Eastern Europe
Economic reform in Hungary

The East European countries suffer major rigidities in economic structure, large foreign debts and poor rates of growth. In Discussion Paper No. 371, written for the advisory group to the EC's PHARE programme (see the lead article in the Bulletin), Research Fellow David Newbery examines the major economic reform issues in Hungary. A critical first step has been tax reform, begun in 1988. Though important issues remain to be resolved, Newbery argues that the move towards uniform tax treatment of individuals and of enterprises is important in creating a stable economic environment and hardening the `soft' budget constraint facing firms.
Creating competitive conditions in product and factor markets, and in particular dismantling Hungary's highly concentrated industrial structure, is a precondition for the success of other reforms. International trade could play a key role, but liberalization is constrained by the contractual nature of trade within CMEA and by the large overhang of hard currency debt. The Hungarian reformers appear to accept the need for a liberal trade regime, absence of discretionary subsidies, and free entry into production. But they will be under continued local pressure, Newbery warns, to rescue firms where employment is jeopardized and to protect inefficient production.
He described this research at a February lunchtime meeting, to be reported in Bulletin No. 38.

Tax Reform, Trade Liberalisation and Industrial Restructuring in Hungary
David M Newbery

Discussion Paper No. 371, February 1990 (IT)