At a lunchtime meeting on 1 March, István Székely discussed the current state of the reform process in Hungary. Székely is Economic Affairs Officer at the United Nations Department of Economic and Social Development and a Research Associate in CEPR's programme on Economic Transformation in Eastern Europe. His remarks drew on his current research and on the conference volume, Hungary: An Economy in Transition (see box). Financial support for the conference from the ACE programme of the Commission of the European Communities, Citibank and the Foreign and Commonwealth Office and for this meeting from Cambridge University Press is gratefully acknowledged. The views expressed by Dr Székely were his own, however, not those of these institutions nor of CEPR, which takes no institutional policy positions.

Székely stated that economic activity in Hungary had stagnated at the end of 1991 and bottomed out during 1992, so annual data continue to show a decline, but there are now signs of recovery. In 1992, export volumes increased for the first time since the beginning of economic transformation, mainly due to further sizeable increases in exports to OECD and EC markets. Hungary is now over the worst of the collapse of its trade with Eastern Europe and the former Soviet Union, while being able to maintain a positive current account balance since 1990. The latter enabled Hungary to attain a comfortably high level of international reserves and to reduce its net foreign debt significantly.

Székely stressed that the state budget deficit remains high: if financed through the capital market, this will crowd out private investment essential to the transformation's long-term success, while issuing money instead would bring back high inflation. The budget deficit is less important in itself than as an indicator of the postponement of necessary reforms, which will be painful regardless of who carries them out and when. The administration had successfully brought inflation under control, but the current domestic real interest rates on corporate loans of over 15% pose a major threat to recovery. Even firms that could expand export activity cannot afford to borrow the funds they require. Over one-quarter of all exports are to Germany, so producers must prepare for a harsher export climate in the short run.

Turning to longer-term prospects, Székely maintained that successful economic development must be based on export-led growth, while the necessary improvements in the product market structure or in technology to keep costs low and sales high will depend critically on new investments. Almost no long-term finance is available to industry, since the state budget deficit crowds it out and most investors are not yet ready to hold long-term assets. Foreign direct investment is high relative to other countries of the region but low relative to investment needs, and a considerable part has been tied to privatization, so increasing domestic savings is an urgent priority.

Székely noted that technical assistance from the West will continue, but no more large-scale aid is expected. A clear commitment by the European Community to well-defined criteria for Hungary's future membership would promote growth, not least through the effects of harmonization of its legal and taxation systems with those of the Community during the process leading to accession. Unemployment reached 13.3% in January, however, which was well above the European average and increasing, and many enterprises are now engaged in bankruptcy or liquidation procedures. The cuts to public spending now required will have drastic effects on education and health care, which will harm lower-income groups disproportionately. The extent of social tolerance for the reforms remains unclear, and Székely concluded that Hungary faces a difficult process of transition. Hopes remain of future prosperity, integration into the world economy and convergence between Eastern and Western Europe, but it is still too early to say whether these will be fulfilled.