HUNGARYS REFORM PROCESS

Central planning is a system in which all the decisions about what people need are decided
from the top. Central planning of all economic decisions in a large modern industrial nation is
.an extremely complex business
Planners need to know the entire range of technological possibilities for production and to
have full details of supplies of all the factors of production with their characteristics. On the
basis of this information, the planners must settle on their choice of goods and services to be
produced and how to produce them. The planners must predict the pattern of consumers
demand in order to issue the correct production order. Whenever they get the quantities
.wrong, there are queues for some scarce goods and unsold surpluses of others
Centralisation of decision taking appeared to make sense politically in the context of socialist
principles. But it was also maintained that a command economy was an efficient system for
the allocation of resources. However in 1989 Hungary rejected their centrally planned
.economies
The changes reflected political and economic matters- wholesale dissatisfaction with systems
based on single party government and the popular clamour for multi party democracies. The
-:command style system of economic organization has also failed in many ways as follows
a) Failure of organisation- The plan is not once and for all. It must be a rolling process,
continually changing to take account of current data, future trends in labour supplies,
technological developments and tastes of population for different goods and services.
b) Failure of quality control- The central planners monitored the quantity produced
rewarding those over fulfil their targets and punishing those who fall short. The main
emphasis was given on quantity and not on quality.
c) Lack of incentives- In command economies, the planners have limited power to use
wage incentives to encourage labour to move from one job to another and to work
hard. Workers usually have complete job security. Industrial unemployment is rare.
However, it proved impossible to provide sufficient incentives for reasonably hard
and efficient work under such condition. The prevailing relationship between workers
and government may be summed up as we pretend to work and you pretend to pay
us.
The most important incentive failure is related to innovation. In market economies
private entrepreneurs accept the risk of introducing new products and production
.processes. If they succeed they hope to earn large profits; if they fail to make losses
Thus innovation is the engine of long term growth that has raised living standards
.over the centuries since the first industrial revolution
In planned economies there are no profits and losses to reward successful innovators
and penalize unsuccessful ones. The result has been lack of the long term
technological dynamism that characterises many advanced marker economies. The
long term failure of plan was substantially a failure to produce satisfactory economic
.growth
d) Environmental degradation- Fulfilling production plans became the
all embracing incentive in planned economies to the exclusion of most other
considerations including the environment. As a result environmental degradation
.occurred in all the countries of Eastern Europe on a monumental scale

HUNGARYS REFORM PROCESS

Central planning left a devastating mark on the natural environments of Eastern European
countries. Environmental damage first became noticeable in this region in the 1950s in the
form of air pollution. This damage was the result of intensive resource extraction, including
strip mining, and inefficient, energy-intensive methods of production developed during
socialist industrialization. Prices of natural resources were subsidized and maintained at a
very low level, which excluded environmental costs, by the state in order to keep production
costs low. This resulted in overuse of resources and perpetuated the use of polluting
.production technologies as there was no incentive to create newer and cleaner technologies
Funds diverted to environmental improvement were viewed as wasteful and non-productive,
while the only measure of success for central planners was growth in output. Fines and
sanctions were set at low levels so that producers frequently preferred to accept the costs of
.these penalties rather than altering production
Economic crisis plagued the socialist states of Eastern Europe in the 1970s and 1980s.The
socialist philosophy of relying on the use of accumulated stock of capital faltered as resources
including raw materials, financial capital, and labour began to dry up, leaving states severely
lacking the resources needed for production. World prices for Eastern European exports
(primarily industrial goods, such as fossil fuels) fell and these countries ran huge trade
.deficits through the 1970s
During this time, environmental investment continued to receive low priority and funds
allocated to environmental protection were diverted toward production in an effort to stabilize
the staggering economy. Strip mining increased, devastating surrounding forests and
communities. Also in the 1970s and 1980s, state planning began to favour nuclear power
.production over coal in an effort to reduce air pollution
By 1989 environmental damage had begun to take its toll on human health. Shorter life
expectancies problems were observed. In Hungary in 1990, environment related health
problems accounted for 13% of health and social welfare spending. Productivity of resources
declined during central planning as countries were forced to eliminate food production on the
.most seriously degraded agricultural lands
Entering the period of economic transition, the most serious environmental threats facing
Eastern European countries included air pollution, inadequate waste water treatment for
.industrial hazardous waste and nuclear safety
The 1993 Environmental Action Program (EAP) identified primary problems in East Europe
:to be
High levels of air pollution and industrial hot spots (extremely high polluting industrial .1
.sites)
High levels of the greenhouse gases from power and metallurgical plants. Greenhouse .2
gases were identified in the 1992 Earth Summit to be a primary contributor to the destruction
.of the ozone layer
.High lead concentration from use of leaded gasoline in air and soil .3

HUNGARYS REFORM PROCESS

Hungary is now a parliamentary democracy, holding its first free election in March of 1990
and then experiencing fairly rapid and smooth economic reform. Hungarys natural assets
.include its fertile soil, natural gas and coal

HUNGARYS REFORM PROCESS

Reducing regulatory barriers to trade and investment enables countries in expanding global
economies to benefit more from comparative advantages & innovation. This means that more
market openness increases the benefits that consumers & producers can draw from regulatory
.reform
Over the past 10 years Hungary has gone through radical changes to open its economy to
international competition and integrate in the world economy. This opening has even been
among the principal instruments used by successive Hungarian governments in order to
achieve rapid and sustainable growth of the economy. Changes have guaranteed the right to
private property and free enterprise, reducing the role of the state in the economy, lifting
restrictions to capital flows and liberalising FDI regulations. At present economic and
regulatory reforms have succeeded in establishing a business friendly environment, turning
Hungary into one of the most attractive markets for foreign investment in the region.
Businesses are generally assured of benefiting from effective equality of competitive
opportunities, while the regulatory process is geared to avoid unnecessary trade
restrictiveness and encouraging the reduction of technical barriers to trade. Overall, it can be
said that the study commitment of successive Hungarian governments since 1990 to the procompetitive market opening reforms as a means for achieving rapid and sustainable growth of
the economy which is the most fundamental strength of the regulatory environment in
.Hungary today
Time consuming procedures, burdensome requirements and administrative inefficiencies
.remain frequent complaints of foreign firms operating in Hungary
Despite, increasing acceptance by the Hungarian administration of transparency objectives,
the regulatory process continues to offer insufficient opportunities for information, comment
.and dialogue
In recent years, the urge to move forward the reform agenda at a rapid pace has overridden
the need to enhance the dialogue over this agenda with concerned constituencies, affecting
.the predictability of regulatory system
The most significant improvement with respect to market openness in Hungary will thus
come from a better match between the formal incorporation of efficient regulation, principles
into regulation and their actual implementation and enforcement. In the mean time, efforts
should continue to meet the challenge of keeping up momentum for reform so as to reinforce
confidence in the regulatory system that is well adapted and responsive to the needs of a
.dynamic market economy
On 16th December 1991, the Republic of Hungary and EU signed the European Agreement
which entered into force on 1st Feb. 1994. This association agreement can be considered as
the first step in the Hungarian endeavor to join the EU. It includes a range of commitments
towards the establishment of a free trade area, as well as the promotion of political dialogue,
economic, monitory and industrial cooperation, education and training, and the
harmonization of legislation. The trade related part of the Agreement entered into force on 1st
March 1992 under the form of Interim Agreement. The Agreement includes a commitment by
.the community to provide Hungary with technical assistance

HUNGARYS REFORM PROCESS

With concern to trade in goods & services, the European agreement aims to gradually
establish a free trade area, with a quicker liberalisation on the EU side than on the Hungarian
side. It provides for
- Elimination of tariffs and quantitative restrictions on import of industrial goods
- Reciprocal concessions in the form of lower tariffs and less restrictive quotas on
Agricultural imports.
- A prohibition against introducing new charges or quantitative restrictions,
supplemented with exception mechanisms, some applicable by both sides (safeguard,
anti-dumping,shortage,agricultural policy and BOP measures) and some only
applicable by Hungary( infant industries, restructuring, social problems)
- Progressive liberalisation of trade in services
Hungary became a member of EU on 1st May 2004. The membership has significant positive
effects on the Hungarian economy and gives important competitive advantages for company
.settled in the country
-:General advantages
-

Being a member of a community of stability,democracy,security and prosperity

Growing internal market, increase in domestic demand (customs free access to 450
million consumers)
Free movement of labour force, goods and services and capital.

Hungarys attractiveness as a investment location and thus the volume of Foreign direct
investment (FDI) into Hungary has been significantly enhanced by the accession to EU,
which also resulted in the increasing volume of profit reinvestment within FDI. Even after
privatisation has come to an end in Hungary, FDI inflows show a balanced confidence of
Foreign investors in the countries business environment and in good returns on
.investment
Hungary is one of the most attractive places in the Central and Eastern European region
.for upgraded and high value added investments
As Hungary enters the European Union, it should see much economic success. The
country as a whole has been growing greatly over the past years, and its admission to the
EU should perpetuate this growth. Out of the new ten nations added to the European
Union, Hungary ranked highly in terms of the criteria required for admission. The
nations admittance into the EU will bring with it many victories. Innovation will grow
due to an increase in market accessibility. Also, with so much inward foreign direct
investment pouring into the country, Hungary will soon be able to participate in a great
amount of outward foreign direct investment. The highly developed nations of the
European Union will serve as role models for strategy and success, and perhaps, in the
.future, Hungary will become a role model itself

HUNGARYS REFORM PROCESS