Eastern Europe
Hungarian trade

Hungary's economic transformation led to the collapse of trade in transferable roubles and a general reduction of trade with the former CMEA countries, increased trade with the West, large-scale price and import liberalization and falling domestic demand. Firms in Hungary started to adjust to market conditions earlier than those elsewhere in Central and Eastern Europe. In Discussion Paper No. 772, László Halpern uses panel model estimations on data for firms exporting throughout 1981-90 to investigate the change in Hungarian trade patterns. During the early, slow phase of the reorientation, firms adjusted their export structures and prices to achieve profitability; subsidies did not differentiate across firms, since export activities received a flat-rate subsidy over the exchange rate. In the second, more intensive phase, which entailed the dissolution of the CMEA, cost adjustment weakened and subsidies played a greater role, but falling rouble export demand had a direct effect on dollar exports in only three years.

Exporting firms adjusted their activity to cope with the collapse of regional integration and raise dollar exports; in 1991, the direct unit costs of dollar exports fell but so did profitability, reflecting the combined effects of a real exchange appreciation, a foreign price increase, cost adjustment, and a steep increase in unit overheads. The latter arose from rising unit banking costs, falling demand in the domestic market and capacity underutilization, and the end of managers' freedom to rechannel costs.

Halpern reports that the profitability of dollar exports and share of dollar exports both increased, while the profitability of domestic sales fell, so the total profitability of exporters' sales increased substantially. There was a positive relationship between the growth rate and profitability of dollar exports and also an increasing positive link between the growth rates of domestic and dollar export sales. This widened the gap between firms that could improve performance and those suffering considerable losses in profit and market shares. This adjustment has yet to be completed; foreign ownership and the introduction of new corporate forms may yet yield further improvements to performance.

Factors and Effects of Trade Reorientation in Hungary
László Halpern

Discussion Paper No. 772, March 1993 (IT)