay, 2009). Chart 9-3: Activity rates in EU Member States 80

Per cent

80 70

0 Malta Hungary Italy Croatia Bulgaria Greece Belgium Poland Luxembourg Romania France Spain Lithuania Slovenia Slovakia Latvia Czechia Germany Austria Estonia Ireland Portugal Cyprus Finland United Kingdom Netherlands Sweden Denmark

Note: From 15 to 74 years. Average between 2000 and 2010. Source: Eurostat

Following the dotcom crisis in the early 2000s, investment rates both in Hungary and the region moved on a downward trend between 2001 and 2005 (Chart 9-4). US — 249 —

9 From Vanguard to the Rear: the 2000s

technology stock prices collapsed in the spring of 2000, resulting in the cancellation of investment plans in the infocommunication and electronics sectors. Accordingly, investment activity declined in the sectors that had previously generated the most dynamic growth (Matolcsy, 2015). The development of investment rates indicates that Hungary was unable to exploit the possibilities provided by EU accession, especially as far as new funds for investment were concerned. In the region, investment rates started to rise from 2005. In Hungary, however, investment activity continued to falter due to the buildup and increase in risks, as a result of irresponsible fiscal spending, and thus a significant lag could be observed in 2008. The regional average exceeded 28 per cent, while the Hungarian investment rate was around 23 per cent (Chart 9-4). Chart 9-4: Development of investment rates in Hungary and the region 40

As percentage of GDP

Regional investment rates Hungary

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Average of the CEE region

Note: Seasonally adjusted data. The band depicts the minimum and maximum of the countries in the CEE region. Countries of the CEE region: Czechia, Poland, Romania and Slovakia. Source: Eurostat.

— 250 —

9 From Vanguard to the Rear: the 2000s

Low investment activity restrains GDP growth not only in the given year, as it also has a negative impact on future growth potential as well. Capacities that would contribute to economic growth in the following years through new production and exports are not created. A low level of investments indicates slower growth and lower competitiveness (Báger et al., 2012). The situation was made even worse by the strong corporate duality. The productivity of SMEs was well below that of large corporations. Financing of the SME sector in this period was unfavourable; it was more difficult for them to obtain adequate funds, and thus their competitiveness also did not improve. The level of investments was low in a regional comparison. Moreover, its structure was not appropriate. Looking at the investment rate in a sectoral breakdown, compared to the countries in the region, Hungary’s performance was worse mainly in the field of corporate investment (Chart 9-5). The value of corporate investments as a proportion of GDP fell short of the average of the region, and this lag increased further following EU accession.

— 251 —

9 From Vanguard to the Rear: the 2000s

Chart 9-5: Deviation of domestic investment rate from the average of Visegrad countries in a sectoral decomposition 3

As percentage of GDP

-4

Households

2010

-3 2009

-3 2008

-2

2007

-1

-2

2006

-1

2005

2004

2003

2002

2001

2000

Government Corporate sector Difference of Hungary and V3

Source: Eurostat.

Until 2006, i.e. the start of the first austerity package, investments by households exceeded the average of the region compared to GDP. However, the investment surplus stemmed from the indebtedness of Hungarian households and especially from the upswing in foreign currency lending. As a result of state programmes, the number of newly built homes completed rose at the beginning of the decade. In 2004, more than 40,000 new homes were completed (Chart 9-6), but then a decline started, and foreign currency financing became determinant. Similar developments were observed in government investments as well.

— 252 —

9 From Vanguard to the Rear: the 2000s

Chart 9-6: Number of new completions 45

Thousand pcs

0 2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: HCSO.

The absence of structural reforms had a negative impact not only on investment and the labour market, but also on the efficiency of production. Labour market problems (low activity and employment), the inadequate level and structure of investments as well as the decelerating increase in productivity all contributed to the fact that the growth rate of the Hungarian economy increasingly fell behind that of the Visegrad countries (Chart 9-7). Prior to the crisis, average growth in the Visegrad region was close to 8 per cent, while growth in Hungary stopped by 2007. Existing structural problems, the unsuccessful fiscal adjustment in the wrong structure as well as the global crisis inevitably resulted in deep recession in Hungary in 2009. Moreover, developments in the economy were further exacerbated by the need to adjust again

— 253 —

9 From Vanguard to the Rear: the 2000s

in 2009 (which this time meant expenditure cuts as well, in addition to tax increases). Hungary was more seriously affected by the crisis than the other countries in the region, and the recovery was also more protracted as a result of previously existing financing and structural problems as well as the inadequate crisis management. Chart 9-7: Development of economic growth in Hungary, the euro area and the V3 countries 12

Per cent

-2

-4

-6

-8

Eurozone

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Hungary

Note: The band depicts the minimum and maximum of the V3 countries. V3 countries: Czechia, Poland and Slovakia. Source: Eurostat.

Structural problems can also be identified when examining the expenditure side breakdown of economic growth. Household consumption was the main contributor to GDP expansion. Although buoyant domestic demand is an important source of growth, the expansion in consumption was supported by unsustainable processes,

— 254 —

9 From Vanguard to the Rear: the 2000s

initially by the overly generous social benefit system and later by the overheatedness of the credit market. As discussed above, investment – which is the other component of domestic demand – was already unable to make a major contribution to the expansion of the economy in the pre-crisis years. As Hungary is a small, open economy, exports have a considerable weight within GDP, and they increased almost continuously. In line with that, the level of imports as a percentage of GDP also rose gradually. Looking at the other, production side breakdown of GDP, growth was primarily supported by services and industry, whereas construction restrained the performance of the economy between 2006 and 2010 (Chart 9-8). The weight of services within GDP increased steadily until the crisis, while the level of industry as a percentage of GDP remained practically unchanged. Within the services sector, accommodation and food service activities, real estate activities, information and communication as well as professional and scientific activities played a key role until 2006. However, following the unsuccessful fiscal adjustment in 2006, the services subsectors made hardly any contribution to the weak growth. Within industrial production, until the beginning of the crisis, electronics expanded more rapidly than vehicle manufacturing. The weight of both construction and agriculture declined in the pre-crisis period.

— 255 —

9 From Vanguard to the Rear: the 2000s

Chart 9-8: Decomposition of change in production side GDP 6

Percentage point

Per cent

-6

-8

-8 2010

-4

2009

-4

2008

-2

2007

-2

2006

2005

2004

2003

2002

2001

Taxes less subsidies Services Construction Industry Agriculture GDP (right axis)

Source: HCSO

In summary, as a result of financing and structural problems, Hungary’s convergence to the average of the European Union – in terms of per capita GDP measured at purchasing power parity – stopped for nearly a decade after 2005 (Chart 9-9). Czechia further increased its advantage vis-à-vis Hungary, while – from a lower starting level – Slovakia and Poland first reached, and then exceeded the level of development of Hungary.

— 256 —

9 From Vanguard to the Rear: the 2000s

Chart 9-9: Development of GDP per capita measured in purchasing power parities in the Visegrad countries compared to the average of EU28 100

EU28=100

100

Hungary

Poland

Slovakia

2010

40 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Czechia

Source: Eurostat.

9.4 Monetary policy and lending An inflation targeting system was introduced in Hungary in 2001. Following that, inflation, which had been persistently high before, started to decline. From the early 2000s, imported inflation was at a low level. At the same time, for most of the period domestic monetary policy was unable to achieve the inflation target, and

— 257 —

9 From Vanguard to the Rear: the 2000s

inflation was more volatile compared to the countries in the region. After 2002, the undisciplined fiscal policy contributed to the renewed rise in inflation from both the demand and supply sides (Szapáry, 2006). Fiscal measures (tax increases) in 2006 raised inflation to 8 per cent, i.e. to well above the 3-per cent target (Chart 9-10). At the same time, the steps taken by the government in power also contributed to rising inflation expectations. The leeway of monetary policy was reduced as the increase in foreign currency lending (mainly Swiss franc) limited monetary transmission. Chart 9-10: Inflation decomposition 12

Per cent

-2

Food Fuel and market energy Primary effects of government measures Demand sensitive inflation Inflation

Source: HCSO.

— 258 —

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

9 From Vanguard to the Rear: the 2000s

In addition to the undisciplined fiscal policy, monetary policy decisions also exacerbated the economic situation. The increase in external debt due to the significant deficit of the general government and the current account resulted in weakening of the forint. In view of the high level of external debt, the central bank had to pay special attention not only to inflation but also to the exchange rate. In early 2003, a high amount of speculative capital flowed into the country. The MNB reacted to the capital inflow by cutting the interest rate, and thus the appreciation pressure ceased. Following that, however, the amendment to the exchange rate band shook the confidence of investors, which led to capital withdrawal, and thus the forint depreciated considerably, and the risk premium also rose (Szapáry, 2006). The central bank raised the base rate in two steps to 12.5 per cent (Chart 9-11), which was considered a high level in a historical and regional comparison as well. Although further depreciation of the exchange rate was stopped by the high interest rate level, the artificially strong exchange rate and rising domestic lending rates contributed to the upswing in foreign currency lending. External indebtedness became the highest in the banking sector, although in fact it represented the indebtedness of households (Chart 9-2). The Hungarian banking sector started to extend loans in foreign currency, mainly in Swiss francs. Accordingly, economic agents were able to substitute expensive forint funds with loans denominated in foreign currency. Between 2004 and 2008, the amount of loans granted to households in HUF declined, but lending to households in foreign currency – mainly in Swiss francs and to a lesser degree in euros – increased considerably until 2010. As a percentage of GDP, foreign currency loans accounted for an increasing portion of the loans outstanding, resulting in a higher exchange rate risk for the private sector due to households’ uncovered foreign exchange position (Matolcsy, 2007).

— 259 —

9 From Vanguard to the Rear: the 2000s

Chart 9-11: Central bank base rates in the Visegrad region 20

Per cent

Hungary

Poland

Slovakia

2010

2009

2008

2007

0 2006

0 2005

2004

2003

2002

2001

2000

Czechia

Source: MNB, CNB, NBP and NBS.

Foreign currency loans and the overheatedness of the credit market posed a major risk to financial stability. Consumption expanded more rapidly than disposable income, and, in parallel with the upturn in lending, households’ net financial savings rate also declined (Chart 9-12). A reduction of the previously accumulated excessive debt started after the crisis, and thus consumption shrank.

— 260 —

9 From Vanguard to the Rear: the 2000s

Chart 9-12: Evolution of households’ consumption, investment and financial savings rates as a percentage of disposable income 12

Per cent

-2

80 2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Financial savings rate Investment rate Consumption rate (right axis)

Source: HCSO and MNB.

9.5 Wrong crisis management measures, bad economic policy mix As the economy was not restructured in 2006, the crisis found Hungary in an extremely weakened state. The failure of the growth model relying upon external indebtedness became obvious. As a result of the financing and structural problems of the pre-crisis period as well as the inadequate crisis management measures, Hungary suffered one of the most serious crises in Europe.

— 261 —

9 From Vanguard to the Rear: the 2000s

In the area of crisis management, neoliberal economic philosophy, which was dominant before, focuses on the implementation of supply reforms, which result in a decline in demand in the short run. A typical crisis management measure is to cut government expenditures, including social benefits in particular. By contrast, the views propagating Keynesian demand expansion and the necessity of widely distributing the burdens of reforms appeared increasingly strongly. Capital withdrawal started as a result of the crisis, and amid the international market sentiment of risk aversion, the forint depreciated by around 30 per cent against the euro in nearly half a year. Depreciation of the exchange rate had a particularly severe impact on Hungarian households through the high foreign currency exposure. Households’ payment-to-income ratios increased drastically as a result of the weakening of the exchange rate. At the same time, the possibilities to finance the public debt became more limited. Moreover, an excessive deficit procedure (EDP) had also been going on against Hungary since 2004, representing a further difficulty in terms of crisis management. Fiscal consolidation became indispensable again in a situation when the state should have carried out a stimulation of demand. However, the limited economic policy leeway did not make that possible. Another fiscal adjustment became unavoidable, and the sustainability of government debt had to be ensured. Crisis management was also hindered by an inappropriate assessment of the problems. The measures concentrated exclusively on the financial situation of the economy, resulting in a further decline in the already ailing aggregate demand, i.e. in restrictions. The measures focusing on the expenditure side could not be successful, because those who applied fiscal tightening significantly underestimated the size

— 262 —

9 From Vanguard to the Rear: the 2000s

of the fiscal multiplier38 (the impact of one unit of government measure on growth) and its power in a recessionary environment (Baum et al., 2012; Matolcsy – Palotai, 2018). In the short run, fiscal tightening may result in an increase in debt ratios, as it may imply a decline in output (Eyraud – Weber, 2013). The government restrained the expenditures of the general government in vain; the similar – or even greater – decline in domestic demand undermined the fiscal consolidation through the decreasing tax revenues. Restoring the balance was unsuccessful, and the measures resulted in a further deepening of the recession. Unemployment rose, and the already high debt ratios increased further. The crisis management, which was based on classical austerity measures, only paved the way for further adjustments. As a result of its serious vulnerability problems, Hungary quickly needed the rescue loan of the IMF and the European Commission after the outbreak of the global financial crisis. This reduced Hungary’s sovereignty, and further fiscal tightening was implemented. The measures put households in an extremely difficult situation. The general VAT rate was increased, wages in the public sector and the family allowance were frozen, conditions of child care allowance and child care fee were tightened, the 13th month income and the 13th month pension were terminated, pension indexation changed, and the retirement age was raised. Simultaneously with that, the instalments of foreign currency loans also increased as a result of the weakening of the exchange rate. The modest reduction of contributions burdening labour and the slight increase in the minimum wage were unable to offset the negative impacts on households, resulting in a decline in real income and a downturn in borrowing. Balance was not restored, and the measures implemented entailed major real economy sacrifices and persistently high inflation (Matolcsy, 2015).

comprehensive summary of the correlation between fiscal multipliers and the cyclical position of the A economy is provided by Molnár et al. (2017).

— 263 —

9 From Vanguard to the Rear: the 2000s

Austerity measures and the gradual decline in the wage share resulted in a drop in household consumption, and output also shrank significantly in parallel with that, leading to further deterioration in Hungary’s debt indicators. In addition, in spite of the availability of EU funds, investment suffered an even greater downturn than consumption, as a result of which Hungary’s longer-term growth potential declined further. In view of the high fiscal multiplier, the role of fiscal policy in crisis management proved to be crucial in the downturn after the crisis (Matolcsy – Palotai, 2018). As Hungary’s trading partners also fell into recession, external demand was also unable to contribute to offsetting the losses suffered on the expenditure side of the budget. The leeway of monetary policy was also limited. The high foreign currency exposure and the weakening of the exchange rate did not allow the easing of monetary conditions. This was because a reduction in interest rates would have resulted in a further weakening of the exchange rate, which would have led to a further increase in instalments through the revaluation of foreign currency loans, thus causing an even greater decline in households’ disposable income and in consumption. Restoring financial stability, formulating adequate supervisory regulations as well as adopting monetary policy measures that support crisis management and then economic growth could also take place only later. Accordingly, upon managing the crisis in 2008 and 2009, both fiscal and monetary policies chose the wrong recipe, and the structural problems that had built up in the previous years also contributed to it. As a result, the decline in Hungary’s economic performance was one of the largest among the countries of the EU (Chart 9-13).

— 264 —

9 From Vanguard to the Rear: the 2000s

Chart 9-13: Annual change in GDP in EU countries in 2009 4

Per cent

Per cent 4 2

-2

-4

-6

−8

−10

−12

−14

−16

−16 Lithuania Estonia Latvia Finland Slovenia Croatia Hungary Germany Romania Slovakia Italy Ireland Denmark Czechia Sweden Luxembourg United Kingdom Greece Spain Austria Netherlands Bulgaria Portugal France Malta Belgium Cyprus Poland

Source: Eurostat.

In addition, the classical, tightening-based crisis management revealed further problems as well. Voters’ authorisation of the governing party declined considerably, resulting in the development of political instability and a government crisis.

— 265 —

9 From Vanguard to the Rear: the 2000s

Financing and growth problems turned into a political crisis, and thus the support of economic policy by the society for the implementation of reforms was also missing after some time. Accordingly, a turnaround to reach a balance could only be achieved with an economic policy that went beyond the traditional fiscal tightening measures. This was only able to take place following the change of government in 2010.

References Báger, G. – Galbács, P. – Pulay, Gy. (2012): Az állami költségvetés makrogazdasági kockázatainak elemzése (Analysis of the macroeconomic risks of the state budget). Közgazdasági Szemle, Vol. LIX., September 2012, pp. 1014–1036. Baum, A. – Poplawski-Ribeiro, M. – Weber, A. (2012): Fiscal Multipliers and the State of the Economy. IMF Working Paper, 12/286. Eyraud, L. – Weber, A. (2013): The Challenge of Debt Reduction during Fiscal Consolidation. IMF Working Paper, 13/67. Hoffmann, M. – Kóczián, B. – Koroknai, P. (2013): Developments in the external balance of the Hungarian economy: indebtedness and adjustment. MNB Bulletin, Special Issue, October 2013, pp. 71–82. Kátay, G. (ed., 2009): Az alacsony aktivitás és foglalkoztatottság okai és következményei (The reasons and consequences of low activity and employment). MNB Occasional Papers 79 Matolcsy, Gy. (2007): A neoliberális gazdaságpolitika téveszméi (The delusions of neoliberal economic policy). Polgári Szemle. 2007. (Vol. 3) Issue 7–8, pp. 6–16. Matolcsy, Gy. (2008a): Harmadik sokkterápia (Third Shock Therapy). Magyarország politikai évkönyve 2007-ről (Political Yearbook of Hungary – 2007). Vol. II: Közpolitika (Public politics). 2008, pp. 707–723. Matolcsy, Gy. (2008b): From Vanguard to Bringing Up the Rear – A Chronicle of Lost Years. Éghajlat Könyvkiadó, 2008. Matolcsy, Gy. (2015): Egyensúly és növekedés. Konszolidáció és stabilizáció Magyarországon, 2010–2014 (Balance and Growth. Consolidation and Stabilisation in Hungary, 2010–2014). Kairosz Kiadó, Budapest, 2015. Matolcsy, Gy. – Palotai, D. (2018): The Hungarian Model: Hungarian Crisis Management in View of the Mediterranean Way. Financial and Economic Review, Vol. 17. Issue 2, June 2018, pp. 5–42. Molnár, Gy. – Soós, G.D. – Világi, B. (2017): Fiscal Policy and the Business Cycle, Financial and Economic Review. Vol. 16, Issue 4, December 2017, pp. 58–85.

— 266 —

9 From Vanguard to the Rear: the 2000s Parragh, B. (2017a): Competitiveness and Economic Stimulus. New Dimensions and Instruments of Monetary Policy. Polgári Szemle: Gazdasági és Társadalmi Folyóirat, 13 (Spec.), pp. 151-166. Parragh, B. (2017b): Monetáris hitviták. Pénzügyi Szemle, 62(2), pp. 234. Szapáry, Gy. (2006): Experience with inflation targeting in Hungary. Public Finance Quarterly, Volume LI, 2006, Fourth Issue.

— 267 —

10 An era of balance and growth: the 2010s Judith Balázs – Gábor Dániel Soós Main economic indicators 2010-2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 GDP growth

0.7

1.8

-1.5

2.0

4.2

3.8

2.2

4.3

5.1

4.9

GDP/capita growth

0.9

2.2

-1.2

2.4

4.3

3.4

2.2

4.7

5.0

Difference between the GDP/capita growth in Hungary and Austria

-0.8

-0.3

-1.5

2.9

4.4

3.5

1.8

3.0

3.5

4.3

Change in consumer price index

4.9

3.9

5.7

1.7

-0.2

-0.1

0.4

2.4

2.8

3.4

Government debt as percentage of GDP

80.6 80.8 78.5 77.3 76.8 76.1 75.5 72.9 70.2 66.3

Unemployment rate

11.2 11.0 11.0 10.2

7.7

6.8

5.1

4.2

3.7

3.4

Current account balance as percentage of GDP

0.3

0.6

1.6

3.5

1.2

2.4

4.5

2.3

0.0

-0.9

Interest rate level

5.5

6.0

6.8

4.4

2.4

1.6

1.0

0.9

Source: WDI, Eurostat, Penn World table, Maddison, MNB.

The global economic crisis of 2008 caused considerable economic and social damage to the Hungarian economy, the effects of which were exacerbated by the austerity-based economic policy decisions. The new type of crisis management applied after 2010 proclaimed an economic policy that went beyond the traditional recipe of austerity. From 2010 onwards, there were a number of turning points in Hungarian economic history. Before 2010, the main problem was the high level of debt in addition to budgetary policy, so first of all Hungary needed a budgetary turnaround. This was aimed at sustainably improving the budgetary situation, which laid the foundations for a later turnaround in growth. The transformation of the tax system began, the — 269 —

10 An era of balance and growth: the 2010s

turnaround in the labour market started, and with it, new incentives went into effect in the labour market, contributing to the creation of hundreds of thousands of new jobs in the following years. In the meantime, internal and external balance was restored, and government debt relative to GDP was put on a sustainable downward path. From 2013 onwards, the full turnaround in economic policy was completed with the turnaround in monetary policy, and therefore the Hungarian economy was set on a growth path with a sustainable balance. The country avoided a credit crunch. Due to the post-2013 central bank programmes, corporate lending activity was the first to be relaunched. The re-expansion of retail lending took place in a healthy structure, and the introduction of macroprudential rules provided additional stability for the sustainable functioning of the country. As a result of the general economic recovery, the reduction of previous debts, the constantly improving labour market situation and the restoration of general confidence, a turnaround in investment and growth unfolded from 2013 onwards. Based on the experience of the 2010s, harmony between branches of economic policy can restore financial balance. In addition, it is important that fiscal and monetary policy steps be constantly complemented by structural reforms. The strategy pursued on this basis successfully stabilised Hungary, putting it back on a sustainable convergence path. In the following, we present the most important steps and results of the post-2010 crisis management and economic revival.

10.1 Budgetary turnaround Tax system transformation, labour market and motivation turnaround Economic crisis management required a tax reform that could ensure a sustainable budgetary balance while increasing employment and investment via structural — 270 —

10 An era of balance and growth: the 2010s

reforms, improving the situation of families and, through all of this, fostering economic growth. In the early 2010s, fiscal policy was simultaneously challenged by significant government debt (government debt relative to GDP exceeded 80 per cent) and a lack of growth reserves. Therefore, balance and conditions for growth had to be created at the same time, as both were missing. To achieve this dual goal, the government transformed the tax structure, and instead of taxes on labour, it focused on consumption-type taxes (Chart 10-1) (Matolcsy, 2015). Chart 10-1: Estimated (static) impact of the tax reform on each type of tax 6

As a percentage of GDP

-6

-8

-8 2019*

-4

2018

-4

2017

-2

2016

-2

2015

2014

2013

2012

2011

2010

Taxes on consumption Sectoral taxes (taxes on consumption) Sectoral taxes (taxes on capital) Taxes on labor Taxes on capital

Note: Data for 2019 are preliminary estimates. Source: MNB

— 271 —

10 An era of balance and growth: the 2010s

The new tax system provided an appropriate incentive for the existing inactive and unemployed to enter the labour market. The introduction of family taxation, the single-rate personal income tax, the Job Protection Action Plan and other targeted instruments all contributed to the overall reform of the tax system. The so-called marginal tax wedge (extra tax on extra work per unit) decreased significantly in Hungary after 2010. On the expenditure side of the budget, thanks to the structural reforms of the Széll Kálmán Plans, the focus shifted from aid to the promotion of employment, thus substantially transforming the labour market incentive system. Focus on the labour market Prior to the labour market turnaround, in addition to the high unemployment rate, Hungary had one of the lowest levels of activity and employment in the European Union. During the recovery from the crisis, bringing together people who had lost their jobs and companies that could potentially employ workers was hindered by geographical, sectoral and skills matching problems. After 2010, a number of government measures were taken to create jobs. These measures contributed to an increase in the number of people employed and, at the same time, to a decrease in the number of unemployed persons. One of the main means of this was to reduce employee and employer tax and contribution burdens on wages (Matolcsy – Palotai, 2018). The increase in labour demand was stimulated by the single-rate personal income tax system, the family taxation regime, the 2011 reduction of tax wedge which was high in a European comparison, the Job Protection Action Plan launched in 2013 and the expansion of public work programmes. Under the Job Protection Action Plan, a social contribution tax allowance was introduced to improve the labour market situation of certain disadvantaged social groups (persons over 55, young people, mothers with small children, the lowskilled and the long-term unemployed), thereby reducing the corporate tax burden (Matolcsy, 2015). — 272 —

10 An era of balance and growth: the 2010s

Reducing the amount and duration of welfare transfers encouraged labour market participation. One key example of this was tightening the conditions for old-age and invalidity pensions before retirement age, as well as the duration and amount of unemployment benefits (Matolcsy, 2015). Over the past decade since 2010, due to the measures aimed at the recovery of the labour market from the crisis, the employment rate reached the EU average, while the unemployment rate fell to a historic low, bringing Hungary close to full employment. In 2013, employment started to rise sharply, with the number of employees increasing by nearly 800,000 by 2019 compared to 2010. In Hungary, the unemployment rate fell from 11.2 per cent in 2010 to 3.4 per cent in 2019, which was one of the lowest rates in the European Union at the end of the decade (Chart 10-2). Chart 10-2: Unemployment rate in the 15–74 age group 15

Per cent

V3 countries

Euro area

Note: V3 countries: Czech Republic, Poland and Slovakia. Source: Eurostat, MNB

— 273 —

Hungary

2019

0 2018

0 2017

2016

2015

2014

2013

2012

2011

2010

10 An era of balance and growth: the 2010s

Amongst other things, due to the remarkable increase in the minimum wage and the guaranteed minimum wage, there was a significant wage increase in the Hungarian economy during the decade under review, especially during the second half (Chart 10-3). In addition to maintaining Hungary’s competitiveness, a substantial reduction in the social contribution tax provided room for wage growth while maintaining the sustainability of the economic trajectory. Chart 10-3: Evolution of nominal and gross average earnings growth in Hungary 15

Per cent

2019

2018

2017

-5

2016

-5

2015

2014

2013

2012

2011

2010

Annual change in nominal gross national average earnings Annual change in real gross national average earnings

Source: HCSO, MNB

Turnaround in general government and government debt Permanently reducing the budget deficit and breaking the trend of previously steeply rising government debt, as well as putting it on a downward path, became a key aspect for economic policy after 2010. In 2011, the government raised its debt — 274 —

10 An era of balance and growth: the 2010s

reduction objective to a constitutional level by enshrining it in the Fundamental Law. The debt ratio, which was still over 80 per cent in 2011, fell by almost 15 percentage points by the end of 2019, making Hungary the only economy in the European Union where the gross government debt-to-GDP ratio steadily declined every year since 2011. From 2012, the deficit remained stable below the Maastricht threshold of 3 per cent. As a result, in 2013 Hungary exited the Excessive Deficit Procedure (EDP), which had been ongoing since the country’s accession to the EU in 2004 (Matolcsy, 2015). One significant contribution to stability was the fact that the MNB reformed the monetary policy toolkit by announcing the Self-financing Programme in April 2014, so that banks could hold their excess liquidity in longer-term, liquid securities instead of central bank deposits. The programme also facilitated the funding of government debt from internal sources through an increase in bank demand for government securities (Gór-Holecz et al., 2016). The FX ratio of central government debt amounted to almost half of the debt in 2011, falling to below 20 per cent by 2019 (Chart 10-4). This significantly reduced Hungary’s external vulnerability, strengthened financial stability and improved Hungary’s international image. In addition to the Self-financing Programme, full repayment of the EU and IMF loans also contributed to the large reduction (Matolcsy – Palotai, 2016). By 2019, as a result of the transformation of the structure of external debt and the persistent reduction in its level, the country’s net external debt indicator as a percentage of GDP dropped below 9 per cent.

— 275 —

10 An era of balance and growth: the 2010s

Chart 10-4: Gross public debt in GDP ratio and the share of FX-denominated debt 85

As a percentage of GDP

As a percentage of debt

Gross public debt

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

Share of FX-denominated debt (right axis)

Source: ÁKK, MNB

Box 10‑1 A decade of reforms and catching-up

Thanks to the successful budgetary and economic stabilisation and the comprehensive structural reform measures implemented after 2010 as well as the turnaround in monetary policy in 2013, the average growth rate of the Hungarian economy was 3.8 per cent between 2013 and 2019, exceeding the value of the euro area by more than 2 percentage points on average, and thus Hungary was on a balanced catching-up path from 2013 onwards. As for the progress made in the past decade, between 2010 and 2013, nearly 90 per cent of the 50 economic policy reforms were already completed or started, and thus it became possible for Hungary to achieve a turnaround in terms of growth

— 276 —

10 An era of balance and growth: the 2010s

and catching-up in 2013 (Chart 10-5). In contrast to the previous, traditional, austerity-based economic policy decisions, the post-2010 reforms had an incentive effect to increase employment and investment through a number of targeted and innovative instruments (Baksay et al., 2020). The reforms carried out during this period affected several areas. In order to improve budgetary balance and stimulate economic growth through employment expansion, the government implemented a comprehensive tax reform after 2010. The Széll Kálmán Plan, launched in 2011, also stimulated employment growth by expanding and developing public employment and eliminating retirement before pension age. Economic growth was also supported by the New Széchenyi Plan with the efficient use of EU funds. Furthermore, the measures aimed at whitening the economy (the 2013 introduction and subsequent expansion of online cash registers) contributed greatly to maintaining the budgetary balance over the long term. The reduction of corporate tax in 2017 and the introduction of preferential small business taxes also helped improve the profitability of the corporate sector. In addition to the family tax benefits and the Family Housing Benefit Scheme (CSOK), the income and wealth situation of households was also supported by reducing households’ utility costs (Chart 10-5). Overall, thanks to the reform measures implemented after 2010, in Hungary successful crisis management and sustainable convergence have been achieved in conjunction with economic balance.

— 277 —

10 An era of balance and growth: the 2010s

Chart 10-5: 50 reform measures since 2010 Tax reform Bank levy Small business tax cut Public work New Fundamental Law New Széchenyi Plan Public debt rules in the constitution Family tax benefits Széll Kálmán Plans Fiscal turnaround Renewal of retail government bond strategy Achieving a primary balance surplus Strategic agreements Exchange rate cap Public debt reduction Monetary policy turnaround Road Toll Funding for Growth Scheme Online cash registers New Land Act Repayment of IMF loan Educational reform Debt consolidation of local governments Crisis management without IMF safety net

2010 6 pcs

2011 12 pcs

2012 10 pcs

2013 15 pcs

Eastern opening Crisis taxes Reducing inactivity Early repayment Green taxes SZÉP card Dual training Growth of government property Private pension fund reform FX debt repayment in HUF EU 2014-20 planning – 60% on economic development Renewable Student Loan Constructions Renewing the Labour Act

Free economic zones Financial transaction levy Job protection action plan Integration of Financial Supervisory Authority into MNB Abolition of the EDP procedure Reducing Households’ utility costs

Self-financing Programme

2014 1 pcs

Hungarian ownership of the stock exchange

2015 3 pcs

Family Housing Benefit Scheme Conversion of FX loans

Stable 0.9% interest rate for 4 years

2016 2 pcs

Reducing red tape

9% CIT rate

2017 1 pcs

Source: Baksay et al. (2020)

— 278 —

10 An era of balance and growth: the 2010s

10.2 Turnaround in monetary policy and lending From 2013 onwards, the full turnaround in economic policy was completed with the turnaround in monetary policy, and the Hungarian economy was thus set on a growth path with a sustainable balance. From 2013 onwards, the central bank was characterised by a number of new, unconventional steps, in addition to conventional measures. The revised central bank instruments worked simultaneously to achieve price stability and to promote the government’s economic policy. The supervision system was renewed, which notably contributed to reducing the country’s vulnerability. Due to the post-2013 central bank programmes, corporate lending activity was relaunched. After that, due to the general economic recovery, the reduction of previous debts, the constantly improving labour market situation and the restoration of general confidence, there was also a turnaround in retail lending. In developed economies, small and medium-sized enterprises receive more attention because they are a key aspect in domestic production and in reducing unemployment, as they can absorb labour and thus can play a role in economic stability (Parragh, 2017). In the following, we analyse these main processes. Reduction of the central bank base rate, reform of the central bank instrument and its effects The fiscal turnaround from 2010 onwards, the establishment of government debt on a downward path, the reduction of external vulnerability and the structural reforms aimed at stimulating long-term growth also supported implementation of the central bank’s easing steps (MNB, 2017). The MNB launched its interest rate reduction cycle in August 2012, as a result of which over 4 years it reduced the policy rate by 610 basis points in three stages from the initial 7 per cent to an all-time low of 0.9 per cent (Chart 10-6).

— 279 —

10 An era of balance and growth: the 2010s

This substantial reduction of the base rate reduced the risk of a deflationary environment and contributed significantly to increasing the output level.39 With the favourable macroeconomic effects of the interest rate reduction cycle, the balance of the economy was maintained and the economy’s external financing capacity remained stable. Low interest rate conditions greatly reduced the interest rate burdens on the private sector, preventing further declines in credit, consumption and investment following the crisis. Chart 10-6: Evolution of the Hungarian central bank interest rate 10

Per cent

10 9

First cycle of interest rate cuts 7% -> 2.1%

−610 bp Second cycle of interest rate cuts 2.1% -> 1.35%

5 4

Third cycle of interest rate cuts 1.35% -> 0.9%

2019

2018

2017

2016

0 2015

0 2014

2013

2012

Central bank base rate

Source: MNB.

or more information on the macroeconomic and financial impact of the interest rate reduction cycle, see F Felcser – Soós – Váradi (2015).

— 280 —

10 An era of balance and growth: the 2010s

During the period, the central bank also reformed the tool system, by means of which it implemented a targeted, unconventional monetary easing policy while keeping the base rate sustainable and taking into account inflationary developments. The core element of the system was the transformation of the policy instrument, the quantitative restriction on the three-month deposit, through which the MNB supported lending and self-financing, and ensured a further decrease in relevant money market yields within the interest rate corridor (MNB, 2017). Lending and investment From 2005 onwards, the level of domestic investment declined and lagged substantially behind regional trends. Following the outbreak of the financial crisis in 2007-2008, the loan portfolio of domestic banking system contracted significantly and the proportion of non-performing loans surged. Between 2009 and the second quarter of 2013, corporate lending was characterised by the phenomenon of a credit crunch (Balog et al., 2014). During these years, the corporate loan portfolio contracted by an average of about 4–5 per cent per year, due to disbursements and repayments. Moderate investment activity and a lack of lending resulted in lower economic growth, substantially contributing to the decline in the long-term growth potential of the domestic economy. Furthermore, in a period of crisis or recovery, the access of companies’ credit is strongly influenced by future growth and development paths (Parragh – Végh, 2018). Between 2007 and 2013, the structure of investment in the national economy changed significantly: the share of manufacturing increased significantly, while the share of public administration and water supply increased to a lesser extent; real estate, electricity and gas, education and transportation have declined significantly (Báger, 2015). In addition to the government measures presented above, the MNB’s Funding for Growth Scheme launched in 2013 made a significant contribution to restoring — 281 —

10 An era of balance and growth: the 2010s

investment and lending processes. The aim of the programme was to stimulate the economy and strengthen financial stability by providing credit incentives to the SMEs (MNB, 2018). In addition to the gradual phasing out of the FGS, in parallel with its third phase, the Market-based Lending Scheme (MLS) was launched in early 2016. Its goal was to promote market-based lending without central bank refinancing (MNB, 2015). As a result, the gradual recovery of the corporate and SME sectors credit market started in 2013 (Chart 10-7). Chart 10-7: Evolution of loan portfolios in the household, corporate and SME sectors 30

Per cent

10 -5

-10

Corporate sector

SME-sector

2019

2018

2017

2016

2015

2014

2013

-20 2012

-10 2011

-15

2010

-5

Household sector (right axis)

Note: Loans provided by a financial intermediation system. Transaction-based growth rates filtered from exchange rate effects, write-offs and reclassifications. Source: MNB.

— 282 —

10 An era of balance and growth: the 2010s

By 2018, the dynamics of corporate lending had reached an appropriate level, with growth in excess of 10 per cent, but its structure was still not healthy enough, and thus the MNB launched a new FGS strategy in early 2019 with a total amount of HUF 1,000 billion. The key parameters of the new strategy announced under the name of FGS fix were identical to the ones specified in the earlier phases of the FGS. However, the loan scheme was available with a term of at least 3 years and exclusively for investment purposes (MNB, 2018). To alleviate the economic slowdown caused by the global health crisis in early 2020, the central bank launched the FGS Go! strategy that, in line with the changed credit market needs, allows SMEs to use larger amount of money for a wider range of uses than was formerly possible in the previous phases. The Funding for Growth Scheme (FGS), launched in 2013 and later extended by further phases, played an important role in access to finances for Hungarian micro, small and medium-sized enterprises. In seven years, under the FGS, nearly 50,000 SMEs received favourable financing, amounting to about HUF 3,400 billion. Due to the low interest rate level fixed until the end of the maturity period, the scheme facilitated the realisation of a number of investments and helped enterprises operate more flexibly, grow and become more competitive. The FGS played an important role in halting and reversing the previous downward trend in SME lending. Thus, the scheme also had a significant impact on domestic economic growth. With regard to the debt-type borrowing of Hungarian companies, bank loans have dominated. At the end of 2018, the value of bank loans of non-financial corporations as a percentage of GDP exceeded 17 per cent, while their bond portfolio was only 1.1 per cent. This value is far below the average of both the European Union countries and the Central and Eastern European countries. In order to ensure that domestic companies have sufficient reliance on other forms of financing in addition to bank loans, the central bank launched its Bond Funding for Growth Scheme in July 2019. Within this framework, bonds with a rating of at least B+ issued by non-financial — 283 —

10 An era of balance and growth: the 2010s

corporations domiciled in Hungary and securities secured with credit claims against companies were purchased (MNB, 2019a). Buoyant corporate credit expansion, in parallel with high capacity utilisation and a low interest rate environment, has supported the dynamic growth in corporate investment activity. By 2019, the investment rate rose from about 20 per cent to close to 30 per cent, which was one of the highest in the European Union (Chart 10-8). Expanding investments will ensure a sustained increase in Hungary’s longerterm growth rate. Chart 10-8: Evolution of investment rates in the European Union in 2019 45

As a percentage of GDP

45 40

0 IE HU EE CZ SE AT BE FI RO FR LV DK EA DE SK EU LT NL HR ES MT SI CY PL PT BG IT UK LU EL

Source: Eurostat, MNB

Following the onset of the crisis, households’ attitudes to borrowing were determined by the pursuit of prudence and debt reduction. Accordingly, credit institutions’

— 284 —

10 An era of balance and growth: the 2010s

household credit volume decreased steadily between 2010 and 2016, in which government programmes (early repayment and settlement of unilateral interest rate increases and exchange rate margins) played a major role. After the onset of the crisis, household credit-to-GDP was at 31 per cent (exceeding the values of several countries in the region), but by now it has fallen significantly. Currently, it is among the lowest in the European Union. The healthy expansion of household lending has been ensured, among other things, by the debt cap rules on payment-to-income ratio and the loan-to-value ratio ceiling, which have been in force since 2015, as well as the dominance of longer-term fixed-rate loans in new lending (MNB, 2019b). Furthermore, with the forint conversion of foreign currency loans in 2015, the significant exchange rate risk assumed by the population has essentially disappeared and Hungary’s vulnerability has decreased substantially. As a result, households have increasingly expanded their consumption, and thus the other most important foundation of strong internal demand – which is the basis of domestic economic growth – has been created (Matolcsy, 2015). Overall, conventional and unconventional central bank actions have substantially and comprehensively supported the structural and financing conditions for macroeconomic growth and laid the foundations for the transition of the Hungarian economy to a sustainable growth path and the resumption of real economic convergence. Since the crisis, the household savings rate has risen above 6 per cent as a percentage of GDP (Chart 10-9). After 2010, the net financial wealth of households started to rise steadily, reaching a historically high level of more than 100 per cent of GDP in recent years, while its indebtedness index fell below the level of pre-crisis years.

— 285 —

10 An era of balance and growth: the 2010s

Chart 10-9: Net financial savings and wealth of households 10

As a percentage of GDP

115 105

85 1

-2

-5 2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

Net financial savings Net financial wealth (right axis)

Source: MNB.

Before the crisis, Hungary was built on a consumption-driven growth model financed by foreign currency-denominated loans, which resulted in slower economic growth in Hungary compared to other countries in the region (Matolcsy, 2015). Due to the debt repayments to the rest of the world, the reduction of external vulnerability, the remittances of Hungarian employees working abroad, the population’s high willingness to save, the high foreign trade surplus and the inflow of EU funds, Hungary’s current account balance has consistently been in surplus after 2010. The external financing capacity of the Hungarian economy is also significant in a regional comparison: it has been steadily positive as a percentage of GDP and exceeded the average level typical in the region (Chart 10-10). Since the crisis, the stock of direct equity investments has changed significantly in terms of structure,

— 286 —

10 An era of balance and growth: the 2010s

as the weight of manufacturing and vehicle production almost doubled, while the share of services has declined. Chart 10-10: Net lending in the Visegrad countries (four-quarter values as a percentage of GDP) 14

Per cent

14 12

-2

-4

-6

-8

2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019* 2013 2014 2015 2016 2017 2018 2019* 2013 2014 2015 2016 2017 2018 2019* 2013 2014 2015 2016 2017 2018 2019*

Hungary

Czechia

Poland

Slovakia

Romania

Balance of goods and services Income balance Transfer balance Net lending (real economy's side)

Note: Data for 2019 are only available for Hungary. Source: Eurostat, MNB.

— 287 —

10 An era of balance and growth: the 2010s

Inflationary developments Before the crisis, the domestic consumer price index substantially exceeded the central bank’s target of 3 per cent, with the inflationary tendency of budgetary policy also contributing to this. After the crisis, the globally low inflation environment, the decrease in official energy prices and the moderate dynamics of consumption resulted in a rapid decline in domestic inflation from 2012 (Hajnal – Várhegyi, 2019). Domestic inflation had hovered around zero per cent up until 2016. The effectiveness of monetary policy is underlined by the fact that the pace of price change has remained almost continuously within the central bank’s tolerance band since the start of 2017 (Chart 10-11). Chart 10-11: Evolution of inflation and core inflation excl. indirect taxes 7

Per cent

Per cent Tolerance band

7 6 5

5 Inflation target

Inflation

2019

2017

2016

2015

2014

2013

2012

2011

2010

-2

2018

-1 Inflation fluctuating around 3 per cent -2

-1

Core inflation excl. indirect taxes

Source: HCSO, MNB.

— 288 —

10 An era of balance and growth: the 2010s

10.3 Turnaround in growth and convergence Over the past 7 years, dynamic, sustained growth has been accompanied by aÂ moderate European economic recovery, and domestic GDP dynamics thus have exceeded the growth rate of advanced Western European economies by more than 2 percentage points on average, rising to 3 percentage points at the end of the period (Chart 10-12). In recent years, the role of services and construction industry has steadily increased in line with economic development, while the level of industry in terms of GDP can be considered broadly unchanged. Chart 10-12: Evolution of economic growth 6

Per cent

Per cent 2006-2012

2013-2019

6 4

+2.2

-1.0

-2

-4

Growth difference

Hungary

Source: Eurostat, European Commission, MNB.

â&#x20AC;&#x201D; 289 â&#x20AC;&#x201D;

Eurozone

2019

2018

2017

2016

2015

2014

More than 2 percentagepoint growth surplus 2012

2011

2010

2009

2008

2006

2005

2004

2003

2002

2001

2000

-8

2007

1 percentage point growth deficit

2013

-6

-6 -8

10 An era of balance and growth: the 2010s

Since 2013, growth and convergence have been achieved in a sustainable, balanced financing structure. The domestic investment rate is at the forefront of Europe. Hungary’s export market share has been expanding, and services have played an increasing role in exports. Due to high wage outflows, incomes and household consumption have also increased steadily. Growth has occurred in parallel with the maintenance of balance, as a result of appropriate and effective economic policy mix. The balance of the current account shows a consistent surplus after a substantial turnaround, the primary budget balance has been in a positive range since 2012, and Hungary’s net external debt has fallen to a historic low because the financing of economy is mainly based on internal sources. Overall, due to both fiscal policy and monetary policy measures, the Hungarian economy has expanded by nearly 30 per cent since 2013. In line with the buoyant economic performance, between 2013 and 2019, domestic GDP grew by an average of 3.8 per cent per year. All of these results are also reflected in Hungary’s convergence with the European Union average, as in 2019 Hungary caught up with Poland in terms of percentage of GDP per capita measured in purchasing power parity, and surpassed the development of Greece (Chart 10-13).

— 290 —

10 An era of balance and growth: the 2010s

Chart 10-13: Relative development compared to the EU 140

Per cent

140 120

100

0 DK NL AT DE SE BE FI UK FR MT IT CZ ES SI LT PT SK HU PL LV EL RO HR BG

120

2019

2012

Note: Expressed in PPS at current prices. Source: Eurostat, MNB

The equilibrium structure of growth reflects the fact that the high economic growth experienced since 2013 took place in such a way that wealth differences in Hungary were moderate in a global comparison (Chart 10-14). This is mainly due to employment growth and the dynamic rise in lower wage categories.

â&#x20AC;&#x201D; 291 â&#x20AC;&#x201D;

10 An era of balance and growth: the 2010s

Chart 10-14: The wealth Gini index in global comparison in 2019 95

Global average

75 Hungary

Note: The Gini index is an indicator of inequality. Its value is between 0 per cent and 100 per cent, where zero represents perfect equality. Source: Credit Suisse.

References Báger, G. (2015): Beruházási hullámvölgy és élénkülés a magyar gazdaságban. (Investment downturn and recovery in the Hungarian economy), Pénzügyi Szemle, Vol. 60. No. 2, 2015, pp. 155-177. https://www.penzugyiszemle.hu/documents/ bagerg-2015-1-mpdf_20170817153342_15.pdf Baksay, G. – Nagy, Á. – Palotai, D. – Szalai, Á. (2020): A reformok és a felzárkózás évtizede – 50 reformlépés az egyensúlyi felzárkózás megteremtéséhez (A decade of reforms and catching-up – 50 reform steps to achieve equilibrium catching-up). Magyar Nemzeti Bank, 2020. Balog, Á. – Matolcsy, Gy. – Nagy, M. – Vonnák, B. (2014): Credit crunch Magyarországon 2009–2013 között: egy hiteltelen korszak vége? (Credit crunch in Hungary between 2009 and 2013 – End of an era without credit?). Hitelintézeti Szemle, 2014. 13 [4]. pp. 11–34. Felcser, D. – Soós, G. D. – Váradi, B. (2015): A kamatcsökkentési ciklus hatása a magyar makrogazdaságra és a pénzügyi piacokra (The impact of the easing cycle on the Hungarian macroeconomy and financial markets). Hitelintézeti Szemle, September 2015. Vol. 14. No. 3. pp. 39–59.

— 292 —

10 An era of balance and growth: the 2010s Gór-Holecz, F. – Kolozsi, P.P. – Novák, Zs. – Zágonyi, Á. (2016): Az Önfinanszírozási program koncepciója és hatásmechanizmusa in: Az Önfinanszírozási program első két éve (Self-financing Programme – Concept and impact mechanism in: The first two years of the Self-financing Programme). Volume of studies. Magyar Nemzeti Bank. Hajnal, M. – Várhegyi, J. (2019): Három a magyar igazság – fontos mérföldkőhöz ért a hazai infláció (“Three is the Hungarian justice” – Domestic inflation has reached an important milestone). Magyar Nemzeti Bank. Matolcsy, Gy. (2015): Egyensúly és növekedés. Konszolidáció és stabilizáció Magyarországon, 2010–2014 (Economic balance and growth. Consolidation and stabilisation in Hungary, 2010–2014). Kairosz Kiadó, Budapest, 2015. Matolcsy, Gy. – Palotai, D. (2016): A fiskális és a monetáris politika kölcsönhatása Magyarországon az elmúlt másfél évtizedben (The interaction between fiscal and monetary policy in Hungary over the past decade and a half). Hitelintézeti Szemle. Vol. 15. No. 2. pp. 5–32. Matolcsy, Gy. – Palotai, D. (2018): A magyar modell: A válságkezelés magyar receptje a mediterrán út tükrében (The Hungarian model: Hungarian crisis management in view of the Mediterranean way). Hitelintézeti Szemle, June 2018. Vol. 17. No. 2. pp. 5–42. http://www.hitelintezetiszemle.hu/letoltes/hsz-17-2-t1-matolcsy-palotai.pdf MNB (2015): A Piaci Hitelprogram (PHP) alapösszefüggései és eszközei (Basic correlations and instruments of the Marketbased Lending Scheme [MLS]). Magyar Nemzeti Bank. MNB (2017): A magyar út – Célzott jegybanki politika (The Hungarian way – Targeted central bank policy). Magyar Nemzeti Bank. MNB (2018): A Növekedési Hitelprogram Fix (NHP fix) elindításának jegybanki szempontjai és a konstrukció fontosabb jellemzői (The central bank’s considerations with regard to the launch of the Funding for Growth Scheme Fix [FGS fix] and main features of the scheme). Magyar Nemzeti Bank. MNB (2019a): A Növekedési Kötvényprogram elindításának jegybanki szempontjai és a konstrukció főbb jellemzői (The central bank’s considerations with regard to the launch of the Bond Funding for Growth Scheme and main features of the scheme). Magyar Nemzeti Bank. MNB (2019b): Hitelezési folyamatok, 2019. március (Trends in lending). March 2019, Magyar Nemzeti Bank. Parragh, B. (2017): Competitiveness and Economic Stimulus. New Dimensions and Instruments of Monetary Policy, Polgári Szemle, Vol. 13. Special edition, 2017, pp. 151-166. http://real.mtak.hu/80138/1/PSZ%202017.%20angol.szam_beliv_9. pdf Parragh, B. – Végh, R. (2018): Megújuló állam – megújuló tőkepiac. A gazdaságösztönzés új dimenziói (State renewal – Capital market renewal: New dimensions of economic stimulus policy), Polgári Szemle, Vol. 14. No. 4–6, 2018, pp. 48-72. http://real.mtak.hu/98621/1/PSZ%202018.%204-6.szam_beliv_5.pdf

— 293 —

Annex: Statistical tables

Annex-1: Net national product, household consumption, government revenues and balance, 1920-1939 Budget year

National product (NNP) P millions

Household consumption

1924/25=100

P millions

Government revenues, P millions

1924/25=100

Total

o/w Taxes

Government balance P millions

NNP %

1920/21

749

534

1921/22

479

354

1922/23

415

276

1923/24

1073

699

1924/25

5058

100

4835

100

1076

699

1.4

1925/26

5888

120

5271

113

1236

766

1.5

1926/27

5823

118

5650

115

1401

856

151

2.6

1927/28

6343

125

5775

119

1448

904

1.5

1928/29

6793

134

5955

124

1483

899

0.2

1929/30

6480

136

5180

116

1424

798

-54

-0.8

1930/31

5789

133

4561

114

1399

713

-230

-4.0

1931/32

5025

126

3985

109

1208

705

-180

-3.6

1932/33

4500

120

3589

106

1076

643

-109

-2.4

1933/34

4406

131

3368

112

1119

654

-66

-1.5

1934/35

4560

132

3510

118

1117

664

-70

-1.5

1935/36

4889

138

3752

127

1195

698

-35

-0.7

4087

132

1936/37

5289

146

1937/38

5495

143

1938/39

5800

149

Source: Magyar Gazdaságkutató Intézet, HCSO.

— 295 —

1313

759

0.2

1199

697

-68

-1.2

Annex: Statistical tables

Annex-2: Population, number of employees and number of dwellings at the end of the year, thousands Year

Population thousands

Expected lifetime, M, years

Expected lifetime, F, years

Number of employees

Employed in industry, %

Employed in agriculture, %

Number of female employees

Number of dwellings

1920

7990

3565

1062

1827

1930

8688

3738

977

2182

1940

9317

4202

1145

2398

1949

9293

4107

1199

2480

1959

9961

4710

1673

2758

1969

10322

4998

2059

3122

1979

10709

5074

2204

3542

1990

10373

4669

2077

3853

2000

10200

3866

1756

4052

2010

9986

3750

1750

4390

2018

9773

4483

2026

4455

Source: HCSO.

â&#x20AC;&#x201D; 296 â&#x20AC;&#x201D;

Annex: Statistical tables

Annex-3: Population, number of employees and employees in agriculture and industry at the end of the year, thousands Year 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Population 9119 9205 9293 9383 9463 9545 9645 9767 9883 9829 9850 9913 9961 10006 10052 10074 10108 10140 10166 10203 10244 10284 10322 10352 10378 10410 10442 10501 10563 10615 10660 10687 10709 10705 10695 10671

Employees 3840 3970 4107 4254 4306 4349 4400 4470 4563 4520 4582 4652 4710 4651 4630 4661 4707 4739 4781 4830 4884 4990 4998 5010 5039 5061 5074 5086 5093 5081 5069 5081 5074 5015 5002 4970

Agriculture 2200 2191 2135 2112 2053 1934 1910 1952 1990 2032 2006 1976 1925 1779 1697 1629 1544 1511 1465 1410 1382 1360 1315 1288 1262 1233 1183 1150 1130 1111 1100 1105 1116 1109 1130 1150

Industry 745 750 797 817 899 939 1072 1115 1123 1093 1192 1231 1291 1329 1360 1405 1463 1527 1590 1632 1697 1785 1792 1815 1790 1799 1816 1800 1788 1764 1752 1733 1689 1647 1615 1578

Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 297 â&#x20AC;&#x201D;

Population 10640 10599 10560 10509 10464 10421 10375 10373 10374 10365 10350 10337 10321 10301 10280 10253 10222 10200 10175 10142 10117 10098 10077 10066 10045 10031 10014 9986 9932 9909 9877 9856 9830 9798 9778 9773

Employees 4940 4913 4892 4885 4845 4823 4795 4669 4242 3867 3701 3636 3615 3611 3648 3770 3830 3866 3869 3895 3920 3890 3900 3917 3848 3824 3742 3750 3790 3837 3985 4146 4257 4391 4443 4483

Agriculture 1150 1113 1065 1022 991 966 938 819 648 444 395 373 347 359 338 343 345 314 308 302 278 262 256 254 235 232 234 237 249 255 238 258 269 274 288 282

Industry 1540 1527 1498 1481 1446 1427 1394 1352 1227 1119 1021 969 964 979 1043 1058 1061 1061 1082 1049 1012 963 934 947 915 901 831 836 850 843 915 979 1004 1069 1113 1142

Annex: Statistical tables

Annex-4: Number of pensioners, beneficiaries of childcare allowances and unemployed persons, thousands Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Pensioners

Childcare allowance 608 596 563 539 553 562 569 575 597 617 636 759 844 952 1009 1073 1125 1183 1239 1294 1350 1415 1496 1581 1651 1715 1776 1840 1903 1955 1997 2058 2107 2154 2196

20 90 144 170 180 190 208 229 265 287 290 277 264 254 242 233 224

Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: HCSO, MNB compilation.

— 298 —

Pensioners 2238 2280 2318 2356 2398 2505 2628 2732 2832 2908 2979 3035 3082 3122 3162 3165 3131 3110 3098 3081 3066 3058 3049 3050 3043 3006 2951 2920 2894 2835 2764 2694 2650 2620 2586

Childcare allowance 218 220 225 231 241 245 252 262 262 260 250 231 247 253 236 243 244 246 241 245 246 248 261 259 261 273 273 252 248 234 247 248 253 261 262

unemployed persons … … 6 11 14 24 101 406 663 632 520 450 420 360 286 269 250 228 244 232 263 310 318 327 336 435 454 455 459 400 318 281 204 175 167

Annex: Statistical tables

Annex-5: Number of dwellings built annually, thousands Year

Dwellings

Year

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943

…

1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

8.1 20.3 20.7 28.0 35.3 43.4 53.3 50.9 33.4 37.5 26.9 21.1 17.9 16.0 15.7 24.3 22.2 23.4 18.1 19.7 31.1 33.3 26.7

Dwellings 19.0 13.3 24.7 17.7 16.7 16.8 27.2 31.5 25.5 51.3 41.8 46.6 58.1 67.5 54.1 52.7 53.4 54.6 55.6 62.6 67.1 61.9 80.3 75.3

Built from government sources … 5.1 5.8 6.3 7.4 9.2 11.3 13.6 7.4 26.2 10.8 13.3 18.4 19.7 21.0 19.8 21.3 22.4 20.3 21.6 24.6 22.5 29.5 22.5

Year 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Source: HCSO, MNB compilation.

— 299 —

Dwellings 90.2 85.2 87.8 99.6 93.9 93.4 88.2 88.2 89.1 77.0 75.6 74.2 70.4 72.5 69.4 57.2 50.6 51.5 43.8 33.2 25.8 20.9 21.0 24.7

Built from government sources 29.5 28.0 30.8 38.0 32.2 34.0 34.8 35.1 40.2 36.3 35.3 32.5 26.8 29.6 23.4 21.4 15.5 13.5 7.0 1.6 0.9 0.4 0.6 0.2

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Dwellings 28.3 28.1 20.3 19.3 21.6 28.1 31.5 35.5 43.9 41.1 33.9 36.2 36.1 32.0 20.8 12.7 10.6 7.3 8.4 7.6 10.0 14.4 17.7 21.1

Annex: Statistical tables

Annex-6: Value of annual investments at current prices, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Investments total

Industrial investments

7.0 11.7 14.3 17.4 17.9 13.7 13.3 14.4 13.1 17.0 37.9 42.6 39.9 44.1 50.2 52.0 49.7 54.9 65.7 65.0 84.4 101.4 114.3 118.4 125.7 139.4 163.4 170.7 201.5 218.5 225.7 213.3 209.4 215.6 224.2 231.5

1.9 3.7 5.9 7.3 7.9 4.9 4.7 5.4 4.7 5.9 13.0 16.8 15.8 17.8 18.8 19.8 18.9 21.2 26.0 23.2 30.5 34.2 38.4 40.8 41.6 46.1 52.9 58.8 75.7 80.5 80.5 73.5 69.8 69.7 67.3 63.7

Household investments 1.3 2.1 1.1 1.6 1.2 2.0 2.4 3.1 2.3 3.5 6.2 4.1 5.2 3.9 4.7 4.4 5.0 5.7 6.0 7.2 6.9 9.4 11.5 12.8 14.0 15.2 16.9 18.6 20.0 21.5 23.5 23.7 26.6 29.8 36.1 42.7

Source: HCSO, MNB compilation.

— 300 —

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Investments total 239.6 259.2 295.1 290.4 340.0 356.3 491.9 555.6 638.3 842.7 1038.8 1337.6 1709.9 2137.9 2427.1 2852.9 3158.0 3525.6 3709.5 4188.3 4469.8 4652.5 4771.5 4942.4 4659.7 4505.7 4390.9 4264.1 4572.3 5532.1 6066.8 5363.7 6878.0 8746.2 10555.7

Industrial investments 64.3 66.5 82.7 73.9 87.3 91.8 144.1 154.0 187.4 242.0 318.6 411.5 516.4 721.5 884.4 971.3 982.7 935.0 1093.6 1236.9 1221.1 1224.1 1426.9 1372.2 1175.0 1274.6 1559.1 1534.3 1508.0 1684.5 1683.1 1911.1 2258.5 2725.1 3271.0

Household investments 45.5 51.8 51.5 58.5 70.5 72.0 85.0 90.6 95.1 123.3 197.6 280.6 333.1 329.6 413.5 518.6 685.5 838.2 917.5 1085.5 898.5 901.1 878.6 977.4 871.4 671.3 503.8 455.7 415.8 526.3 593.5 686.8 865.0 1053.1 …

Annex: Statistical tables

Annex-7: Volume indices of investments Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

1960=100 100 97 108 122 129 130 145 173 176 193 227 251 249 259 282 319 319 360 377 381

Previous year = 100 … 97 111 113 106 101 112 119 102 110 118 111 99 104 109 113 100 113 105 101

Year

1960=100

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

359 341 333 323 314 307 314 338 312 325 293 257 253 259 291 276 290 315 355 374

Source: HCSO, MNB compilation.

— 301 —

Previous year = 100 94 95 98 97 97 98 102 108 92 104 90 88 98 102 112 95 105 109 113 105

Year

1960=100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

399 418 460 465 506 528 522 522 524 482 458 437 415 440 525 567 494 614 735 837

Previous year = 100 107 105 110 101 109 104 99 100 100 92 95 95 95 106 119 108 87 124 120 114

Annex: Statistical tables

Annex-8: Gross output, gross domestic product (GDP) and intermediate consumption at market prices, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Gross output 76.5 96.9 133.1 159.8 182.5 198.3 218.2 199.3 242.5 266.7 354.2 379.7 402.6 428.5 453.3 482.6 486.8 526.3 570.1 632.3 682.0 752.4 823.9 883.1 964.7 1051.5 1165.0 1284.8 1414.5 1548.7 1650.7 1879.7 2052.1 2214.6 2367.3 2563.6

GDP 44.5 56.7 78.6 89.3 101.1 106.7 118.0 106.4 133.9 137.7 163.4 175.2 185.3 195.4 205.6 216.1 214.9 237.5 256.8 281.1 312.4 332.9 362.5 393.0 433.2 454.5 487.5 528.9 581.9 629.7 682.3 721.0 779.9 847.9 896.4 978.5

Intermed. consumpt. 32.0 40.1 54.5 70.5 81.4 91.6 100.2 92.8 108.6 129.0 190.8 204.5 217.3 233.1 247.7 266.4 271.9 288.8 313.3 351.2 369.7 419.4 461.4 490.1 531.5 597.0 677.5 755.9 832.5 919.0 968.4 1158.7 1272.2 1366.7 1470.9 1585.2

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

— 302 —

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Gross output 2695.0 2846.2 3119.1 3457.8 4021.7 4790.1 5631.2 6305.2 7267.5 8819.7 12088.6 14912.1 18554.4 22125.7 25240.3 29712.4 33750.3 36955.4 40467.9 44395.0 48687.8 53847.1 56308.0 60290.7 56578.0 59425.6 62840.2 62811.6 65713.6 70584.5 74525.7 76751.0 82432.9 89083.8 …

GDP 1033.7 1088.8 1226.4 1440.4 1722.8 2089.3 2498.3 2942.7 3548.3 4364.8 5836.5 7122.3 8834.6 10442.8 11637.5 13324.1 15398.7 17433.9 19133.8 21077.5 22549.0 24316.3 25701.4 27217.4 26458.3 27268.9 28370.8 28847.9 30290.3 32694.2 34785.2 35896.3 38835.2 42661.8 46786.7

Intermed. consumpt. 1661.3 1757.4 1892.7 2017.4 2298.8 2700.8 3132.9 3362.6 3719.2 4454.9 6252.2 7789.8 9719.9 11682.9 13602.8 16388.3 18351.6 19521.5 21334.0 23317.5 26138.8 29530.8 30606.6 33073.3 30119.8 32156.7 34469.5 33963.7 35423.3 37890.3 39740.5 40854.6 43597.7 46422.0 …

Annex: Statistical tables

Annex-9: Gross output (production) broken down by main economic sectors, at current prices, HUF billions Year

Gross output

Corporations

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

76.5 96.9 133.1 159.8 182.5 198.3 218.2 199.3 242.5 266.7 354.2 379.7 402.6 428.5 453.3 482.6 486.8 526.3 570.1 632.3 682.0 752.4 823.9 883.1 964.7 1051.5 1165.0 1286.3 1419.1 1549.4 1636.3 1804.2 1975.7 2125.2 2273.1

45.4 63.0 87.2 119.7 136.3 137.9 147.5 134.7 158.9 180.6 266.1 315.7 347.8 372.0 394.4 421.4 426.2 458.8 494.2 530.8 573.9 632.0 692.1 744.2 814.7 890.5 993.4 1106.1 1217.7 1327.4 1399.7 1542.4 1684.4 1803.6 1905.7

General government 6.5 9.2 12.3 16.4 18.6 19.7 21.7 20.7 21.6 22.4 28.6 26.3 29.4 33.4 35.7 37.0 36.9 38.5 40.0 45.2 49.9 56.4 64.4 68.3 72.7 81.5 89.2 92.6 100.9 116.7 128.4 140.3 157.7 171.0 189.3

Other sectors

Year

24.7 24.6 33.5 23.7 27.6 40.7 49.0 43.8 62.1 63.7 59.4 37.8 25.4 23.1 23.3 24.2 23.7 28.9 35.8 56.2 58.2 64.0 67.5 70.5 77.3 79.5 82.5 87.6 100.6 105.2 108.1 121.5 133.6 150.5 178.1

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 303 â&#x20AC;&#x201D;

Gross output 2460.4 2592.8 2754.7 3003.0 3280.4 3808.5 4497.3 5324.2 5886.2 6737.1 8175.2 11194.9 13866.0 17349.7 20685.0 23577.9 27736.8 31644.5 34638.8 37759.1 41332.2 45542.4 50619.7 52685.6 56364.1 52582.6 55250.1 58564.1 58205.1 60974.5 65477.2 68998.9 71237.4 76462.1 82429.1

Corporations 2039.6 2140.2 2255.0 2457.3 2610.4 3067.9 3530.9 4003.5 4152.6 4556.7 5546.2 7449.1 9326.3 12185.6 14924.8 17062.9 20495.2 23256.1 25345.4 27679.8 30617.0 34198.8 38859.9 40675.4 43619.9 40099.0 42716.0 45852.4 45537.1 47720.9 51200.0 53856.6 55418.5 59284.7 64099.4

General government 205.2 221.3 236.2 256.3 340.0 371.8 467.3 633.6 790.4 1012.0 1141.0 1412.9 1608.8 1933.8 2230.3 2547.6 2886.6 3306.9 3853.1 4441.2 4662.2 4947.0 5272.0 5435.6 5962.9 5977.0 6079.1 6019.7 6051.9 6373.9 7001.2 7543.8 7862.0 8675.6 9200.8

Other sectors 215.6 231.3 263.5 289.4 330.0 368.9 499.2 687.1 943.2 1168.4 1488.0 2332.9 2930.9 3230.4 3529.8 3967.5 4354.9 5081.6 5440.4 5638.1 6053.0 6396.5 6487.7 6574.7 6781.4 6506.6 6455.1 6692.0 6616.1 6879.7 7276.0 7598.6 7956.9 8501.8 9128.9

Annex: Statistical tables

Annex-10: Production of gross value added broken down by main activities, at current prices, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Material activities 40.1 50.3 69.3 78.6 88.3 91.5 100.5 89.2 115.9 119.5 139.7 155.0 163.9 172.8 181.8 191.1 189.1 210.2 228.1 250.6 279.9 298.4 322.4 348.4 384.7 402.8 430.8 469.3 519.5 556.7 586.7 556.5 607.0 655.2 689.3 749.8

Of which Industry 19.8 24.3 27.2 47.1 49.5 49.7 53.6 44.9 56.5 64.3 73.4 87.6 96.8 104.1 109.4 117.5 108.6 115.7 126.1 107.2 116.2 124.5 130.4 143.3 157.6 169.6 193.9 212.2 231.1 248.5 269.3 250.4 276.3 298.5 313.4 340.6

Agriculture 10.1 12.0 22.5 14.6 20.8 24.3 31.8 29.2 40.3 35.9 36.1 34.7 33.0 35.9 38.1 42.5 59.8 48.4 50.9 56.8 64.7 62.3 69.1 70.7 82.5 85.6 86.8 94.7 105.4 107.8 108.8 123.5 136.8 148.5 152.9 166.2

Non-material 4.4 6.4 9.3 10.7 12.8 15.1 17.4 17.3 18.0 18.2 23.7 20.3 21.4 22.6 23.8 25.0 25.8 27.2 28.7 30.5 32.4 34.5 40.1 44.6 48.6 51.7 56.8 61.2 67.1 73.6 81.2 89.0 96.5 103.3 112.9 125.4

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 304 â&#x20AC;&#x201D;

Material activities 791.0 842.9 936.6 1002.6 1200.4 1401.2 1550.7 1647.9 1892.4 2284.8 2935.3 3599.8 4695.3 5575.8 6065.8 6822.5 7955.7 8903.7 9467.0 10592.2 11303.0 12293.0 12988.5 13516.5 12626.8 13039.1 13877.3 13981.4 14863.1 16299.1 17397.2 17715.8 19069.9 20988.9 23377.6

Of which Industry 363.4 373.6 416.1 444.1 532.1 576.2 666.0 717.3 835.6 996.0 1259.7 1531.3 2085.5 2489.8 2697.2 3018.2 3444.2 3781.2 4133.6 4679.6 4999.4 5470.5 5763.8 5856.3 5540.6 5938.3 6162.6 6297.0 6550.2 7249.3 7963.9 8115.0 8528.7 8915.8 9564.3

Agriculture 166.7 182.6 189.2 209.8 235.9 261.2 195.1 189.9 209.3 262.0 418.9 517.3 558.5 630.4 618.0 657.5 756.8 742.8 746.4 918.8 840.8 860.8 897.5 940.9 810.6 833.9 1140.2 1128.3 1188.9 1291.2 1325.0 1408.3 1475.0 1516.1 1624.3

Non-material 140.4 154.3 173.7 260.3 309.3 395.3 748.3 976.4 1249.9 1634.6 2007.4 2476.4 2934.5 3426.3 3909.4 4525.9 5337.3 6213.6 6958.1 7422.5 8100.6 8795.9 9090.5 9774.3 9836.0 10054.3 10217.3 10259.9 10688.2 11287.8 11861.3 12667.0 13794.6 15018.2 16272.5

Annex: Statistical tables

Annex-11: Volume indices of gross value added broken down by main industries, 1950=100 Year 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Agriculture 100 119 74 103 98 113 95 111 114 118 106 101 108 114 119 111 124 127 131 148 131 139 143 151 156 159 153 174 174 171 179 186 209 209 218

Industry Construction 100 100 117 136 137 146 152 156 146 121 162 136 137 139 165 155 184 172 198 193 228 224 252 227 270 233 285 237 308 245 321 252 347 268 376 303 393 322 409 340 438 368 465 404 498 419 540 441 584 479 622 526 657 556 702 595 741 621 776 639 769 600 805 607 842 602 859 619 880 587

Services GDP total 100 100 87 117 124 114 84 128 101 122 61 132 91 117 161 144 126 152 126 162 166 177 175 185 182 197 190 208 197 218 201 220 210 236 225 254 241 266 253 285 274 298 290 316 308 336 330 359 348 380 372 404 386 418 408 450 427 470 439 482 441 483 457 497 462 511 470 515 484 529

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: HCSO, MNB compilation.

— 305 —

Agriculture 209 217 209 227 224 213 196 164 151 150 154 161 155 162 166 149 169 142 146 218 206 193 154 238 212 165 191 150 172 197 197 222 207 217 216

Industry Construction 862 560 860 561 887 604 874 571 857 619 791 483 651 411 607 418 625 395 663 414 716 409 744 380 833 406 897 448 941 474 977 524 1006 563 1066 638 1126 636 1192 644 1232 715 1308 687 1386 626 1325 564 1139 542 1228 489 1223 499 1201 474 1173 505 1247 548 1345 582 1369 495 1413 601 1420 715 1491 868

Services 498 513 543 530 543 562 531 525 528 537 521 524 525 533 543 574 595 627 655 665 696 728 727 729 700 701 715 717 742 761 779 802 838 891 928

GDP total 527 535 557 556 560 541 476 462 459 472 479 480 495 514 530 554 577 604 628 658 686 713 714 722 673 678 690 680 693 722 749 766 798 839 880

Annex: Statistical tables

Annex-12: Main components of use of gross domestic product (GDP), HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Household consumption 29.0 35.6 48.4 59.3 63.5 72.7 77.7 83.5 93.2 96.1 108.0 115.5 117.7 123.2 128.5 136.3 140.2 151.2 161.2 170.5 181.6 197.5 213.0 226.9 245.9 266.3 288.8 307.3 333.9 361.7 401.2 441.2 477.7 515.1 551.2 600.5

Government Accumulation consumption 4.9 9.9 5.8 14.4 7.9 21.7 11.5 18.2 13.0 24.1 12.3 21.6 12.3 26.1 11.7 10.9 10.3 35.3 11.0 28.6 13.4 41.9 14.9 48.8 16.6 51.3 20.6 52.7 21.3 59.1 22.3 63.7 21.5 54.8 21.6 62.3 22.8 77.4 25.9 86.9 28.5 95.4 33.1 111.7 37.4 134.9 37.7 124.6 40.1 130.0 45.7 164.0 50.1 174.8 53.2 189.7 57.8 216.5 65.8 259.8 71.3 232.2 74.2 221.3 79.1 231.4 84.2 241.8 90.9 237.2 95.3 251.8

Net exports 0.7 1.0 0.6 0.3 0.6 0.0 1.9 0.3 -5.0 2.1 0.0 -3.9 -0.3 -1.1 -3.3 -6.2 -1.6 2.4 -4.8 -2.2 6.9 -9.4 -22.7 3.8 17.2 -21.5 -26.1 -21.3 -26.3 -57.7 -22.4 -15.6 -8.2 6.8 17.2 30.9

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 306 â&#x20AC;&#x201D;

Household consumption 649.3 695.5 778.5 868.6 1029.6 1282.5 1746.9 2141.1 2639.9 3151.7 3851.7 4593.3 5528.5 6572.5 7599.8 8703.3 9970.6 11511.1 13112.1 14094.7 15071.9 15861.1 16802.9 17633.4 17215.3 17336.0 17983.8 18488.8 18810.5 19609.8 20476.5 21520.4 23203.5 24989.0 27121.3

Government Accumulation consumption 104.6 258.4 116.0 292.7 126.3 327.5 168.5 364.7 177.7 458.1 221.8 530.4 264.6 511.0 336.5 473.1 491.4 708.1 527.1 968.6 634.3 1350.9 728.3 1767.0 899.2 2321.9 1035.6 2998.7 1195.2 3161.2 1373.1 3739.4 1586.9 4039.9 1815.8 4463.7 2067.2 4708.4 2150.8 5666.4 2288.6 5708.9 2458.8 6271.1 2520.5 6239.7 2784.8 6702.2 2815.1 5361.3 2870.4 5618.3 2868.0 5783.4 2827.4 5577.5 3024.1 6337.9 3346.3 7663.3 3424.7 8105.5 3583.4 7652.3 3927.8 8873.3 4191.9 11615.0 4551.3 13394.4

Net exports 21.4 -15.4 -5.9 38.7 57.4 54.6 -24.2 -7.9 -291.1 -282.6 -0.5 33.7 85.0 -163.9 -318.7 -491.8 -198.7 -356.7 -753.8 -834.4 -520.4 -274.7 138.2 96.9 1066.6 1444.3 1735.5 1954.2 2117.8 2074.8 2778.5 3140.2 2830.7 1866.0 1719.7

Annex: Statistical tables

Annex-13: Components of use of gross domestic product (GDP) as a percentage of GDP Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Household consumption 65.3 62.8 61.5 66.4 62.8 68.2 65.9 78.5 69.6 69.8 66.1 65.9 63.5 63.1 62.5 63.1 65.2 63.7 62.8 60.6 58.1 59.3 58.7 57.7 56.8 58.6 59.2 58.1 57.4 57.4 58.8 61.2 61.2 60.8 61.5 61.4

Government Accumulation consumption 11.0 22.3 10.2 25.4 10.1 27.6 12.8 20.4 12.8 23.8 11.5 20.3 10.4 22.2 11.0 10.2 7.7 26.4 8.0 20.7 8.2 25.7 8.5 27.8 8.9 27.7 10.6 27.0 10.4 28.7 10.3 29.5 10.0 25.5 9.1 26.2 8.9 30.2 9.2 30.9 9.1 30.6 9.9 33.5 10.3 37.2 9.6 31.7 9.3 30.0 10.1 36.1 10.3 35.9 10.1 35.9 9.9 37.2 10.5 41.3 10.5 34.0 10.3 30.7 10.1 29.7 9.9 28.5 10.1 26.5 9.7 25.7

Net exports 1.5 1.7 0.8 0.4 0.5 0.0 1.6 0.3 -3.7 1.5 0.0 -2.2 -0.1 -0.6 -1.6 -2.9 -0.7 1.0 -1.9 -0.8 2.2 -2.8 -6.3 1.0 4.0 -4.7 -5.4 -4.0 -4.5 -9.2 -3.3 -2.2 -1.1 0.8 1.9 3.2

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 307 â&#x20AC;&#x201D;

Household consumption 62.8 63.9 63.5 60.3 59.8 61.4 69.9 72.8 74.4 72.2 66.0 64.5 62.6 62.9 65.3 65.3 64.7 66.0 68.5 66.9 66.8 65.2 65.4 64.8 65.1 63.6 63.4 64.1 62.1 60.0 58.9 60.0 59.7 58.6 58.0

Government Accumulation consumption 10.1 25.0 10.7 26.9 10.3 26.7 11.7 25.3 10.3 26.6 10.6 25.4 10.6 20.5 11.4 16.1 13.8 20.0 12.1 22.2 10.9 23.1 10.2 24.8 10.2 26.3 9.9 28.7 10.3 27.2 10.3 28.1 10.3 26.2 10.4 25.6 10.8 24.6 10.2 26.9 10.1 25.3 10.1 25.8 9.8 24.3 10.2 24.6 10.6 20.3 10.5 20.6 10.1 20.4 9.8 19.3 10.0 20.9 10.2 23.4 9.8 23.3 10.0 21.3 10.1 22.8 9.8 27.2 9.7 28.6

Net exports 2.1 -1.4 -0.5 2.7 3.3 2.6 -1.0 -0.3 -8.2 -6.5 0.0 0.5 1.0 -1.6 -2.7 -3.7 -1.3 -2.0 -3.9 -4.0 -2.3 -1.1 0.5 0.4 4.0 5.3 6.1 6.8 7.0 6.3 8.0 8.7 7.3 4.4 3.7

Annex: Statistical tables

Anex-14: Disposable income, consumption and financial saving of households Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Disposable Consumption income 28.1 29.0 37.0 35.6 51.6 48.4 55.9 59.3 63.5 63.5 72.9 72.7 77.6 77.7 84.8 83.5 95.6 93.2 98.2 96.1 105.6 108.0 118.5 115.5 121.3 117.7 127.3 123.2 134.2 128.5 143.2 136.3 146.0 140.2 157.0 151.2 167.9 161.2 179.7 170.5 193.7 181.6 211.7 197.5 226.1 213.0 240.9 226.9 261.8 245.9 284.4 266.3 309.8 288.8 330.5 307.3 362.5 333.9 391.9 361.7 424.1 401.2 464.8 441.2 504.2 477.7 542.2 515.1 584.3 551.2 637.0 600.5

Net lending

GDP%

…

… 1.8 1.4 1.7 2.8 2.3 1.8 2.0 1.0 1.5 3.9 2.7 2.5 2.1 3.9 4.5 2.6 1.1 1.3 4.5 6.2 7.0 4.7 5.1 7.3 6.8 9.5 6.4 11.5 10.9 8.6 8.7 9.1 9.8 10.9 14.3

Year 3.1 1.8 1.9 2.8 2.2 1.5 1.9 0.7 1.1 2.4 1.6 1.3 1.1 1.9 2.1 1.2 0.5 0.5 1.6 2.0 2.1 1.3 1.3 1.7 1.5 1.9 1.2 2.0 1.7 1.3 1.2 1.2 1.2 1.2 1.5

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: HCSO, MNB compilation.

— 308 —

Disposable Consumption income 691.5 649.3 743.6 695.5 810.0 778.5 932.0 868.6 1123.1 1029.6 1424.9 1282.5 2130.4 1746.9 2521.1 2141.1 2929.3 2639.9 3578.1 3151.7 4351.0 3851.7 5151.6 4593.3 6120.2 5528.5 7170.0 6572.5 7955.5 7599.8 8952.3 8703.3 10311.0 9970.6 11641.1 11511.1 13076.1 13112.1 14510.4 14094.7 15730.7 15071.9 16547.0 15861.1 16886.8 16802.9 17592.0 17633.4 17554.0 17215.3 17817.5 17336.0 18931.0 17983.8 19288.7 18488.8 19949.4 18810.5 20849.3 19609.8 21738.9 20476.5 22733.6 21520.4 24437.4 23203.5 26471.9 24989.0 … 27121.3

Net lending 14.0 21.0 14.7 15.5 40.6 125.7 424.5 382.4 332.1 425.1 563.1 707.1 753.4 964.8 814.1 756.7 786.2 503.8 195.7 585.1 882.8 805.0 490.7 356.7 900.7 1158.2 1471.8 1520.1 1479.5 1796.5 2789.0 1709.7 1984.0 2624.0 2301.6

GDP% 1.4 1.9 1.2 1.1 2.4 6.0 17.0 13.0 9.4 9.7 9.6 9.9 8.5 9.2 7.0 5.7 5.1 2.9 1.0 2.8 3.9 3.3 1.9 1.3 3.4 4.2 5.2 5.3 4.9 5.5 8.0 4.8 5.1 6.2 4.9

Annex: Statistical tables

Annex-15: Net lending or borrowing of main sectors and the total economy (financial accounts), HUF billions Year

Corporations

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

-1.3 -1.0 -1.9 -2.5 -3.3 -3.2 -0.1 -2.1 -2.2 -6.6 -9.4 -7.8 -6.0 -10.4 -11.0 -5.6 12.2 -4.1 -5.0 2.8 -13.4 -20.3 -1.4 10.5 -12.6 -20.5 -16.4 -23.5 -41.7 -20.1 -6.0 -2.6 -7.8 -13.5 -23.0

General government -0.7 -0.9 -1.1 -1.3 -1.0 -0.2 -6.3 -1.5 3.6 2.9 2.9 5.1 2.2 1.9 0.0 1.0 -11.2 -1.2 -2.2 -4.7 -2.9 -2.7 0.7 0.9 -10.8 -18.9 -18.6 -23.0 -38.1 -31.5 -27.5 -24.6 -15.5 -4.0 8.4

Households 1.8 1.4 1.7 2.8 2.3 1.8 2.0 1.0 1.5 3.9 2.7 2.5 2.1 3.9 4.5 2.6 1.1 1.3 4.5 6.2 7.0 4.7 5.1 7.3 6.8 9.5 6.4 11.5 10.9 8.6 8.7 9.1 9.8 10.9 14.3

Total economy

Year

-0.2 -0.5 -1.3 -1.0 -2.0 -1.6 -4.4 -2.7 2.9 0.2 -3.8 -0.2 -1.6 -4.5 -6.5 -1.9 2.1 -4.0 -2.7 4.3 -9.3 -18.2 4.4 18.8 -16.6 -29.9 -28.6 -35.0 -69.0 -43.0 -24.8 -18.1 -13.4 -6.6 -0.2

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

â&#x20AC;&#x201D; 309 â&#x20AC;&#x201D;

Corporations -20.9 -52.0 -32.3 -66.7 -40.9 -157.6 -194.2 -183.5 -211.8 -307.1 -181.1 -587.3 -685.2 -901.4 -1227.9 -1421.7 -953.1 5.2 -144.5 -1357.0 -1109.2 -635.1 -669.5 -1587.7 363.0 392.6 168.2 490.5 1174.3 452.5 -104.9 -216.1 -718.1 -1454.2 -1470.8

General government -11.9 -29.2 -28.1 -1.0 -39.7 5.9 -224.4 -220.3 -465.5 -558.6 -551.2 -352.6 -536.2 -845.3 -557.4 -409.1 -609.1 -1579.4 -1411.2 -1427.6 -1776.7 -2254.0 -1259.9 -964.5 -1263.8 -1238.0 -1480.3 -735.9 -758.3 -963.5 -648.2 -656.8 -946.3 -918.8 -999.6

Households 14.0 21.0 14.7 15.5 40.6 125.7 424.5 382.4 332.1 425.1 563.1 707.1 753.4 964.8 814.1 756.7 786.2 503.8 195.7 585.1 882.8 805.0 490.7 356.7 900.7 1158.2 1471.8 1520.1 1479.5 1796.5 2789.0 1709.7 1984.0 2624.0 2301.6

Total economy -18.8 -60.2 -45.7 -52.2 -40.0 -20.9 12.2 2.2 -337.9 -438.9 -157.6 -202.3 -454.8 -747.4 -968.8 -1071.0 -770.1 -1060.4 -1354.4 -2192.9 -2001.2 -2058.7 -1415.3 -2173.7 0.5 299.9 205.8 1296.7 1917.9 1345.8 2067.6 1103.7 579.9 369.3 -172.2

Annex: Statistical tables

Annex-16: Net lending or borrowing of main sectors and the total economy (financial accounts), as a percentage of GDP Year

Corporations

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

-2.2 -1.3 -2.1 -2.5 -3.1 -2.7 -0.1 -1.6 -1.6 -4.1 -5.4 -4.2 -3.0 -5.1 -5.1 -2.6 5.1 -1.6 -1.8 0.9 -4.0 -5.6 -0.4 2.4 -2.8 -4.2 -3.1 -4.0 -6.6 -2.9 -0.8 -0.3 -0.9 -1.5 -2.4

General government -1.3 -1.1 -1.2 -1.3 -0.9 -0.2 -5.9 -1.2 2.6 1.8 1.6 2.8 1.1 0.9 0.0 0.5 -4.7 -0.5 -0.8 -1.5 -0.9 -0.7 0.2 0.2 -2.4 -3.9 -3.5 -4.0 -6.1 -4.6 -3.8 -3.2 -1.8 -0.4 0.9

Households 3.1 1.8 1.9 2.8 2.2 1.5 1.9 0.7 1.1 2.4 1.6 1.3 1.1 1.9 2.1 1.2 0.5 0.5 1.6 2.0 2.1 1.3 1.3 1.7 1.5 1.9 1.2 2.0 1.7 1.3 1.2 1.2 1.2 1.2 1.5

Total economy

Year

-0.4 -0.6 -1.4 -1.0 -1.8 -1.4 -4.1 -2.0 2.1 0.1 -2.2 -0.1 -0.8 -2.2 -3.0 -0.9 0.9 -1.6 -1.0 1.4 -2.8 -5.0 1.1 4.3 -3.7 -6.1 -5.4 -6.0 -11.0 -6.3 -3.4 -2.3 -1.6 -0.7 0.0

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

â&#x20AC;&#x201D; 310 â&#x20AC;&#x201D;

Corporations -2.0 -4.8 -2.6 -4.6 -2.4 -7.5 -7.8 -6.2 -6.0 -7.0 -3.1 -8.2 -7.8 -8.6 -10.6 -10.7 -6.2 0.0 -0.8 -6.4 -4.9 -2.6 -2.6 -5.8 1.4 1.4 0.6 1.7 3.9 1.4 -0.3 -0.6 -1.8 -3.4 -3.1

General government -1.2 -2.7 -2.3 -0.1 -2.3 0.3 -9.0 -7.5 -13.1 -12.8 -9.4 -5.0 -6.1 -8.1 -4.8 -3.1 -4.0 -9.1 -7.4 -6.8 -7.9 -9.3 -4.9 -3.5 -4.8 -4.5 -5.2 -2.6 -2.5 -2.9 -1.9 -1.8 -2.4 -2.2 -2.1

Households 1.4 1.9 1.2 1.1 2.4 6.0 17.0 13.0 9.4 9.7 9.6 9.9 8.5 9.2 7.0 5.7 5.1 2.9 1.0 2.8 3.9 3.3 1.9 1.3 3.4 4.2 5.2 5.3 4.9 5.5 8.0 4.8 5.1 6.2 4.9

Total economy -1.8 -5.5 -3.7 -3.6 -2.3 -1.0 0.5 0.1 -9.5 -10.1 -2.7 -2.8 -5.1 -7.2 -8.3 -8.0 -5.0 -6.1 -7.1 -10.4 -8.9 -8.5 -5.5 -8.0 0.0 1.1 0.7 4.5 6.3 4.1 5.9 3.1 1.5 0.9 -0.4

Annex: Statistical tables

Annex-17: Consolidated revenues, expenditures and balance of the budgetary general government, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Revenues 14.3 23.1 32.3 42.8 46.0 43.2 46.4 34.4 57.9 69.0 59.0 74.7 76.2 82.4 84.6 91.6 90.4 96.5 109.3 138.8 155.0 171.9 191.6 209.4 230.6 280.8 313.3 320.4 361.3 382.9 411.6 447.5 472.6 485.8 543.7

Expenditures 14.7 22.8 32.0 42.5 46.3 41.8 44.6 35.5 55.6 62.8 58.7 74.4 75.7 81.9 84.5 91.5 90.2 97.1 107.8 140.5 156.9 175.7 194.9 212.0 232.5 284.3 316.2 322.9 364.8 386.4 415.2 452.0 482.1 498.0 549.8

Balance Balance, GDP% -0.4 -0.9 0.3 0.6 0.3 0.4 0.3 0.3 -0.3 -0.3 1.4 1.3 1.8 1.5 -1.1 -1.0 2.3 1.7 6.2 4.5 0.3 0.2 0.3 0.2 0.5 0.3 0.5 0.3 0.1 0.0 0.1 0.0 0.2 0.1 -0.6 -0.3 1.5 0.6 -1.7 -0.6 -1.9 -0.6 -3.8 -1.1 -3.3 -0.9 -2.6 -0.7 -1.9 -0.4 -3.5 -0.8 -2.9 -0.6 -2.5 -0.5 -3.5 -0.6 -3.5 -0.6 -3.6 -0.5 -4.5 -0.6 -9.5 -1.2 -12.2 -1.4 -6.1 -0.7

Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Ministry of Finance, MNB compilation.

â&#x20AC;&#x201D; 311 â&#x20AC;&#x201D;

Revenues 572.9 632.8 682.0 780.6 898.2 1063.7 1279.0 1588.7 1894.4 2449.0 3060.5 3352.6 3985.4 4692.7 4398.7 4961.9 5568.0 6325.7 6961.0 7676.0 8341.0 9541.0 10242.0 11589.8 12162.0 12033.0 12256.5 12416.3 13200.0 14573.0 15913.8 16063.1 16360.1 17332.4 18087.8

Expenditures 576.6 646.6 727.3 795.0 908.4 1112.4 1279.7 1641.8 2070.9 2597.5 3229.2 3545.1 3930.7 4845.4 5030.7 5354.2 6048.0 6769.7 8647.0 8779.0 9658.0 10609.0 12441.0 12951.2 13055.7 13047.3 13378.0 14014.3 13708.3 15390.6 16627.3 17284.1 16900.1 18650.4 19289.8

Balance Balance, GDP% -3.7 -0.4 -13.8 -1.3 -45.3 -4.2 -34.4 -2.8 -10.2 -0.7 -48.7 -2.8 -0.7 0.0 -53.1 -2.1 -176.5 -6.0 -148.5 -4.2 -168.7 -3.9 -192.5 -3.3 54.7 0.8 -152.7 -1.7 -632.0 -6.1 -392.3 -3.4 -480.0 -3.6 -444.0 -2.9 -1686.0 -9.7 -1103.0 -5.8 -1317.0 -6.2 -1068.0 -4.7 -2199.0 -9.0 -1361.4 -5.3 -893.7 -3.3 -1014.3 -3.8 -1121.5 -4.1 -1598.0 -5.6 -508.3 -1.8 -817.6 -2.7 -713.5 -2.2 -1221.0 -3.5 -540.0 -1.5 -1318.0 -3.4 -1202.0 -2.8

Annex: Statistical tables

Annex-18: Consolidated gross debt of general government at face value (year-end stocks), HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Debt from abroad 4.4 4.4 4.2 4.7 4.7 5.4 5.6 8.6 13.6 13.7 14.2 14.9 15.2 15.6 15.3 15.1 15.7 16.5 17.2 16.1 17.4 17.4 14.7 12.9 13.6 11.2 11.9 13.5 22.3 28.2 32.3 30.8 42.5 47.4 50.9 52.0

Debt from residents 0.6 1.5 2.8 4.2 7.7 9.7 13.5 14.9 14.5 13.6 13.4 15.3 15.7 17.6 21.4 21.4 21.4 21.4 29.4 44.4 52.5 84.3 115.4 131.7 149.3 175.4 229.8 276.5 338.8 401.6 451.8 474.2 487.1 539.1 534.0 547.2

Total debt 4.9 5.9 7.0 8.9 12.5 15.2 19.0 23.6 28.1 27.3 27.5 30.2 30.9 33.2 36.7 36.5 37.1 38.0 46.6 60.6 69.9 101.7 130.1 144.5 163.0 186.6 241.6 290.0 361.1 429.9 484.2 505.0 529.6 586.5 584.9 599.2

Total debt GDP%

Year

11.1 10.4 8.9 10.0 12.3 14.2 16.1 22.1 21.0 19.8 16.9 17.2 16.7 17.0 17.9 16.9 17.2 16.0 18.2 21.5 22.4 30.5 35.9 36.8 37.6 41.1 49.6 54.8 62.1 68.3 71.0 70.0 67.9 69.2 65.3 61.2

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB (Without Eximbank.).

â&#x20AC;&#x201D; 312 â&#x20AC;&#x201D;

Debt from abroad 52.0 42.1 33.8 23.0 16.3 37.7 122.2 154.4 211.9 278.3 366.5 360.2 411.2 604.5 1426.7 1871.5 2384.8 3131.8 4232.0 5194.7 6202.1 7249.5 8213.2 10000.0 11367.4 12381.6 14811.2 13861.1 13319.6 13267.5 12138.0 10798.7 10039.3 10367.1 10134.4

Debt from residents 548.8 686.7 860.5 961.4 1249.8 1344.9 1806.0 2185.4 3006.3 3631.5 4545.2 4725.6 5069.8 5669.2 5557.6 5487.1 5576.3 6437.4 6743.1 7081.9 7353.8 8346.9 8534.1 9383.8 9144.7 9466.6 7954.9 8573.3 9750.9 11372.0 13679.8 15562.4 17536.5 18830.8 20152.9

Total debt 600.8 728.9 894.3 984.5 1266.1 1382.6 1928.2 2339.8 3218.2 3909.8 4911.7 5085.8 5481.0 6273.7 6984.3 7358.6 7961.1 9569.2 10975.0 12276.5 13556.0 15596.4 16747.2 19383.8 20512.1 21848.2 22766.1 22434.5 23070.6 24639.6 25817.8 26361.1 27575.8 29197.9 30287.2

Total debt GDP% 58.1 66.9 72.9 68.3 73.5 66.2 77.2 79.5 90.7 89.6 84.2 71.4 62.0 60.1 60.0 55.2 51.7 54.9 57.4 58.2 60.1 64.1 65.2 71.2 77.5 80.1 80.2 77.8 76.2 75.4 74.2 73.4 71.0 68.4 64.7

Annex: Statistical tables

Annex-19: Consolidated gross debt of general government at face value including Eximbank, HUF billions Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Debt from other Debt from Debt from MNB abroad residents 52.0 540.3 8.5 42.1 678.0 8.7 33.8 836.7 23.8 23.0 923.6 37.9 16.3 1201.9 47.9 37.7 1296.3 48.7 122.2 1620.1 186.0 154.4 1841.9 343.5 211.9 2166.8 839.4 278.3 2540.8 1090.3 366.5 3161.4 1383.1 360.5 2905.5 1821.8 417.4 2860.9 2228.2 634.3 2929.7 2755.8 1456.1 2301.3 3272.1 1917.8 2024.3 3480.0 2444.7 1432.2 4169.4 3215.5 1156.3 5317.8 4361.1 775.8 5979.6 5321.6 601.5 6499.6 6305.5 272.0 7096.6 7328.6 253.6 8102.7 8288.0 154.4 8431.5 10045.7 392.9 9115.1 11413.4 305.0 8976.3 12392.8 270.6 9326.5 14823.6 177.3 7926.2 13981.4 144.7 8536.2 13570.2 141.2 9719.7 13657.7 218.1 11233.6 12605.9 246.3 13637.6 11249.5 195.9 15655.5 10542.4 76.8 17692.7 10868.4 42.9 19051.3 10527.5 42.4 20470.5

Total debt 600.8 728.9 894.3 984.5 1266.1 1382.6 1928.2 2339.8 3218.2 3909.4 4911.0 5087.8 5506.5 6319.8 7029.5 7422.2 8046.3 9689.6 11116.4 12422.7 13674.1 15685.0 16873.9 19553.7 20694.7 21989.9 22927.1 22662.2 23431.2 25109.4 26489.8 27100.8 28311.9 29962.6 31040.4

Total debt GDP% 58.1 66.9 72.9 68.3 73.5 66.2 77.2 79.5 90.7 89.6 84.1 71.4 62.3 60.5 60.4 55.7 52.3 55.6 58.1 58.9 60.6 64.5 65.7 71.8 78.2 80.6 80.8 78.6 77.4 76.8 76.2 75.5 72.9 70.2 66.3

Source: MNB.

â&#x20AC;&#x201D; 313 â&#x20AC;&#x201D;

Share of debt Share of foreign Share of debt from abroad % currency % from MNB % 8.7 8.7 89.9 5.8 5.8 93.0 3.8 3.8 93.6 2.3 2.3 93.8 1.3 1.3 94.9 2.7 2.7 93.8 6.3 6.3 84.0 6.6 6.6 78.7 6.6 6.4 67.3 7.1 7.0 65.0 7.5 7.6 64.4 7.1 6.9 57.1 7.6 41.7 52.0 10.0 40.3 46.4 20.7 38.5 32.7 25.8 36.8 27.3 30.4 31.7 17.8 33.2 26.0 11.9 39.2 25.8 7.0 42.8 27.7 4.8 46.1 29.9 2.0 46.7 29.9 1.6 49.1 32.5 0.9 51.4 40.9 2.0 55.2 47.3 1.5 56.4 48.0 1.2 64.7 52.6 0.8 61.7 44.3 0.6 57.9 43.2 0.6 54.4 41.1 0.9 47.6 37.1 0.9 41.5 30.8 0.7 37.2 26.1 0.3 36.3 23.2 0.1 33.9 20.5 0.1

Share of securities % 2.1 2.2 2.5 3.0 3.0 2.7 9.2 19.8 31.6 35.3 34.8 49.1 48.2 52.3 63.6 68.8 75.3 77.0 83.7 86.9 88.4 87.1 88.6 80.5 72.6 71.5 70.8 76.3 81.4 84.8 83.8 85.7 87.8 88.1 87.5

Annex: Statistical tables

Annex-20: Exports, imports and the current account balance (balance of payments), HUF billions Year 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Exports 13.0 15.7 17.8 20.1 21.2 24.7 20.2 20.4 28.7 32.6 36.2 42.3 47.3 51.8 56.4 62.4 67.1 68.0 73.7 88.5 101.4 109.9 135.3 165.7 188.5 200.2 205.2 240.6 243.9 283.3 281.9 308.2 321.8 360.7 402.0

Imports 12.5 15.7 18.5 19.8 21.8 22.9 20.1 28.7 26.8 33.9 40.1 42.5 48.4 55.0 62.6 64.0 64.8 72.9 75.9 81.7 109.2 132.5 130.5 146.2 208.7 236.2 226.5 266.9 301.5 305.7 297.4 316.5 315.0 343.6 371.1

Current account Balance, GDP% balance -0.4 -0.7 -1.2 -1.5 -2.7 -3.1 -0.7 -0.7 -1.8 -1.7 1.4 1.2 -1.8 -1.7 -10.3 -7.7 1.9 1.4 -1.8 -1.1 -4.4 -2.5 0.0 0.0 -2.2 -1.1 -4.6 -2.2 -6.4 -3.0 -2.4 -1.1 1.8 0.8 -4.4 -1.7 -1.5 -0.5 6.7 2.1 -9.4 -2.8 -16.0 -4.4 5.1 1.3 21.3 4.9 -17.9 -3.9 -29.9 -6.1 -28.2 -5.3 -35.8 -6.2 -71.4 -11.3 -40.3 -5.9 -23.1 -3.2 -17.5 -2.2 -14.1 -1.7 -8.0 -0.9 3.9 0.4

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

â&#x20AC;&#x201D; 314 â&#x20AC;&#x201D;

Exports 436.2 431.6 464.4 530.4 620.9 650.7 818.4 925.3 937.1 1262.5 2287.2 2983.0 4232.2 5527.4 6475.6 8908.2 9990.3 10135.5 10778.7 12573.6 14125.3 17962.2 20032.2 21576.8 19684.8 22292.4 24565.0 24902.1 25923.8 28580.6 30603.8 31284.3 33842.2 36236.5 38986.5

Imports 414.8 447.0 470.3 491.7 563.5 596.1 842.6 933.3 1228.1 1545.1 2287.7 2949.3 4147.2 5691.3 6794.2 9399.9 10189.0 10492.2 11532.5 13408.1 14645.7 18236.9 19894.0 21479.8 18618.3 20848.1 22829.5 22948.0 23806.0 26505.8 27825.3 28144.1 31011.6 34370.5 37266.8

Current account Balance, GDP% balance -17.7 -1.7 -59.9 -5.5 -43.9 -3.6 -32.5 -2.3 -32.0 -1.9 8.4 0.4 19.3 0.8 23.1 0.8 -318.4 -9.0 -411.7 -9.4 -197.7 -3.4 -282.0 -4.0 -389.1 -4.4 -795.8 -7.6 -971.0 -8.3 -1182.1 -8.9 -945.0 -6.1 -1109.2 -6.4 -1574.7 -8.2 -1916.9 -9.1 -1621.5 -7.2 -1757.9 -7.2 -1861.4 -7.2 -1944.8 -7.1 -193.4 -0.7 75.1 0.3 161.4 0.6 452.1 1.6 1063.6 3.5 393.3 1.2 820.6 2.4 1622.5 4.5 907.6 2.3 -15.4 0.0 -399.7 -0.9

Annex: Statistical tables

Annex-21: Volume indices of exports and imports, 1960=100 Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Exports

Imports 100 118 130 139 154 170 186 202 216 248 266 289 348 394 404 427 455 519 524 586 588 612 642 684 732 770 753 778 830 834

100 108 124 142 159 158 168 197 203 215 274 326 309 318 374 398 406 447 503 481 473 479 463 468 473 508 521 533 532 546

Source: HCSO, MNB.

— 315 —

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Exports

Imports 800 760 768 666 777 842 881 1144 1401 1625 1978 2132 2258 2464 2916 3250 3832 4438 4623 4035 4719 5184 5215 5438 5812 6265 6540 6926 7222 7527

505 607 502 608 695 668 704 890 1112 1271 1535 1597 1678 1848 2131 2262 2587 2898 3024 2508 2888 3083 3080 3237 3520 3739 3921 4249 4523 4778

Annex: Statistical tables

Annex-22: Year-end stocks of selected financial assets and liabilities in the Hungarian economy, HUF billions Year 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Hungarian currency 1.0 2.1 2.9 2.8 3.4 3.3 2.9 3.9 4.8 5.1 7.0 7.0 7.3 9.4 8.9 9.1 9.5 10.8 12.5 12.6 12.9 14.4 15.9 18.4 22.3 25.2 26.2 31.3 34.6 41.3 45.1 50.7 57.2 63.5 72.8 81.3 87.3

Household Household loans deposits 0.1 0.0 0.2 0.1 0.3 0.1 0.3 0.2 0.3 0.2 0.3 0.2 0.4 0.3 0.4 0.4 0.6 0.6 0.7 0.9 0.6 1.1 1.3 1.6 2.3 2.2 3.9 2.9 5.5 4.4 6.7 5.9 8.8 7.8 12.3 9.8 16.8 11.7 20.4 13.3 23.0 15.7 24.8 18.1 29.2 19.8 34.4 21.6 41.2 25.2 47.5 29.6 53.4 34.4 60.8 39.7 69.5 46.3 79.9 54.2 91.5 64.7 105.0 75.9 121.3 87.3 132.5 99.8 142.9 115.2 156.5 129.0 172.5 142.9

Corporation deposits … … 3.5 3.5 4.0 5.6 7.2 6.2 6.1 5.6 6.4 7.9 8.8 11.2 14.6 17.8 20.8 25.4 23.3 25.0 29.5 31.7 38.3 46.6 67.1 82.5 93.4 115.3 127.0 130.5 143.7 172.5 186.6 216.6 239.1 255.4 258.5

Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

— 316 —

Hungarian currency 97.9 108.8 122.4 135.4 171.1 182.5 199.9 230.5 286.7 349.5 400.7 438.2 481.5 556.5 621.3 737.9 965.0 974.1 1138.4 1279.6 1466.8 1452.6 1714.1 1967.9 2202.2 2308.7 2187.9 2378.1 2709.6 2737.7 3202.7 3749.1 4318.4 4594.0 5153.3 6116.8 6627.1

Household Household loans deposits 193.1 165.2 215.5 192.1 238.7 220.8 267.7 253.5 283.0 292.8 306.0 326.9 334.8 355.0 403.6 402.5 565.5 288.0 773.6 310.7 928.3 359.4 1157.2 407.3 1498.3 385.6 1874.0 372.7 2202.0 427.4 2638.8 450.5 2959.1 578.5 3324.6 853.1 3825.3 1257.7 4140.2 2047.2 4767.9 3239.4 5313.5 4198.1 5888.3 5281.7 6212.2 6338.9 6673.5 7695.8 7596.3 9875.0 8006.9 9934.1 7798.4 10797.6 8357.4 10649.8 8386.4 9157.7 7650.4 8548.2 7640.0 8377.2 7877.8 7350.7 8204.7 7258.0 8569.8 7296.9 9742.3 7650.7 10396.5 8708.7

Corporation deposits 199.0 151.7 151.2 151.3 199.7 179.0 258.3 348.5 425.5 492.8 587.9 630.0 739.3 915.3 1102.3 1195.7 1418.2 1651.7 1982.3 2413.8 2673.0 2811.3 3279.3 4214.3 4197.3 4052.2 3983.7 4474.3 4673.2 4587.4 5289.9 5506.0 6147.6 7198.1 8301.1 9557.0 10481.8

Annex: Statistical tables

Annex-23: Statistical balance sheet of MNB, financial assets and liabilities, HUF billions Year 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Loans to corporations 0.5 1.7 6.1 8.6 11.0 13.5 16.7 17.1 19.6 23.4 25.9 31.2 33.1 39.2 52.0 60.7 62.8 76.5 90.9 97.4 88.8 88.0 84.3 83.2 89.5 111.8 115.0 118.9 138.6 141.3 169.2 188.9 220.6 243.5 261.2 274.1 283.2

Loans to Foreign assets Of which: Gold Financial assets Currency issued government 0.3 1.0 … 2.2 1.0 0.3 1.5 … 3.1 2.0 0.3 1.7 … 8.2 2.8 0.4 2.4 1.7 11.5 2.6 0.7 2.6 1.9 14.3 3.2 1.0 2.6 2.0 17.2 3.1 1.2 3.3 2.2 21.2 2.8 3.1 3.5 2.1 23.8 3.8 4.3 5.2 2.6 29.1 4.7 6.9 5.6 2.8 35.9 5.0 6.9 4.9 2.2 37.7 6.8 6.4 4.0 1.0 41.6 6.8 5.5 5.3 1.1 43.9 7.2 5.2 4.5 1.3 48.9 9.2 7.2 5.0 1.9 64.2 8.7 7.9 6.9 2.3 75.5 8.9 10.1 9.1 2.7 82.0 9.3 14.3 11.0 2.3 101.8 10.5 14.6 11.4 2.0 116.9 12.2 15.0 11.2 2.2 123.6 12.3 15.4 14.6 2.6 118.7 12.6 23.8 15.8 3.1 127.5 14.1 39.7 14.7 3.1 138.6 15.9 48.6 22.7 3.7 154.6 18.4 81.3 20.4 2.8 191.3 22.3 111.8 30.5 2.5 254.2 25.2 127.9 41.9 3.1 284.8 26.2 146.0 49.6 3.8 314.5 31.3 173.2 62.5 3.4 374.3 34.6 227.5 62.9 2.6 431.7 41.3 275.8 67.7 3.1 512.7 45.1 337.7 65.7 2.9 592.3 50.7 400.7 81.3 9.7 702.7 57.2 451.1 82.4 18.6 777.2 63.5 474.7 83.3 20.7 819.5 72.8 488.5 62.1 15.7 825.0 81.3 535.1 52.1 7.4 878.1 87.3

Source: MNB.

— 317 —

Government deposits 0.1 0.1 0.0 1.5 1.7 1.9 2.5 4.0 5.8 9.5 7.4 12.0 12.0 11.1 19.7 24.6 23.5 28.4 32.9 33.3 22.1 22.7 18.9 14.6 10.8 9.3 18.6 26.1 24.2 27.8 44.7 39.0 48.0 43.8 51.0 45.8 52.3

Corporations Foreign liabilities deposits 0.0 0.9 0.0 0.7 3.5 1.5 3.5 2.2 4.0 2.7 5.6 3.2 6.6 5.0 6.2 6.2 6.1 9.4 5.6 12.3 6.4 13.2 7.9 10.6 7.2 10.1 9.7 9.0 10.5 12.5 13.4 15.7 13.9 19.7 16.2 27.3 14.9 35.7 19.3 38.2 22.1 39.3 27.5 43.8 34.9 48.1 45.9 52.2 66.3 63.5 81.3 93.1 92.0 102.7 113.6 90.1 124.9 127.4 122.8 168.9 130.7 208.4 153.0 242.2 165.8 309.6 190.8 342.8 213.0 344.6 229.0 329.0 232.1 359.4

Annex: Statistical tables

Annex-23: Statistical balance sheet of MNB, financial assets and liabilities, HUF billions (continued) Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Loans to corporations 292.0 308.5 330.4 356.3 1.4 6.7 4.0

Loans to Foreign assets Of which: Gold Financial assets Currency issued government 528.4 89.6 18.1 917.7 97.9 540.2 121.7 24.2 980.2 108.8 540.4 177.3 33.9 1058.6 122.4 674.3 165.1 33.9 1217.4 135.4 834.5 138.8 31.8 1260.0 171.1 927.6 145.4 33.7 1332.0 182.5 1208.3 170.5 29.1 1656.7 199.9 1304.2 135.9 7.0 1834.1 230.5 1625.1 384.0 6.9 2491.9 286.7 1716.8 396.4 2.9 2602.0 349.5 1975.8 704.3 4.5 3350.3 400.7 2184.2 808.4 4.7 3883.0 438.2 2746.5 1717.4 6.0 5293.3 481.5 2181.4 1658.8 6.1 4957.2 556.5 2370.3 1773.3 5.9 5018.3 621.3 2620.2 2123.5 6.4 5376.9 737.9 2134.0 3043.9 7.4 5825.7 965.0 1879.8 3536.1 7.8 6005.8 974.1 1418.1 3398.9 7.8 5426.2 1138.4 1016.9 2515.1 7.8 3889.9 1279.6 518.9 2975.0 8.8 3815.3 1466.8 336.3 2917.3 7.8 3581.6 1452.6 92.6 4009.3 10.8 4334.8 1714.1 83.7 4159.1 12.0 4469.5 1967.9 0.0 4169.8 14.1 4355.4 2202.2 6427.5 16.1 7021.5 2308.7 8336.8 20.5 8677.1 2187.9 9431.7 29.1 9804.7 2378.1 11770.2 37.2 12107.0 2709.6 9948.4 36.3 10324.8 2737.7 10074.7 25.6 11107.4 3202.7 11059.3 30.7 12507.5 3749.1 9581.6 30.1 11373.8 4318.4 7732.8 0.0 9654.2 4594.0 7325.5 33.2 8942.9 5153.3 8855.2 363.3 10600.2 6116.8 9543.1 454.9 11881.1 6627.1

Source: MNB.

â&#x20AC;&#x201D; 318 â&#x20AC;&#x201D;

Government deposits 53.3 62.1 44.0 62.3 55.9 47.2 34.1 104.8 211.7 255.2 345.9 316.6 561.8 389.9 328.3 193.7 367.8 254.9 428.6 78.4 133.6 314.6 283.5 373.2 254.9 1647.6 988.5 1076.9 1383.1 1378.1 752.0 991.8 665.1 1147.4 693.9 1396.6 946.2

Corporations Foreign liabilities deposits 169.9 439.3 121.0 511.4 122.5 596.9 119.4 727.6 3.4 844.8 2.4 947.5 5.3 1133.5 1120.3 1384.1 1367.0 1877.1 2260.8 2997.3 2712.3 2451.3 2611.5 2544.5 2487.0 1892.9 1236.0 1043.5 541.3 329.3 318.5 199.1 334.5 1259.7 2179.9 2296.7 1107.3 948.0 725.5 623.3 609.6 517.2 578.4 659.5

Annex: Statistical tables

Annex-24: Statistical balance sheet of credit institutions, financial assets and liabilities, HUF billions Year

Financial assets

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

2.9 2.9 2.9 3.5 3.0 3.2 3.3 4.4 5.1 9.1 11.5 15.9 17.4 22.2 28.0 31.8 32.9 37.4 36.6 40.5 43.0 50.1 63.1 68.5 79.1 95.4 111.5 133.4 158.6 190.8 216.9 234.6 257.0 276.0 303.1 341.6

Loans to corporations 1.3 0.6 0.5 0.0 0.2 0.7 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.7 1.0 1.2 1.2 1.3 1.4 1.5 1.7 1.9 2.0 2.3 2.6 2.8 3.7 4.4 5.6

Loans to households 0.2 0.2 0.2 0.3 0.4 0.6 0.9 1.1 1.6 2.2 2.9 4.4 5.9 7.8 9.8 11.7 13.3 15.7 17.9 19.5 21.2 24.7 28.8 33.1 38.0 44.0 51.3 60.4 70.3 80.3 91.5 105.6 118.0 130.8 150.3 174.4

Household deposits 0.3 0.3 0.3 0.4 0.4 0.6 0.7 0.6 1.3 2.3 3.9 5.5 6.7 8.8 12.3 16.8 20.4 23.0 24.8 29.2 34.4 41.2 47.5 53.4 60.7 69.4 79.7 91.1 104.5 120.5 131.6 141.9 155.4 171.1 191.5 213.5

Year

Financial assets

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

379.8 444.9 974.4 1002.5 1213.4 1569.5 2079.8 2202.2 2801.3 3257.1 3815.3 4640.9 5753.2 6882.2 7710.7 8868.8 9997.9 11600.4 14612.3 17098.0 19866.7 23393.8 27127.0 33201.8 34622.7 34493.8 35890.6 32995.6 32813.7 34590.1 34155.5 35456.8 37143.1 39966.9 43778.3

Source: MNB.

â&#x20AC;&#x201D; 319 â&#x20AC;&#x201D;

Loans to corporations 6.3 8.0 396.1 384.0 460.7 573.9 684.7 669.9 726.3 927.5 1050.5 1302.0 1767.7 2057.9 2420.2 3156.4 3387.4 3512.4 4307.0 4946.8 5644.7 6360.7 7188.4 7934.6 7474.8 7426.5 7583.8 6803.2 6594.9 6633.0 5789.2 5795.5 6335.0 7310.9 8309.8

Loans to households 200.2 229.6 265.5 296.1 319.8 351.9 231.0 243.6 282.3 318.9 288.6 265.7 276.9 312.3 417.1 601.5 882.7 1471.9 2362.1 3017.1 3814.0 4778.0 5942.7 7756.5 7893.1 8623.2 8544.4 7276.4 6878.1 6757.1 5910.5 5782.7 5843.8 6226.8 7182.2

Household deposits 236.2 264.6 278.8 299.7 324.1 391.7 550.9 758.4 910.7 1135.3 1468.9 1840.0 2161.1 2585.9 2897.8 3248.2 3740.0 4044.5 4644.3 5180.3 5715.9 6001.1 6431.3 7313.2 7696.0 7456.8 7899.6 7827.9 7061.3 6987.5 7187.7 7439.4 7799.9 8875.0 9504.1

Annex: Statistical tables

Annex-25: Non-consolidated financial assets and liabilities of general government, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Financial assets Shares, equity 105.2 99.9 140.2 134.4 183.0 175.9 216.8 207.8 244.0 232.1 261.7 247.7 288.0 270.1 292.4 277.6 323.2 303.5 345.1 323.4 365.9 342.5 392.6 363.6 418.4 383.5 436.9 397.4 461.3 416.5 471.6 426.6 475.6 428.6 512.8 476.1 554.3 511.8 640.9 595.1 685.1 635.3 767.6 710.6 853.8 781.3 921.7 839.0 1002.0 898.3 1106.3 990.2 1221.2 1080.7 1369.6 1200.7 1511.4 1302.8 1646.1 1408.6 1754.7 1496.5 1857.1 1587.1 1945.2 1681.8 2018.9 1746.6 2108.5 1822.1 2145.3 1830.7

Liabilities Debt securities 6.9 8.2 10.3 13.3 18.0 21.1 25.2 28.3 34.9 33.2 32.0 34.7 35.5 37.8 41.7 41.9 42.9 44.5 53.9 69.4 80.4 113.7 143.5 159.1 185.5 212.6 262.6 313.0 386.3 456.9 513.0 535.9 562.9 625.9 8.0 626.7 10.8 642.3 12.3

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB (Without Eximbank.).

â&#x20AC;&#x201D; 320 â&#x20AC;&#x201D;

Financial assets Shares, equity 2233.7 1947.3 2382.3 2068.8 2581.6 2237.9 2747.0 2351.2 2972.5 2534.0 3295.3 2759.7 3544.1 2912.1 3920.1 3114.8 4150.2 3141.0 4074.9 3040.1 3851.1 2513.3 3720.2 2489.4 3891.7 2385.4 3740.5 2293.2 4105.1 2191.7 4124.6 2265.7 4456.7 2308.3 4499.7 2666.3 5133.3 3092.5 5526.7 2943.6 5885.7 3140.4 5197.4 2536.2 5252.9 2598.0 7207.7 2910.8 7313.8 2991.9 7308.6 3161.3 9711.8 4983.6 8610.7 4162.7 8369.8 4188.1 9707.8 4867.3 11157.9 5514.5 12404.3 5897.8 13274.6 6257.9 14873.4 6494.1 15747.8 7119.9

Liabilities Debt securities 644.4 12.4 773.5 16.4 942.1 27.5 1057.4 37.1 1347.4 54.2 1498.0 54.8 2064.7 201.7 2509.3 491.4 3477.3 1104.8 4261.5 1481.3 5308.2 1794.9 5586.7 2699.6 6205.1 2885.0 7177.5 3607.2 8148.6 4851.7 8569.4 5439.4 9470.8 6405.8 10894.3 7815.2 12322.3 9286.5 14347.0 11140.5 15983.4 12593.8 17741.6 13978.2 18894.8 15238.9 21156.3 15616.2 23002.2 15207.0 24018.8 15695.8 27509.8 15523.4 28826.9 18195.8 29754.0 20028.6 32913.5 23688.1 34227.8 24977.1 35836.2 26369.2 37519.6 27759.1 39068.0 28667.9 41168.9 30390.2

Annex: Statistical tables

Annex-26: Statistical balance sheet of non-financial corporations, financial assets and liabilities, HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Financial assets 20.2 24.4 32.9 38.5 42.8 46.3 50.5 47.3 61.6 67.1 81.5 91.8 103.5 112.2 123.5 129.1 133.5 146.4 159.8 184.9 212.2 256.6 298.6 333.0 392.7 445.4 480.0 526.8 597.4 646.5 714.8 781.6 843.2 905.3 908.1 945.6

Liabilities Shares, equity 126.9 102.9 167.3 138.1 219.5 180.9 258.6 213.0 290.3 238.4 313.0 255.4 343.9 279.0 348.0 286.0 391.7 313.4 420.7 335.2 466.5 361.1 514.4 392.8 557.9 420.4 588.9 438.4 631.1 461.6 662.7 477.9 679.5 486.3 730.8 539.1 787.1 581.7 899.0 679.0 971.7 736.5 1090.4 826.4 1229.0 919.0 1331.4 1001.0 1445.0 1078.2 1607.5 1185.5 1760.5 1292.7 1946.7 1425.3 2142.5 1541.2 2346.5 1666.0 2533.3 1772.8 2710.9 1886.0 2870.9 1997.7 3017.8 2088.4 3157.8 2174.7 3257.2 2185.4

Loans (debt) 10.7 12.4 14.8 17.1 17.8 20.8 24.0 26.4 31.2 33.1 39.2 52.0 60.7 62.8 76.5 90.9 97.4 88.8 92.0 92.2 97.2 110.4 134.1 142.2 156.7 184.1 198.1 235.2 271.7 323.2 361.4 381.8 408.5 453.0 483.1 523.0

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

â&#x20AC;&#x201D; 321 â&#x20AC;&#x201D;

Financial assets 1001.3 1056.0 1235.9 1343.9 1623.6 2113.0 2448.3 2623.2 3124.8 3663.2 4551.6 5443.8 7028.8 8168.1 9703.0 11660.3 13432.4 15363.7 18527.6 20955.0 24732.8 28956.9 33648.3 33975.7 36097.8 37150.2 41899.7 40635.0 42246.5 47259.9 53395.4 52587.7 55996.9 63293.6 69224.6

Liabilities Shares, equity 3444.3 2308.7 3661.9 2438.9 4014.4 2605.8 4296.6 2778.2 4761.9 3052.9 5600.2 3438.6 6326.0 3890.7 6861.1 4424.7 7941.9 5060.0 8859.4 5356.8 10065.3 5716.4 12331.1 6777.8 16618.1 9688.8 18965.9 10654.2 22878.6 12772.7 26415.8 13654.8 29585.4 15100.9 32761.2 17626.1 38042.2 20206.8 43154.5 22960.8 50785.7 26735.2 56115.8 28896.2 62712.0 30728.8 64347.0 29788.9 69148.8 32055.8 70898.6 33569.6 76911.4 37165.6 75268.6 37488.3 76697.0 38839.4 83142.8 42174.2 89241.0 48787.2 91758.6 50822.1 96662.8 53767.2 108018.6 59971.9 117536.5 65933.7

Loans (debt) 544.5 573.2 635.1 670.6 765.7 928.7 1051.1 1090.8 1282.6 1734.0 2074.6 2872.6 3818.7 4545.8 5503.0 7063.9 8177.3 8532.8 10359.1 11819.0 14285.0 16227.8 19909.6 22060.9 24220.9 23539.1 25100.0 24054.6 23883.0 25678.1 25729.7 24883.7 25483.5 27789.1 29094.8

Annex: Statistical tables

Annex-27: Year-end stocks of total financial assets and liabilities of resident households Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Financial assets HUF bn GDP% 5.9 13.2 8.1 14.4 10.6 13.5 12.2 13.7 16.2 16.0 19.2 18.0 22.5 19.1 24.4 22.9 27.4 20.5 30.2 21.9 40.7 24.9 51.6 29.5 59.6 32.2 66.1 33.8 74.1 36.0 85.3 39.4 94.6 44.0 102.0 42.9 111.3 43.4 126.6 45.1 145.5 46.6 166.2 49.9 192.5 53.1 217.7 55.4 243.6 56.2 267.5 58.9 297.0 60.9 322.8 61.0 355.1 61.0 390.1 61.9 426.4 62.5 468.5 65.0 505.0 64.8 547.9 64.6 590.4 65.9 638.5 65.3

Liabilities HUF bn 1.2 1.2 1.1 1.1 1.3 1.7 2.2 2.6 3.6 4.5 5.2 6.6 8.1 10.0 12.1 14.1 15.8 18.3 20.8 22.8 25.0 29.0 33.6 38.7 44.4 51.5 59.9 71.0 82.8 95.0 108.7 125.9 141.0 156.8 181.9 212.1

GDP% 2.7 2.1 1.3 1.2 1.3 1.6 1.9 2.5 2.7 3.2 3.2 3.8 4.4 5.1 5.9 6.5 7.3 7.7 8.1 8.1 8.0 8.7 9.3 9.8 10.2 11.3 12.3 13.4 14.2 15.1 15.9 17.5 18.1 18.5 20.3 21.7

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

— 322 —

Financial assets HUF bn GDP% 689.5 66.7 755.2 69.4 819.4 66.8 900.9 62.5 985.1 57.2 1163.3 55.7 1506.2 60.3 1934.9 65.8 2393.8 67.5 2958.5 67.8 3759.1 64.4 4788.0 67.2 6040.4 68.4 7415.2 71.0 8855.1 76.1 10486.0 78.7 12232.5 79.4 14072.1 80.7 15988.4 83.6 18246.0 86.6 21064.9 93.4 23902.3 98.3 26398.9 102.7 27320.6 100.4 29401.2 111.1 31186.8 114.4 32494.0 114.5 33811.1 117.2 35798.1 118.2 39054.3 119.5 42448.2 122.0 45662.5 127.2 49669.8 127.9 54671.4 128.2 60904.8 130.2

Liabilities HUF bn GDP% 243.8 23.6 278.5 25.6 322.0 26.3 372.1 25.8 415.3 24.1 479.1 22.9 394.8 15.8 448.3 15.2 529.8 14.9 619.9 14.2 650.0 11.1 704.6 9.9 823.5 9.3 917.4 8.8 1121.1 9.6 1476.3 11.1 1984.6 12.9 2871.5 16.5 4112.8 21.5 5155.9 24.5 6293.2 27.9 7458.5 30.7 8865.2 34.5 11092.3 40.8 11175.4 42.2 11995.4 44.0 11874.4 41.9 10436.2 36.2 9857.6 32.5 9753.4 29.8 8757.1 25.2 8723.3 24.3 8784.3 22.6 9179.0 21.5 10329.7 22.1

Annex: Statistical tables

Annex-28: Year-end stocks of foreign assets (claims) and liabilities of the Hungarian economy (without SPEs) Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Assets (claims) HUF bn GDP% 4.7 10.5 5.3 9.3 5.5 6.9 6.4 7.2 6.8 6.8 9.1 8.5 10.5 8.9 9.6 9.1 9.1 6.8 11.9 8.7 12.2 7.5 13.5 7.7 17.0 9.2 20.4 10.5 23.9 11.6 26.1 12.1 27.9 13.0 32.3 13.6 34.2 13.3 35.3 12.6 46.5 14.9 50.1 15.0 62.7 17.3 79.1 20.1 91.9 21.2 114.1 25.1 127.6 26.2 145.9 27.6 156.0 26.8 174.6 27.7 178.4 26.1 178.7 24.8 170.9 21.9 179.5 21.2 242.5 27.1 311.0 31.8

Liabilities HUF bn 8.3 9.1 9.7 12.0 13.4 17.7 20.8 24.4 26.7 26.7 26.9 32.0 35.8 40.9 48.9 57.6 61.4 63.6 69.6 73.3 80.3 93.3 123.8 135.2 127.3 166.7 212.9 258.3 303.5 393.4 438.3 445.0 455.6 510.4 603.6 695.6

GDP% 18.7 16.0 12.4 13.4 13.3 16.5 17.6 23.0 20.0 19.4 16.5 18.3 19.3 20.9 23.8 26.6 28.6 26.8 27.1 26.1 25.7 28.0 34.2 34.4 29.4 36.7 43.7 48.8 52.2 62.5 64.2 61.7 58.4 60.2 67.3 71.1

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: MNB.

— 323 —

Assets (claims) HUF bn GDP% 390.1 37.7 408.1 37.5 418.6 34.1 454.5 31.6 552.5 32.1 588.5 28.2 912.3 36.5 1013.7 34.4 1304.6 36.8 1480.4 33.9 2645.5 45.3 2846.9 40.0 3401.1 38.5 4255.0 40.7 5852.1 50.3 7077.0 53.1 8031.8 52.2 7729.6 44.3 9625.3 50.3 10705.3 50.8 13369.2 59.3 16129.2 66.3 19288.7 75.0 23166.0 85.1 27461.8 103.8 30009.2 110.0 34546.7 121.8 31061.2 107.7 31885.3 105.3 36754.1 112.4 43746.9 125.8 37216.1 103.7 38107.2 98.1 43156.7 101.2 46980.6 100.4

Liabilities HUF bn GDP% 800.7 77.5 931.6 85.6 1071.3 87.4 1199.2 83.3 1456.4 84.5 1595.1 76.3 2196.7 87.9 2439.4 82.9 3441.1 97.0 4434.6 101.6 6368.3 109.1 7436.5 104.4 10059.9 113.9 11927.1 114.2 15348.0 131.9 17261.4 129.6 18947.4 123.0 20418.0 117.1 24815.4 129.7 29401.8 139.5 35850.0 159.0 41110.5 169.1 45880.7 178.5 50660.6 186.1 57269.0 216.5 59854.4 219.5 63992.3 225.6 59898.8 207.6 59295.5 195.8 63169.4 193.2 67230.7 193.3 61914.5 172.5 61971.4 159.6 67116.0 157.3 71924.1 153.7

Annex: Statistical tables

Annex-29: Year-end stocks of fixed assets and inventories (produced non-financial assets), HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Fixed assets 140.7 146.0 153.7 163.5 174.9 184.4 194.6 202.7 211.7 225.9 429.1 446.6 458.4 472.3 491.4 510.5 523.0 547.6 574.9 658.4 779.8 849.9 921.5 1004.7 1082.4 1176.1 1297.0 1388.7 1486.7 1597.7 1717.4 1979.1 2070.0 2168.9 2291.3

Inventories 63.0 71.0 82.0 85.0 90.5 97.0 106.8 100.0 116.5 122.0 127.1 134.0 141.7 150.8 163.1 174.8 180.7 193.5 207.2 226.1 254.3 271.7 290.8 302.5 321.7 358.4 390.1 433.7 459.9 511.4 528.5 581.2 652.3 687.2 721.5

Unfinished stocks 1.0 2.4 5.2 8.1 11.2 11.1 10.8 12.0 12.5 11.7 14.6 18.2 20.1 23.9 27.2 29.8 28.9 35.2 43.5 54.8 66.5 76.3 91.9 100.1 101.1 117.3 121.5 131.9 161.5 186.3 201.4 201.1 205.5 221.4 212.8

Total assets 204.7 219.4 240.9 256.7 276.6 292.6 312.2 314.7 340.7 359.6 570.8 598.8 620.2 647.0 681.7 715.1 732.6 776.3 825.6 939.3 1100.6 1197.9 1304.2 1407.3 1505.2 1651.8 1808.6 1954.3 2108.1 2295.4 2447.3 2761.4 2927.8 3077.5 3225.6

Year 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

— 324 —

Fixed assets 2409.4 2499.6 2652.7 2805.3 2935.4 3150.7 3450.0 … … … … 26581.0 33812.0 41515.0 47387.0 55830.0 62414.0 68460.0 72172.0 76878.0 81513.0 85956.0 93713.0 100627.0 107757.0 112157.0 114489.0 117536.0 119277.0 123383.0 126898.0 131293.0 135241.0 146184.0 163963.0

Inventories 757.0 807.4 855.5 882.8 972.2 1067.2 1161.4 1170.0 860.0 970.0 1110.0 1432.0 1724.0 2092.0 2593.0 2998.0 3497.0 3887.0 4103.0 4353.0 5381.0 5965.0 6782.0 7215.0 7818.0 7232.0 7776.0 8328.0 8421.0 8171.0 8796.0 9325.0 10030.0 11099.0 12254.0

Unfinished stocks 198.2 207.5 181.2 199.9 222.7 244.1 261.2 227.8 … … …

Total assets 3364.6 3514.5 3689.4 3888.0 4130.3 4462.0 4872.6 … … … … 28013.0 35536.0 43607.0 49980.0 58828.0 65911.0 72347.0 76275.0 81231.0 86894.0 91921.0 100495.0 107842.0 115575.0 119389.0 122265.0 125864.0 127698.0 131554.0 135694.0 140618.0 145271.0 157283.0 176217.0

Annex: Statistical tables

Annex-30: Accumulation of fixed assets and inventories (national accounts), HUF billions Year 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Fixed assets

Inventories

7.0 10.2 14.6 17.4 20.0 15.7 16.7 17.8 19.0 23.7 36.8 42.6 39.9 44.1 50.2 52.0 49.0 54.1 64.6 73.9 83.2 99.5 112.7 116.6 122.9 136.2 159.8 168.2 197.7 214.4 220.8 207.7 206.7 213.9 220.0 225.4

2.9 4.2 7.1 0.8 4.1 5.9 9.4 -6.9 16.4 4.9 5.2 6.2 11.3 8.6 8.9 11.7 5.8 8.2 12.8 13.0 12.3 12.2 22.3 8.0 7.1 27.8 15.1 21.5 18.8 45.4 11.3 13.6 24.7 27.9 17.1 26.4

Accumulation total 9.9 14.4 21.7 18.2 24.1 21.6 26.1 10.9 35.3 28.6 41.9 48.8 51.3 52.7 59.1 63.7 54.8 62.3 77.4 86.9 95.4 111.7 134.9 124.6 130.0 164.0 174.8 189.7 216.5 259.8 232.2 221.3 231.4 241.8 237.2 251.8

Note: The thick line indicates a methodological change. Source: HCSO, MNB compilation.

â&#x20AC;&#x201D; 325 â&#x20AC;&#x201D;

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Fixed assets 232.1 261.2 303.5 310.8 372.5 402.4 523.0 584.7 670.0 878.5 1270.9 1629.2 2053.8 2521.8 2918.8 3398.0 3826.9 4308.7 4519.5 5075.0 5385.3 5719.3 6098.9 6361.2 6004.2 5516.1 5575.6 5552.8 6312.0 7224.9 7749.7 7058.4 8631.6 10739.3 13381.4

Inventories Accumulation total 26.3 258.4 31.6 292.7 24.0 327.5 53.9 364.7 85.6 458.1 128.0 530.4 -12.0 511.0 -111.7 473.1 38.1 708.1 90.1 968.6 73.9 1350.9 130.0 1767.0 259.4 2321.9 466.9 2998.7 232.3 3161.2 327.5 3739.4 195.9 4039.9 136.2 4463.7 168.2 4708.4 568.4 5666.4 300.2 5708.9 528.4 6271.1 115.8 6239.7 309.7 6702.2 -673.4 5361.3 70.8 5618.3 174.2 5783.4 -5.7 5577.5 -8.3 6337.9 396.3 7663.3 309.6 8105.5 542.1 7652.3 171.6 8873.3 806.2 11615.0 -59.3 13394.4

Acknowledgements The studies in this volume rely heavily on the analyses and working papers of the Magyar Nemzeti Bank as well as its professional discussion in various forms. The editor would like to thank Governor György Matolcsy, and Deputy Governors Csaba Kandrács and Mihály Patai for their encouraging support as well as all the members of the Monetary Council for their professional comments on the previous analyses made on this subject. Special thanks also go to the authors and contributors of the studies in the current volume, namely: Gergely Baksay, Judith Balázs, Dr Pál Pozsonyi, Antónia Hüttl, Gábor P. Kiss, Béla Simon, Gábor Dániel Soós, Eszter Szabó and Katalin Szőke. The authors and editors would especially like to thank Réka Egervári, Péter Kálmán, László Csaba Körtvélyesi, István Schindler, Ferenc Tóth and Árpád Vadkerti for their editorial and coordination efforts. We would also like to thank to the management of the Hungarian Central Statistical Office for their valuable suggestions that contributed to the completion of this publication. We thank Soma Szabó for the layout and graphic works of this volume. The authors owe thanks to Maja Bajcsy, István Csonka and all of our colleagues for the thorough work that was indispensable for producing this publication.

— 327 —

List of charts and tables List of charts Chart 1: Periods of growth and convergence in Hungary compared to Austria

Chart 2: Growth and convergence periods of the Hungarian economy

Chart 3: Government debt and inflation

Chart 4: Life expectancy at birth and the number of people living in one room

Chart 5: Sustainable convergence index

Main economic indicators 1920–1929

Chart 1-1: I mpact of the Treaty of Trianon on the main macroeconomic indicators and structure of the Hungarian economy

Chart 1-2: Number of workers and real wages in the manufacturing industry

Chart 1-3: Wholesale price indices (1913 = 100)

Chart 1-4: Changes in national product

Chart 1-5: Budget balance and government debt as a percentage of national product

Chart 1-6: International balance of payments

Chart 1-7: Household consumption expenditures

Main economic indicators 1930-1939

Chart 2-1: Number of workers and real wages in the manufacturing industry

Chart 2-2: Wholesale price indices (1929–1938)

Chart 2-3: Budget balance and government debt as a ratio of national product

Chart 2-4: Main destination countries of Hungarian exports

Chart 2-5: Volume of household consumption

Main economic indicators 1940-1949

Chart 3-1: Volume indices of production by industries,1938–1944

Chart 3-2: Composition of the national product by industries (1938–1944) in per cent

Main economic indicators 1950-1959

87 — 329 —

List of charts and tables

Chart 4-1: Distribution of the number of active earners by economic activity

Chart 4-2: Key data on agricultural cooperatives

Chart 4-3: Distribution of the number of active earners by sector

Chart 4-4: Distribution of gross production value by sector

Chart 4-5: Distribution of gross production value by activity

Chart 4-6: Distribution of socialist investments by economic activity

Chart 4-7: Growth in gross value added and its individual components

Chart 4-8: Components of gross domestic product use

Chart 4-9: Value of foreign trade turnover in USD million and as a percentage of GDP

100

Chart 4-10: Total general government revenue as a share of GDP and revenue composition 104 Chart 4-11: Total general government expenditure as a share of GDP and expenditure composition 105 Chart 4-12: Expenditures of budgetary units by function

106

Chart 4-13: Components of disposable income and consumption

108

Chart 4-14: Consumer price index, nominal wage index and real wage index

109

Chart 4-15: Annual increase in the number of dwellings in Budapest and the proportion of its individual components

110

Chart 4-16: Housing stock expansion by builder and the amount spent on housing investments 111 Chart 4-17: Annual net lending/borrowing of the economy and individual sectors

113

Chart 4-18: G eneral government gross debt by component

115

Chart 4-19: H ungary’s external debts by component

116

Main economic indicators 1960-1969

121

Chart 5-1: N umber of pensioners and amount of pensions paid

124

Chart 5-2: D istribution of the number of active earners by economic sector

125

Chart 5-3: D istribution of the number of active earners by economic sector

127

Chart 5-4: D istribution of gross output by economic sector

129

Chart 5-5: C ost intensity of production in the economy, and within this in industry and agriculture 130 Chart 5-6: D istribution of national economic investments by economic sector — 330 —

132

List of charts and tables

Chart 5-7: G rowth in gross domestic product and its individual components

135

Chart 5-8: C omponents of gross domestic product use

137

Chart 5-9: V alue of foreign trade turnover in USD million and as a percentage of GDP

139

Chart 5-10: E xternal debt denominated in roubles and dollars

140

Chart 5-11: Annual general government revenues as a share of GDP and revenue composition 142 Chart 5-12: Annual general government expenditures as a share of GDP and expenditure composition 143 Chart 5-13: Expenditures of budgetary bodies by function

144

Chart 5-14: I ndex of real wages, real income and consumption per capita

145

Chart 5-15: Disposable income, its components and consumption

146

Chart 5-16: I ncrease in the number of dwellings by builder and amounts spent on housing investments by source

148

Chart 5-17: Net lending of the national economy and economic sectors

149

Chart 5-18: Financial assets of households by component and net financial wealth of the sector 150 Chart 5-19: G eneral government gross debt by component

151

Chart 5-20: T otal external claims of the country and its debts by component

152

Main economic indicators 1970-1979

157

Chart 6-1: G rowth in gross domestic product and its individual components

161

Chart 6-2: D istribution of national economic investments by branch of activity

163

Chart 6-3: C omponents of gross domestic product use

164

Chart 6-4: V alue of foreign trade turnover in USD million and as a percentage of GDP

166

Chart 6-5: E xternal loan debts denominated in roubles and dollars

168

Chart 6-6: Annual general government revenues as a share of GDP and revenue composition 169 Chart 6-7: Annual general government expenditures as a share of GDP and expenditure composition 170 Chart 6-8: C omponents of disposable income and consumption

172

Chart 6-9: I nflation, real per capita income, real wages and consumption index

173

Chart 6-10: I ncrease in the number of dwellings by builder and amounts spent on housing investments by source

175 — 331 —

List of charts and tables

Chart 6-11: Net lending of economic sectors and the national economy

177

Chart 6-12: General government gross debt by component

180

Chart 6-13: Hungary’s external claims and liabilities by component

181

Main economic indicators 1980-1989

185

Chart 7-1: Average real GDP growth in some European countries (1980-1989)

186

Chart 7-2: G DP trends (1980-1990)

187

Chart 7-3: C omposition of GDP production (1980-1990)

188

Chart 7-4: C omposition of GDP use (1980-1990)

189

Chart 7-5: H ousehold real wage index, real consumption and the consumer price index (1980-1990) 191 Chart 7-6: E xports and imports (1980-1990)

195

Chart 7-7: G ross external debt (and the MNB’s debt within this) (1980-1990)

196

Chart 7-8: B udget balance (1980-1990)

202

Chart 7-9: D ebt-to-GDP ratio (1980-1990)

203

Chart 7-10: G DP per capita (PPP) and government debt in the countries of Central and Eastern Europe (1992*)

204

Main economic indicators 1990-1999

207

Chart 8-1: G DP trends (1989-2000)

208

Chart 8-2: Average GDP growth in 1989-1992 and 1993-2000

209

Chart 8-3: Composition of GDP production (1991-1995)

211

Chart 8-4: Composition of GDP production (1995-2000)

212

Chart 8-5: Composition of GDP use (1990-1995)

215

Chart 8-6: Change in the volume of GDP use at 1990 prices

216

Chart 8-7: Composition of GDP use (1995-2000)

217

Chart 8-8: Change in the volume of GDP use at 1995 prices

217

Chart 8-9: Exports and imports (1990-2000)

218

Chart 8-10: External debt and FDI (1990-2000)

222

Chart 8-11: Evolution of the current account (1990-2000)

223

Chart 8-12: Number of active earners and the unemployed (1989-2000)

225

— 332 —

List of charts and tables

Chart 8-13: B udget deficit and government debt (1990-2000)

231

Chart 8-14: B reakdown of the annual change in nominal government debt by factors (1991-1999) 236 Chart 8-15: G DP per capita (PPP) and government debt in EU countries (1999)

238

Main economic indicators 2000-2009

241

Chart 9-1: Current account balance and general government balance-to-GDP ratios in Hungary 244 Chart 9-2: N et external debt-type financing by sectors

246

Chart 9-3: Activity rates in EU Member States

249

Chart 9-4: D evelopment of investment rates in Hungary and the region

250

Chart 9-5: Deviation of domestic investment rate from the average of Visegrad countries in a sectoral decomposition

252

Chart 9-6: N umber of new completions

253

Chart 9-7: Development of economic growth in Hungary, the euro area and the V3 countries 254 Chart 9-8: D ecomposition of change in production side GDP

256

Chart 9-9: Development of GDP per capita measured in purchasing power parities in the Visegrad countries compared to the average of EU28

257

Chart 9-10: I nflation decomposition

258

Chart 9-11: Central bank base rates in the Visegrad region

260

Chart 9-12: E volution of households’ consumption, investment and financial savings rates as a percentage of disposable income

261

Chart 9-13: Annual change in GDP in EU countries in 2009

265

Main economic indicators 2010-2019

269

Chart 10-1: E stimated (static) impact of the tax reform on each type of tax

271

Chart 10-2: U nemployment rate in the 15–74 age group

273

Chart 10-3: E volution of nominal and gross average earnings growth in Hungary

274

Chart 10-4: G ross public debt in GDP ratio and the share of FX-denominated debt

276

Chart 10-5: 5 0 reform measures since 2010

278

Chart 10-6: E volution of the Hungarian central bank interest rate

280

Chart 10-7: E volution of loan portfolios in the household, corporate and SME sectors

282

— 333 —

List of charts and tables

Chart 10-8: Evolution of investment rates in the European Union in 2019

284

Chart 10-9: Net financial savings and wealth of households

286

Chart 10-10: Net lending in the Visegrad countries (four-quarter values as a percentage of GDP) 287 Chart 10-11: E volution of inflation and core inflation excl. indirect taxes

288

Chart 10-12: E volution of economic growth

289

Chart 10-13: R elative development compared to the EU

291

Chart 10-14: T he wealth Gini index in global comparison in 2019

292

List of tables Table 1-1: Active earners by economic sector (thousand persons)

Table 1-2: W orking time in the manufacturing industry

Table 1-3: C hanges in the value of the korona (1921–1924)

Table 1-4: B udget revenues and expenditures (million pengős)

Table 1-5: S tate tax and excise revenues (million pengős)

Table 2-1: Active earners by economic sectors (1930–1941) (Thousand persons)

Table 2-2: P er capita annual earnings in industry (1936) in pengős

Table 2-3: I nternational wholesale price indices

Table 2-4: P roductivity in an international comparison (National product / Number of employees, in dollars)

Table 3-1: V olume index of the national product (1938–1944), previous year = 100

Table 3-2: B udget expenditures as a percentage of the national product (1938–1944)

Table 3-3: H ungary’s war damages

Table 3-4: C omposition of individual farms by size (in 1935 and 1949)

Table 3-5: C ost-of-living index, including rent (1938–1944)

Table 3-6: P roportion of state ownership (1947-1949) in per cent

Table 3-7: C omposition of manufacturing ownership in 1948

Table 3-8: K ey Charts in the three-year plan

Table 4-1: B alance of payments in HUF billion and as a percentage of GDP — 334 —

101

List of charts and tables

Table 5-1: I ndividual living standard characteristics of households between 1950 and 1980

147

Table 6-1: Annual balance of payments in HUF billion and as a percentage of GDP

167

Table 8-1: C ertain dominant factors in external trade

219

Annexes Annex-1: N et national product, household consumption, government revenues and balance, 1920-1939

295

Annex-2: P opulation, number of employees and number of dwellings at the end of the year, thousands 296 Annex-3: P opulation, number of employees and employees in agriculture and industry at the end of the year, thousands

297

Annex-4: N umber of pensioners, beneficiaries of childcare allowances and unemployed persons, thousands

298

Annex-5: N umber of dwellings built annually, thousands

299

Annex-6: V alue of annual investments at current prices, HUF billions

300

Annex-7: V olume indices of investments

301

Annex-8: G ross output, gross domestic product (GDP) and intermediate consumption at market prices, HUF billions

302

Annex-9: G ross output (production) broken down by main economic sectors, at current prices, HUF billions

303

Annex-10: Production of gross value added broken down by main activities, at current prices, HUF billions

304

Annex-11: Volume indices of gross value added broken down by main industries, 1950=100 305 Annex-12: Main components of use of gross domestic product (GDP), HUF billions

306

Annex-13: Components of use of gross domestic product (GDP) as a percentage of GDP

307

Anex-14: Disposable income, consumption and financial saving of households

308

Annex-15: Net lending or borrowing of main sectors and the total economy (financial accounts), HUF billions — 335 —

309

List of charts and tables

Annex-16: Net lending or borrowing of main sectors and the total economy (financial accounts), as a percentage of GDP

310

Annex-17: Consolidated revenues, expenditures and balance of the budgetary general government, HUF billions

311

Annex-18: Consolidated gross debt of general government at face value (year-end stocks), HUF billions

312

Annex-19: Consolidated gross debt of general government at face value including Eximbank, HUF billions

313

Annex-20: Exports, imports and the current account balance (balance of payments), HUF billions

314

Annex-21: Volume indices of exports and imports, 1960=100

315

Annex-22: Year-end stocks of selected financial assets and liabilities in the Hungarian economy, HUF billions

316

Annex-23: Statistical balance sheet of MNB, financial assets and liabilities, HUF billions

317

Annex-23: Statistical balance sheet of MNB, financial assets and liabilities, HUF billions (continued) 318 Annex-24: Statistical balance sheet of credit institutions, financial assets and liabilities, HUF billions

319

Annex-25: Non-consolidated financial assets and liabilities of general government, HUF billions

320

Annex-26: Statistical balance sheet of non-financial corporations, financial assets and liabilities, HUF billions

321

Annex-27: Year-end stocks of total financial assets and liabilities of resident households

322

Annex-28: Year-end stocks of foreign assets (claims) and liabilities of the Hungarian economy (without SPEs)

323

Annex-29: Year-end stocks of fixed assets and inventories (produced non-financial assets), HUF billions

324

Annex-30: Accumulation of fixed assets and inventories (national accounts), HUF billions

â&#x20AC;&#x201D; 336 â&#x20AC;&#x201D;

325

10 x 10 years in numbers

Articles inside

Foreword