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HUNGARYS REFORM PROCESS

Submitted by: Rahul Sharma Vimarsh Kakkar Isha Sehgal Neha Bhasin Jayadeep Singh

Introduction

By 2006, Hungary had experienced more than 15 years of transition from central planning to free markets. The reform process had involved several distinct phases. The initial "leap to the market," with its widespread privatizations, included a dramatic deregulation with a "guillotine" procedure. A more refined process of "regulatory impact assessments" (RIAs) followed this period.

In 2006, Hungary faced the challenge of a fiscal deficit that was 9.5 per cent of GDP, and responded by raising corporate tax rates from 16 per cent to 20 per cent as an attempt to close the fiscal gap.
Tax rates were an important element in this competition, but so were the regulatory impediments and distortions that still remained in the economy. How to create a rapidly growing economy was a question at the forefront of public policy debate.

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A 2006 Financial Times article discussed this dilemma: Hungary is headed the wrong way in a highly competitive race for capital. Hungary drew a record 5.4 billion Euros in foreign direct investment last year, topped only by Poland, which won 6.2 billion Euros.

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Business leader pointed to various public policies that they felt had to be changed as a precondition for economic success. Gabor Beke Martos, operations in Hungary, said that the key factor for long term investors was not tax rates but whether the government followed through on the structural reforms it has also begun to outline.

Failures of Central Planning

Problems of information and coordination were intensified by any change in the circumstances surrounding an enterprises production process.

Being economically advanced, it experienced four trends that complicated the information, coordination and flexibility challenges:
First, Product became more complex and required a wider variety of inputs, making the production processes increasingly interrelated. Second, both Production and Consumption goods were provided in growing number of versions with wider modifications. Third, Many aspects of commodity could not be quantified easily as there was modern emphasis on quality. Fourth, to obtain and evaluate information concerning potential innovations.

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JEFREY SACHS AND THE LEAP TO THE MARKET

Jefrey Sachs, a Harvard economist, advocated different path from chinas, in knowing what became know as a leap to the market. Privatization Strategy Firms who adjust rapidly to changes in prices and profits, privatization should be undertaken immediately by them, as only privately owned firms could achieve the necessary investment, product modifications, quality improvements and technological innovations. To shift from government price setting to prices established by demand and supply in the market.

Reform Process
In 1989-91marked the inception of Reform process which was undertaken in 3 areas:

Barriers to international trade & investment were reduced. Prices were allowed to fluctuate as per market conditions as well as competitive forces. Privatization of State-owned assets

There was series of legislative initiatives along with elimination or reforming of host regulation for this abrupt shift to market economy.

Guillotine Review

First review(1989-90) led to Deregulation act of 1990


Omnibus

law Initial process focused on dismantling regulatory requirements

Second review(1995-98)
Improving

administration efficiency & effectiveness Tackling negative consequences of earlier reforms

Success of 2nd review was simplification and

Analysis of Economic Data

Direct investment is calculated as a percentage of GDP. From 1989-1999 years ,Hungary was the winner. Later Czech republic got the leading position till 2002. Degree of inflation:-Hyperinflation persisted for many years. Russia attained 875% in 1993 and 308%in 1994 out of Hungary, Romania, Poland etc. Unemployment remained extremely high in Poland at 20%for 2000 period. This was because of shifting individuals into free market jobs-a process that required business expansion as well

A substantial devaluation of the East European currencies against U.S dollar from 1989-1998. Hungarys currency from 59:1 to 237:1 U.S dollar. Polands currency also followed the same pattern. Republic was an exception with a slight

Issues perceived as impediment in business


1. Anti-competitive practices of others 2. Corruption 3. Labour regulations 4. Business licensing and permits 5. Customs and trade regulations
WAY AHEAD Unless the new government acts swiftly to rein in the fiscal deficit, a sharp decline in the value is likely followed by a rise in interest rates that could have deliberating effects in terms of the cost and volume of debt.

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