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TITLE:  HUNGARY ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                             HUNGARY
                     Key Economic Indicators


                                  1991      1992      1993 1/
Income, Production,
 and Employment

Nominal GDP ($billion)               30.6      31.3     n/a
Real GDP Growth (pct.)              -11.9      -4.5   0 to -3
GDP Per Capita, nominal ($)        2,982     3,431      n/a
By sector (bil. current forint)
  Agriculture                        205       208      n/a
  Mining                              71        66      n/a
  Manufacturing                      493       587      n/a
  Energy                              93       122      n/a
  Construction                       117       149      n/a
  Trade                              335       361      n/a
  Hotels, Restaurants                 64        84      n/a
  Transport, Communications.         190       205      n/a
  Financial Services                  44        66      n/a
  Real Estate                        134       174      n/a
  Education                           89       112      n/a
  Health, Social Work                 83       102      n/a
  Other Community Services           160       216      n/a
  Taxes on Products                  269       354      n/a
  Total                            2,346     2,805      n/a
Industrial Output (pct.chg.)        -19       -19       n/a
Labor Force (000's)                6,400     6,400      n/a
Unemployment (year-end, pct.)       7.5      12.3      12-13


Money and Prices

Broad Money (bil. forint)          1,170     1,487      n/a
Gross Savings (pct. of GDP)        18.1      18.5       n/a
Gross Investment (pct. of GDP)     20.8      19.0       n/a
Consumer Price Index (pct. chg.)   35        23        20-22
Avg. Exch. Rate (forints per $)/2  74.8      79.0       n/a
Govt. Spending (pct. GDP)          57.0      60.1       n/a


Trade and Balance of Payments
(Millions of U.S. dollars unless otherwise noted)

Hard currency account          
Total Exports                      9,971    10,710      n/a
  Exports to U.S.                    392       347      n/a
Total Imports                     11,066    11,082      n/a
  Imports from U.S.                  310       282      n/a
Overall Trade Balance             -1,095      -372      n/a
  U.S. trade balance                  82        65      n/a
Current account balance              267       324      n/a
Total For. Investment              3,100     4,850     6,000
Gross Debt                        22,700    21,400      n/a
Net Debt                          14,600    13.300      n/a
Debt Service Ratio (pct.)           40.4     29.0       32
FOREX Reserves
 Excl. Gold                        3,900     4,000     5-6,000


Note:

(1  Estimates based on data available in October 1993.
(2  The forint is pegged to a half-DM, half-US$ basket.



1.  General Policy Framework

    Hungary's democratic government began its four-year term in
May 1990.  Its ambitious economic reform plan is replacing
central planning with private ownership and free markets.  The
record to date is mixed: the economy has been stabilized and
inflation tamed, but economic growth expected in 1992 is now
not foreseen until 1994 at the earliest.

    On the plus side, Hungary's receptive investment climate
has attracted over half the foreign direct investment in
Eastern Europe.  The private sector now produces some 40
percent of GDP.  Three-fourths of trade is with OECD countries,
and trade accords with the European Community (EC), European
Free Trade Association (EFTA), and "Visegrad" partners (Poland,
the Czech Republic and the Slovak Republic) will further boost
trade.  Foreign exchange reserves have risen sharply and are
now healthy.  A high foreign debt burden has been met
assiduously.  The forint is convertible for business purposes. 
Interest rates and inflation are well below their 1991 peaks. 
Hungary has over half a million private entrepreneurs and some
15,000 joint ventures.

    On the minus side, few benefits of reform are yet visible
to the average Hungarian individual and firm.  The number of
those living below the official subsistence level has doubled
since 1989, to 1.6 million.  Industrial output at the end of
1992 had plunged to its 1975 level.  Inflation appears stuck at
around 20 percent.  Due to lower agricultural exports, exports
are off this year after three years of strong increase.  The
current account surpluses of the past three years may become a
$1.4-1.7 billion deficit in 1993.  Joblessness jumped by
two-thirds in 1992, topping 20 percent in hardest-hit regions,
and could rise from the mid-1993's level of 13 percent. 
Hungary still has Europe's highest per capita convertible
currency debt burden.  Firms face 63 percent payroll taxes,
30-40 percent interest rates, and a banking system loath to
lend to risky private ventures.  The farm sector is in crisis. 
A high budget deficit reveals a fiscal system still in need of
basic overhaul, plagued by chronic revenue shortfalls and
overly generous social benefits.

    More vigorous implementation of reform measures is
difficult in the run-up to the spring 1994 national elections. 
Partly as a result, the economy is not expected to turn up in
1993, and only modest growth at best is likely in 1994.

2.  Exchange Rate Policies

    The forint could be fully convertible by the end of 1994;
it already is for most trade purposes.  Foreigners may freely
repatriate cash capital and profits (the National Bank requires
that an equivalent amount in forints be on deposit with a
Hungarian bank).  Firms may convert forint profits (but not 
take out forint loans) to buy hard currency imports.  As of
July 1992, foreigners can open forint bank accounts in Hungary
and use forints to buy Hungarian goods and services.  The hard
currency limit for Hungarian tourists was raised in 1992 from
$50 to $350 a year.  Hungarian firms can take foreign loans
with the central bank's approval; banks may do so without prior
permission.  Joint ventures must open a forint-denominated
business account at a Hungarian bank (which may be a joint
venture bank, but not an offshore one).  A joint venture must
return its hard currency income to Hungary and hold it in
forints in its commercial account, exposing it to inflation and
devaluation risks.  As a sign of the forint's strength, the
official and black market rates are now almost equal.

    In December 1991, the forint's exchange rate was pegged to
a basket consisting half each of the European currency unit
(ECU) and the U.S. dollar.  In August 1993, events in Europe's
currency markets led the central bank to substitute the German
mark for the ECU.  The forint has appreciated in real terms, as
devaluations have lagged behind the inflation rate.  For 1993
through October, the central bank devalued the forint five
times by just under 15 percent, less than inflation of 20-22
percent.  An appreciating forint makes imports cheaper and
cools inflation, but makes it harder for exporters to sell
abroad.  The central bank sets the exchange rate daily and can
adjust it by up to five percent without government approval. 
As of July 1992, commercial banks no longer must sell their
foreign currency to the central bank and a limited interbank
foreign exchange market has been in operation.


3.  Structural Policies

    Hungary introduced value-added (VAT) and personal income
(PIT) taxes in 1988.  PIT rates range from 12 to 44 percent. 
In August 1993, the three VAT rates of zero, six and 25 percent
were replaced with two of 10 and 25 percent.  Medicines will
not be subject to VAT taxes until the end of 1994.  Excise
taxes are levied on gasoline, alcohol and tobacco.  The 63
percent total payroll taxes for social benefits, split 51 and
12 between employer and employee, are among the world's
highest.  The United States has a tax treaty with Hungary.

    Joint ventures with capital above Forint 50 million
($515,000), over 30 percent foreign participation, and at least
half of revenues from manufacturing or hotel construction and
management can receive tax breaks of 60 and 40 percent their
first and second five years of operation.  (The standard
corporate tax rate is 38 percent.)  These rise to 100 and 60
percent for priority export sectors: machinery and machine
tools, packaging, the environment, electronics, tourism,
telecommunications, pharmaceuticals, agribusiness, and vehicle
parts.  These incentives will expire on December 31, 1993
(existing benefits will be grandfathered); their extension is
under consideration.  The government is also thinking of ending
joint ventures' exemption from import duties on production
equipment.  These changes reflect domestic firms' complaints of
discrimination and a feeling in the government that tax
incentives aggravate the budget deficit without attracting
significant foreign investment.

    Over 90 percent of prices are set by the market; the
government still sets prices for electricity, gas,
pharmaceuticals, water supply and public transport.  State
subsidies fell from 11.8 percent of GDP in 1989 to 5.9 percent
in 1992.  Liberalized prices and subsidy cutbacks pushed
inflation to 35 percent in 1991, but tight monetary policies
and wage restrictions cooled this to 23 percent in 1992. 
Consumer prices have risen much more than producer prices as
consumer subsidies have been halted.  For 1993, consumer price
inflation is projected at 20-22 percent.


4.  Debt Management Policies

    Hungary's mid-1993 gross foreign debt of $21.3 billion
makes it the world's tenth most-indebted country, with the
highest per capita debt in Europe.  Hungary has met all debt
service requirements on schedule and has vowed to continue that
policy.  Its responsible debt management has assured it
continuous access to credit markets.  (U.S. rating agencies
have assigned Hungary Ba1/BB+ ratings.  Standard and Poor also
maintains a "positive" rating outlook.)  Most of Hungary's debt
is held by German and Japanese banks, not by governments.  In
1992, principal and interest on external debt equalled 12.4
percent of GDP.  In 1989, the ratio of debt repayment to
convertible currency proceeds was over 75 percent; in 1992, it
was only 26-27 percent.

    Four-fifths of Hungary's external debt is in medium- and
short-term loans; less than 10 percent is long-term.  Mid-1993
hard currency reserves of $5.3 billion and over $5 billion in
foreign investment enable Hungary to service its external
debt.  Of greater concern is the domestic debt.  State spending
has been held in check, but unexpectedly sharp drops in GDP and
a tax administration unable to capture revenues from a rising
private sector have continued to depress tax revenues.  The
1991 deficit target of forint 79 billion ended up at forint 114
billion, and 1992's goal of forint 70 billion came in at forint
197 billion.  In July 1993, Parliament passed a supplementary
budget raising 1993's projected deficit from forint 185 billion
to forint 215 billion (6.8 percent of GDP).  As part of the
conditions for reaching agreement with the IMF for a new
Standby Arrangement, the deficit in 1994 will need to be cut to
5.5 percent.  The budget problem will persist without better
tax collection and a restructuring of generous social benefits,
the latter difficult in an election year.


5.  Significant Barriers to U.S. Exports

    Import licensing:  Imports have been greatly liberalized to
spur domestic competition and let profitable firms obtain
materials to restructure or produce exports.  Over 93 percent
of imported goods need no import license, the main exceptions
(on a "positive list") being energy and fuels, precious metals,
military goods, certain pharmaceuticals, textiles, leather
goods, some chemicals and mineral products, food products and
telecommunications equipment.  Import licenses are not needed
when a joint venture imports goods using hard currency
contributed by the foreign partner to the firm's incorporation
capital.  Hungary has a $750 million global quota on consumer
goods in 1993, and may set quota ceilings for other individual
product groups, importers and countries (there are semi-annual
quotas for automobile imports).  In 1991 and 1992 the quotas
were filled, restricting some firms' access to the Hungarian
market.  Hungary's Association Agreement with the EC entitles
the EC to an increasing share of the quota; in 1993, it
received half of the allotments in a majority of the quota
categories.  An import license may be denied on grounds of
national security, to comply with international obligations or
to ensure the supply of basic necessities.  General licenses
are no longer issued, and all applications must by law be
processed in 15 days.  Licenses are normally valid for 12
months.

    Standards, testing, labelling and certification:  Hungary
is a signatory to the GATT Agreement on Technical Barriers to
Trade (Standards Code).  National standards conform to 
international norms and are set by the Hungarian
Standardization Office and the Trade Quality Control Institute
(KERMI).  They are binding and supersede any sectoral standards
issued by ministries or other government agencies.  The main
labelling requirement is that basic data be indicated in
Hungarian; specific rules apply to products containing alcohol
or vitamins, cosmetics, and human and animal pharmaceuticals. 
New consumer goods, including imports, can only be introduced
into Hungary if they meet national health, safety and consumer
protection regulations.  Domestic and foreign pharmaceuticals
must be registered with the National Hungarian Institute for
Pharmacy (OGYI) and have Ministry of Health approval for
merchandising.  Veterinary drugs must also be registered and
may only be imported by designated importers.  Imports of
animals and animal products require veterinary permission from
the Ministry of Agriculture.  As of October 1, 1993, a
"quality" certificate from KERMI is required for imported
consumer goods, reportedly to stem the entry of "low quality"
and counterfeit goods; nearly one-fourth of all goods sold at
retail will be affected by this rule.

    Investment barriers:  Because of the importance of foreign
capital in Hungary's restructuring plans, neither investments
nor services face major restrictions.  Poor telecommunications
and transport infrastructure and an undeveloped banking system
are the main barriers to U.S. investment.  Major tax incentives
are available to foreign investors but these are scheduled to
expire at the end of 1993.  In 1992, the government announced a
campaign to encourage more "green-field" operations, in part by
strengthening its Investment Promotion Fund, which helps joint
ventures develop infrastructure around their investments. 
Joint ventures are guaranteed national treatment and protection
against expropriation.  There have been no cases of seizure of
foreign assets in Hungary since the early 1950s, and in 1973
Hungary settled all outstanding debts for U.S. assets
expropriated in the early days of communist rule.  Service
firms may operate freely in Hungary, although banks and
insurance companies continue to need special licenses, and
banks cannot be licensed for all banking activities.

    The 1990 securities law lets foreign firms participate in
stock and bond markets.  Representation and service offices no
longer need official permission to open, and now simply
register their establishment as does any Hungarian company. 
Firms with foreign ownership may buy property, as may foreign
individuals with Ministry of Finance permission.  Property can
be mortgaged, leased, sold, or developed, subject to zoning and
building codes.  Long-term usage rights to state property may
be obtained if actual ownership is denied.  Property may not be
acquired for speculative purposes.

    Customs procedures:  Customs laws themselves pose no
significant barriers, but local U.S. firms have complained of
inadequate customs facilities and customs officials' ignorance
of regulations.  Another barrier to U.S. exports is Hungarian
firms' hesitancy to disrupt their strong ties with West
European suppliers.

    Government procurement practices: The government
discourages countertrade, but lets individual firms decide
whether to conduct it.  The phase-out of import licensing has
resulted in a drop in countertrade.  There are no specific
legal provisions for government procurement, and Hungary has no
local content requirements.  In 1992, Parliament mandated
government ownership levels in certain "strategic" industries. 
The law codified Hungarian percentage ownership interest in a
variety of firms and was enacted in response to criticism that
an inordinate number of Hungarian companies were being sold to
foreign investors.  Hungary has signed, and incorporated into
its legal system, the GATT Antidumping Code; to date, it has
not taken antidumping actions.


6.  Export Subsidies Policies

    Hungary is not a signatory to the GATT Subsidies Code.  In
1980, Hungary declared that, except in agriculture, it did not
provide any export subsidies.  The value added tax is refunded
on exports.  The Export Development Program (EDP) was
established in 1985 to spur exports to hard currency markets,
particularly in engineering, chemicals, food, metallurgy and
light industry.  Hungary also offers export credit insurance to
cover economic, political and exchange rate risks.  A Trade
Promotion Fund (TPF) also supports hard currency exports with
loans (to 75 percent of incurred costs) or grants (to 50
percent).  The General Intervention Fund (GIF) has been used to
support agricultural exports and ensure the supply of basic
foodstuffs, but its export support function has been cut back.


7.  Protection of U.S. Intellectual Property

    Hungary provides protection for a wide variety of
intellectual property rights including patents, trademarks,
copyrights, and inventions.  It is a member of the World
Intellectual Property Organization and a signatory of important
agreements such as the Paris Convention for the Protection of
Industrial Property, the Nice Agreement on the Classification
and Registration of Trademarks, the Madrid Agreement Concerning
the Registration and Classification of Trademarks, the Patent
Cooperation Treaty, the Universal Copyright Convention, and the
Bern Convention for the Protection of Literary and Artistic 
Works.  A 1992 law protects the topography (layout design) of
semiconductor chips.

    U.S. industry has long complained that Hungary offers
inadequate IPR protection; specifically, it provides patent
protection for processes but not products.  Compulsory
licensing and inadequate protection against video and tape
piracy have also been problems.  On August 2, 1993 the U.S.
Trade Representative announced Hungary's removal from the
Special 301 "Priority Watch List" after it concluded a
comprehensive IPR agreement with U.S. negotiators.  The United
States is negotiating a Business and Economic Treaty with
Hungary to provide further safeguards for U.S. investment.


8.  Worker Rights

    a.   Right of Association

    Legislation passed in 1992 recognizes the right of unions
to organize and bargain collectively and permits trade union
pluralism.  Excluding judicial and military personnel and
police, workers have the right to associate freely, choose
representatives, publish journals, openly promote members'
interests and views, and go on strike.  A number of trade union
formations have emerged.  A 1992 law allows public sector
workers to negotiate working conditions, but the final decision
on increasing salaries rests with Parliament.

    b.   Right to Organize and Bargain Collectively

    The right to bargain collectively exists in law, although
minimum wage levels are centrally negotiated in a tripartite
interest reconciliation council (IRC) to control inflation. 
The 1992 labor code permits collective bargaining at the
enterprise and industry level.  Trade union views are expressed
in the IRC.  July 1993 legislation prohibits employers from
discriminating against unions and their organizers.  There are
no export processing zones.

    c.   Prohibition of Forced or Compulsory Labor

    Forced or compulsory labor is prohibited by law, which is
enforced by the Ministry of Labor.

    d.   Minimum Age for Employment of Children

    Labor Courts enforce the minimum employment age of 16
years, with exceptions for apprentice programs, which may begin
at 15.  There does not appear to be any significant abuse of
this statute.

    e.   Acceptable Conditions of Work

    The legal minimum wage is set by the IRC and implemented by
Ministry of Labor decree.  To maintain a decent standard of
living in the face of falling real wages, many Hungarians
supplement their income with second jobs.  The 1992 labor code
specifies various conditions of employment including
termination procedures, severance pay, maternity leave, trade
union consultation rights in some management decisions, annual
and sick leave entitlements, and labor conflict resolution
procedures.  Labor Courts and the Ministry of Labor enforce
occupational safety standards set by the government, but
specific safety conditions are not always up to internationally
accepted standards.

    f.   Rights in Sectors with U.S. Investment

    Labor conditions in sectors with U.S. investment do not
differ significantly from those in Hungarian firms.



         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (millions of U.S. dollars)

Category                                    Amount

Petroleum                                               0
Total Manufacturing                                   182
    Food & Kindred Products                   5
    Chemicals and Allied Products             D
    Metals, Primary & Fabricated              D
    Machinery, except Electrical              0
    Electric & Electronic Equipment           O
    Transportation Equipment                  8
    Other Manufacturing                       D
Wholesale Trade                                        52
Banking                                                 D
Finance and Insurance                                   0
Services                                                0
Other Industries                                        D

TOTAL ALL INDUSTRIES                                  336


(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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