Hungary's Transition to the Market: The Case against a 'Big-Bang'

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Abstract
Hungary Paul Hare and Tamás Révész Among Eastern European countries, Hungary's great advantage is that it began economic reforms in 1968, and slowly introduced the institutions of a market economy during the 1980s. These measures laid the foundation for a gradual transition to the market, without the need for any sharp break with the past. Policy mistakes were, of course, made. The most serious, extending over several years, was the 1970s investment boom funded by foreign capital, which contributed to Hungary's large debt burden. Despite this, the government accounts are not now in substantial deficit and the balance of payments on current account is in modest surplus; nevertheless, managing the external debt is now the most difficult of Hungary's problems. It is important that Hungarian joint ventures and privatization are now attracting significant quantities of foreign capital. Given the quite rapid pace of liberalization since the late 1980s, the government's commitment to further changes, and a reasonably satisfactory macroeconomic balance (though inflation is worrying), there is no case for a ‘big-bang’ approach in Hungary. Such a shock could only disrupt established market relationships and expectations, with little benefit. The most valuable forms of ‘aid’ for Hungary would be debt relief and unrestricted access for Hungary's products to EC markets.

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