H.E. Gyula Nemeth
Chairman of the Delegation

at the
International Conference on Financing for Development

Monterrey, Mexico
March 21-22, 2002

It is a great pleasure and honour for me to address the Conference on Financing for Development. The issues being discussed during this week are of great importance for all states participating, for the developed and developing world and countries in transition.

The basic precondition for the eradication of poverty is the sound and sustainable growth of the economy, For economic growth, both a high level of. investment and efficiency thereof are needed. A relatively high level of domestic savings should be the most important source of investments. Foreign savings is also a key for the countries with a significant lag in economic development. It is to be emphasized that foreign capital should be additional to domestic savings, rather than replacing that. It follows that economic policy should create an environment to increase and mobilise domestic savings and to attract foreign capital. In, that respect some lessons could be learned from the results and failures of the Hungarian economic policy in the last decades, which I try to summarize in the following.

Hungary's Economic Direction

Hungary is one of the Central and Eastern European countries having made a transition to a market economy since the early nineties. The Hungarian economy is specifically an open one with a small internal potential while strongly lacking capital. Therefore, it had always come upon for international funds and the structural transformation involved by the enormous political and economical changes in 1989 was even impossible without  international financial assistance. However, the starting position, i.e. the heritage of 'ancien regime' made up a heavy burden in every aspect. The resilience and adaptability to the world market environment of the Hungarian national economy was poor and the domestic producers faced increasing difficulties in the sharp competition.

As a consequence of poor adaptation skills, the economic growth was coupled with permanent imbalances. Finally, the Hungarian economy was close to the debt trap condition by the early 90s. Our net external debt approached 50 per cent of GDP and 130 per cent of exports. In that situation, the economic policy management put the cause of substantial reforms at the forefront to achieve, in several succeeding stages,

  • the legal and institutional framework of market economy to be established;
  • the national economy to be stabilised through structural changes and increasing competitiveness;
  • and then, the sound and balanced economic growth to be implemented permanently.
Over the past ten years Hungary has made serious progress with a view to these objectives. The structural reforms to cause the necessary microeconomic attitude were the following:
  • By now the private sector is dominant in Hungary. Its contribution to the GDP makes more than 70 per cent as a result of the new business establishments supported by the government and elimination of all obstacles to the market access and privatisation of state-owned enterprises.
  • Privatisation was linked to such a bankruptcy law as to contribute to the liquidation of inefficient capacities thereby a radical. structural change.
  • Economic role by the State essentially reduced including income centralisation dropped to just over 40 per cent from 55 per cent while the rate of redistribution fell to about 45 per cent from 60 per cent.
  • The fiscal policy had a large part in increasing the funds available to the enterprises within the total of GDP, thus creating an essential condition of the business sector expansion.
  • All obstacles to market forces in determining prices, costs and the free competition were removed. At a fast pace, wages and external economy were also liberalized. The Hungarian economy has been open to the international competition bringing about a radical adaptation constraint.
  • In view of stabilisation and following modernisation strengthening the financial sector was of vital importance. The entry into force of the laws concerning the bankruptcy, the credit institutions and financial enterprises as well as the recodification of the central bank law have provided for clear rules in accordance with international money market standards.
  • An important objective of Hungarian economic policy since 1990 has been to create an environment attractive for foreign investments. The yearly FDI inflow in the last decade has been in the range of 3-5 per cent of GDP. It has been facilitated by a legal system based on international standards; therefore, the investors are familiar with those.
As a result of structural reforms, the rate of domestic savings in the last 5 years has been about 24-25 per cent of the GDP and the investment/GDP ratio has been even  higher.

There has been a substantial improvement in the efficiency of investments, for example the growth of productivity in the manufacturing sector in the last 10 years has been over 10 per cent on an annual average basis. The problem of indebtedness ceased to exist. The possible capital inflow of the Hungarian economy is clearly subject to the profitability of investment. The equilibrium problems were eliminated. We managed to leave off the 'stop-go' track and since 1997, we have permanently gone on a growth path with the characteristics of 4 to 6 per cent of annual rate based on productivity gains of over 3 per cent above the EU average.

Hungary, while successfully passing through the transition period within historically short time, is ready to share her many-sided experiences in reinforcing democratic institutions and market economy with the partner countries. We are convinced that sharing our own way of practicing the requirements of good governance especially in the fields of privatisation, financial and banking consolidation, running of local governments etc. could constitute an effective form of support to the interested partner countries.

Importance of Common Development Goals and Concluding Remark

The foregoing may give sufficient reasons that the legal environment to provide incentives and safety as appropriate for the development of enterprises, the predictable macroeconomic regulation, the system of taxation causing efficiency to improve as well as strengthening the financial discipline all allow for the internal sources of development to be mobilised and external ones involved.

Hungary fully shares the development goals as internationally agreed including those contained in the Millennium Declaration and is committed to collaborate with all the stakeholders to eradicate poverty and promote sustainable development. Hungary is, within its powers, ready to share its many-sided experiences in building democratic institutions and establishing market economy with the partner countries in the developing world; to participate in the international efforts to mobilize financial resources for development; to promote the equitable multilateral trading system and to increase official development assistance.

In the last year, the Government of Hungary took a decision to launch a gradually expanding national program of development co-operation focusing on the bilateral ODA activities towards the traditional developing partner countries. We intend to increase our development co-operation capacities with the purpose of actively contributing to the implementation of the international community's objectives mentioned above.

In addition Hungary welcome and support, inter alia, the efforts of the international community taken by international financial institutions, as well aimed at creating a functioning structure in which reducing the long-term debt burden, social and economic development of the poorest countries can also be realized through both bilateral contribution and debt relief.

Hungary is determined to participate in building a global alliance for development engaged to ensure that the agreements and commitments reached in this Conference are properly implemented.

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