Despite Hungary's considerable progress in economic reform, many market distortions remain which complicate analyses of its effects. The restructuring decisions (including closures) involved in privatization, for example, are essentially investment decisions and therefore require information about inputs and outputs classified by the time at which they occur and their prices. Since trade restrictions and subsidized prices remain and many firms exploit their domestic monopoly positions, these decisions require a suitable set of prices and branch-level indicators of industrial competitiveness, or `domestic resource costs' (DRCs).

In Discussion Paper No. 736, Thomas Michael, Tamás Révész, Research Associate Paul Hare and Research Fellow Gordon Hughes calculate DRCs for Hungary using both 86- and 21-sector input- output tables for 1990, together with corresponding data on world-to-domestic price ratios calculated from actual data for traded sectors. They allow for different treatments of certain sectors according to whether they are regarded as tradable or not, since the prospects of large sectors such as agriculture depend on the markets to which Hungary has access, which affects both the likely prices and the possibility of significant sales. For the tradable sectors they estimate Hungarian DRC indicators under several sets of assumptions to show that their results on the ranking of sectors are quite robust. The authors use these indicators to abstract from the general recession in Eastern Europe and demonstrate that the structural changes in Hungary are consistent with expectations derived from the estimated competitiveness of different branches. They conclude that Hungary's Association Agreement with the EC will be beneficial to branches such as forestry, agriculture and food processing, while others such as extraction will face a more difficult future. Consumer goods, and much of chemicals and metallurgy are not much affected and remain uncompetitive.

The Competitiveness of Hungarian Industry
Thomas Michael, Tamás Révész, Paul Hare and Gordon Hughes

Discussion Paper No. 736, October 1992 (IT)