Hungary's Open Secret

BUDAPEST: Only a decade ago, with its "goulash socialism" Hungary seemed the most prosperous communist economy. After communism collapsed, Hungarian leaders, and the Hungarian people, thought that their less restricitve system offered big advantages over other communist countries in the race to reform. Where others had to rush, Hungarians thought they could change more slowly. Today, that illusion is tattered.

Hungary's economy differs from other post-communist economies in two ways: the huge debts with which Hungary began the transition, and the open economy that these debts inspired. Although the debt burden decreased since 1993, it still retards growth. As a proportion of GDP Hungary remains one of the most indebted countries of Eastern Europe.

Unlike Poland, however, Hungary never rescheduled its debts. So to maintain creditworthiness, the country has been forced to adopt pragmatic economic policies that today deliver an unusual economic openness -- this, and not the ephemeral benefits of "goulash socialism" is the longterm hope for the Hungarian economy. For with this opening, Hungary absorbed the largest foreign direct investment (FDI) in the region.

Raw politics caused Hungary to open its economy. Hungary's safety valve since 1990 has been to generate open structures. After a slow start, since 1995 privatization has pushed this process forward. Geared to closing gaping holes in the state budget, privatization sales became the favorite mechanism rather than mass distribution schemes in the manner of the Czechs. Sales led to more FDI, as the only people with deep enough pockets to pay big money for state assets came from abroad. In a virtuous circle, FDI reinforced trade openness: according to the Ministry of Industry, Trade and Tourism, 80% of Hungary's exports are generated by companies fully or partially owned by foreigners.