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U.S. Agency for International Development (USAID)

USAID in Hungary: Ten Years of Collaboration 1991-1999
A Retrospective Look at USAID's Role in Hungary's Transition

Executive Summary

I. Introduction

For the past ten years, the U.S. Agency for International Development (USAID) has supported the efforts of the Government and people of Hungary to make the transition from an authoritarian political system and centrally-planned economy to a democratic state with a market economy. By any measure, Hungary has been highly successful in accomplishing this goal and USAID has been instrumental in facilitating its success. Since there are other countries in the region making the transition with the assistance of USAID and other donors, the lessons of Hungary's experience and USAID's role could be useful. This paper does not seek to isolate the causes of Hungary's success, but rather to focus on the means by which USAID facilitated Hungary's efforts. It is addressed primarily to the development professionals of USAID and other assistance agencies.

II. Hungary's Transition

The centrally-planned economies of the communist bloc were imposed on countries that, despite some common features, had different histories, cultures, and resource endowments. Therefore the departure points, strategies, and outcomes of transition across countries varied widely. Before it fell under the hegemony of the Soviet Union, Hungary, like other northern-tier Central and Eastern Europe (CEE) countries, had been part of Europe through the industrial revolution and the political ferment of the nineteenth and early twentieth centuries. Hungary had experienced multiparty democracy and had a growing and modernizing industrial and agricultural economy linked by trade to other European countries. Economically, it was a moderately developed country. Socially, it had an educated population, and a growing, entrepreneurial and professional middle class.

During the period of communist rule, Hungary evolved along a different path from its fellow CEE countries. The Stalinist political, economic and social reorganization of the country according to the Soviet model between 1948 and 1953 was exceptionally harsh. Post-Stalinist efforts to rectify the situation resulted in first, a loosening, and then retightening of economic and political controls. The severity with which control of the economy was imposed combined with historical feelings of national pride provoked the Revolution of 1956. This event made it clear to Hungary's rulers and their backers in the Soviet Union that they could push the people of Hungary only so far without provoking a response. The ruling elite under Janos Kadar, with the tacit support of the Soviet Union, pursued a more consensus-seeking style of political leadership and sought to gain legitimacy in the eyes of the people through economic reforms that would improve their living standards. In effect, political and economic reforms, under the leadership of the communist ruling elite had already started the transformation process that accelerated in 1989.

Political Transition

In 1989, the reform-minded ruling communist leaders in Hungary saw their self-interest being best served by negotiating a peaceful transition to multi-party democracy. The historic National Roundtable negotiations of June to September 1989 between the incumbents and members of re-emerging opposition parties provided the basis for Hungary's return to parliamentary democracy and free and fair multiparty elections in 1990. In a remarkably short time, a wide range of legislative actions were taken which restored parliamentary democracy in Hungary. Laws, that included, setting up an independent judiciary, regulating the registration of political parties, restructuring local government, establishing electoral procedures and were enacted by the interim government between 1989 and 1990. National and local multiparty parliamentary elections were held in March/April of 1990--the first free elections since 1945. Since then, two more elections have been held at the national and local levels. Each time the incumbent party or coalition lost its majority, and a peaceful transfer of power took place demonstrating the strength and irreversibility of Hungary's democracy.

While some NGOs flourished during the early stages of the democratic transition, comprehensive NGO legislation was only enacted in 1997. The number of active NGOs is now large and focus chiefly on advocacy of local issues and the delivery of services. Long-term financial sustainability is the most pressing question for NGOs. Although formal controls over the media were lifted early in the transition, the Government retains considerable control through ownership of media outlets. A Media Law was enacted in 1995 and two TV stations were privatized in 1997. A lively free press and electronic media is evolving. Financial sustainability of local level media still needs to be secured. The court system, while functioning independently, remains inefficient, denying justice through delay. Reforms that created over 3,300 local government units brought government to the people. As a result of the speed of this reform, new administrations were challenged to develop the competence and processes to deliver services demanded by its citizens. While some local governments, with donor assistance, have grown in competence, much remains to be done. The respective roles and relationships between the national and local governments must be clarified and local governments need adequate sources of financing. Although the Constitution guarantees equal rights to all citizens, ingrained attitudes toward minorities, such as the Roma, result in de facto discrimination, and the violation of minority rights.

Economic Transition

While Hungary is generally acknowledged to have started earlier in its reform program, it introduced reforms at a somewhat slower pace than other countries in the region. Despite embarking on transition with a relatively liberalized economy, and despite postponing sharp macroeconomic adjustment until 1995, Hungary was not able to avoid a deep transformational recession. As Hungary began its economic transformation in 1990, its newly elected government was confronted with declining growth, rising inflation, a huge foreign debt, and a large government budget deficit. Real GDP declined by 18 percent from 1990 to 1993. Inflation more than doubled between 1989 and 1991, reaching 35 percent. By 1993, significant deficits had emerged in both the budget (6.5 percent of GDP) and current accounts (9 percent of GDP). Unemployment grew from essentially zero to 12.5 percent. The Government instituted a stabilization program that included tax increases and expenditure cuts, a devaluation of the Forint and tighter monetary policies. It also negotiated a rescheduling of its external debt. It promoted the transformation of the economy by enacting a radical bankruptcy law and began a wide-ranging privatization program. However, the Government delayed implementing critical fiscal adjustment measures and structural reform in the public sector. The initial actions of the first freely-elected government pulled Hungary back from the brink of disaster and produced a 3 percent growth in GDP in 1994. However, the Government's gradualist approach and unwillingness to tackle some of the urgently needed, but more economically and socially disruptive, reforms led to another crisis and ultimately caused a delay in the resumption of sustained economic growth.

The socialist government elected in 1994 introduced a stabilization package in 1995 that dealt effectively with the macroeconomic realities and laid the groundwork for the resumption of sustainable growth. Measures included devaluation of the Forint and establishment of the crawling peg system for controlling the exchange. A temporary eight percent import surcharge on consumer goods was levied and measures to restrain income growth were imposed. Various steps were taken to increase revenue and decrease government spending. The privatization program was revised and reinvigorated. Consequently, 80 percent of the economy is in private hands, including the banking and energy sectors. The Government also addressed public sector and fiscal reform issues. Over the longer term, a recently enacted state-of-the-art pension system should help to reduce budgetary pressures over time.

The reforms are generally recognized to have quickly reversed the deteriorating economic and fiscal situation and laid the groundwork for sustainable economic growth. GDP growth dipped to 1.5 percent in 1995 and 1996 and finally began to rise again in 1997, reaching 5 percent in 1998. The economy is expected to grow about 4 to 4.5 percent in 1999. Unemployment, while still high, declined to an estimated 7.8 percent in 1998. The current government, elected in 1998, is continuing the policies of its predecessor. There is a strong consensus that accession to the European Union (EU) is a priority and that economic and fiscal policies must therefore be compatible with accession requirements. Accordingly, political support continues for fiscal austerity, government deficits reduction and tax rates reduction. 

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