Hungary - Economic analysis of government's policies, investment climate and political risk.






HUNGARY: Economic Policy Analysis

This site presents an analysis of the Hungarian government's economic policies compared to a list of 34 economic policies as prepared by Ms. Katalin Pesti with the McKeever Institute of Economic Policy Analysis in the Fall of 2003 (MIEPA). To read the analysis scroll through this site. To learn more about the background policies, click here

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Several foreign born students living in California have completed a study of their home country governments' economic policies as compared to the MIEPA list of policies as outlined above. The study on Hungary is shown below. The ratings herein are based on the following rating scale:


5.0 Perfect Facilitation of Wealth Creation
4.0 Midway between Perfect and Neutral
3.0 Neutral Effect on Wealth Creation
2.0 Midway between Neutral and Obstructionist
1.0 Perfectly Obstructionist to Wealth Creation
[Rating scale copyright Mike P. McKeever, 2003. Used herein with permission]

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Comparison of Hungary's economic policies to MIEPA criteria as prepared by native student of Hungary, Ms. Katalin Pesti, studying in San Francisco in Fall, 2003.



        1               3.5          10.5             15.0        70%

        2               5.0          15.0             15.0       100

        3               2.5           7.5             15.0        50

        4               4.0          12.0             15.0        80

        5               3.5          10.5             15.0        70

        6               4.5          13.5             15.0        90

        7               4.0          12.0             15.0        80

        8               4.0          12.0             15.0        80

        9               3.5          10.5             15.0        70

        10              5.0          15.0             15.0       100

        11              4.5          13.5             15.0        90

        12              4.5           9.0             10.0        90

        13              4.0           8.0             10.0        80

        14              4.0           8.0             10.0        80

        15              4.0           8.0             10.0        80

        16              2.0           4.0             10.0        40

        17              3.5           7.0             10.0        70

        18              4.0           8.0             10.0        80

        19              3.5           7.0             10.0        70

        20              2.5           5.0             10.0        50

        21              4.0           8.0             10.0        80

        22              5.0          10.0             10.0       100

        23              4.0           8.0             10.0        80

        24              3.5           7.0             10.0        70

        25              3.0           6.0             10.0        60

        26              3.0           6.0             10.0        60

        27              4.0           8.0             10.0        80

        28              4.5           9.0             10.0        90

        29              3.5           3.5              5.0        70 

        30              4.0           4.0              5.0        80

        31              4.5           4.5              5.0        90

        32              3.0           3.0              5.0        60

        33              4.0           4.0              5.0        80

        34              2.0           2.0              5.0        40

   TOTAL              128.0         279.0            375.0       74.4%
                      =====        ======            =====       =====

HUNGARY: Economic Policy Analysis

1. Freedom from internal control: 3.5

Hungary supposed to be free of internal control, but in reality the government tries to have, and to maintain control in some situations. A Hungarian citizen is free, the state doesn `t controls the choice of residence or job. A person in Hungary can travel freely in and out of the country, but as soon as he/she needs a visa to do it, it becomes fairly difficult. Immigration officers can reject a visa application, even if the person has it from the destined country. After joining the European Union traveling in the EU counties going to be like just traveling in one`s own country.

Hungarian citizens can start new enterprises and engage in any activity as long as it is legal. It is very complicated and to start a new business, though. The process takes forever and the authorities go through everything with magnifying glass, not in a particularly helping way.

SOURCE: personal information

2. Freedom of speech: 5.0

The Hungarian constitution guarantees the right of free speech, expression and assembly. The freedom of consciousness and religion are also considered as fundamental liberties. The freedom of the press, radio, and broadcasting is protected. The freedom to access and distribute any information of public interest is also granted. The use of vulgar, offensive, or threatening language is limited. Hate speech has been banned. Peaceful assemblies, associations and strikes are respected by the government.

SOURCE: personal information

3. Effective, fair police force: 2.5

The effectiveness of the police force has improved a lot in the past few year. The results are well perceived. Less crime, better public safety. Car thefts are decreased by 31% and break-in by 15% in 1998.

The fairness of the police force is questionable as there are allegations for ill-treatment and police brutality. Police forces had been reportedly using excess force and racial profiling. These incidents have been decreasing.

The on-spot fines for traffic offenses that can be levied have been increased few years ago. The problem with that is that there is nothing that can stop the police to pocket these fines as they can choose whether they let the offender go with a warning, report the offence or fine on the spot. Unfortunately many times they choose the last one, especially if the offender is foreigner.

SOURCE: personal information

4. Currency: 4.0

The legal national currency, the forint, is relatively new. It was introduced on August 1, 1946 after the collapse of the previous currency, the pengo. The National Bank of Hungary is the only institute entilted to issue bank notes and coins. All person are obliged to except the money issued by the NBH as it is the legal tender of Hungary.

Hungarian Forint - HUF (1 USD = 222.39 HUF / 05.DEC.2003)


5. Commercial banks: 3.5

In 1987 Hungary implemented a new two-tier banking system in which banks supposed to work as genuine, profit-making institutions.

Commercial banks are widely spread across the country. Most of them are foreign owned nationwide banks, and some of them are Hungarian owed joint-stock companies licensed to preform a wild range of commercial-banking services. Commercial banks also lend money to businesses and households and they keep their deposits in those banks. Loans are relatively easily obtainable.

SOURCE: personal information

6. Communication system: 4.5

The Hungarian communication system is excellent and covers all the area possible. Newspapers, magazines, television, radio, phones, faxes, internet are all widely used in the whole country.

In the past five years the usage of cellular phones and the internet spread with great pace. Most people own at least a home or cellular phone. If they don`t have a computer, they can use the internet in the libraries or internet cafes. Most people have televison and radio. Faxing is still on its way to the Hungarian homes, though it is well-known and used.

Hungary has 3 national public television channels, 26 private commercial television stations, over 200 regional cable outlets, and over 30 radio stations (1999).


7. Transportation: 4.0

Hungary has about 188,203 km highway, 7,875 km railways, 1,373 km navigable waterways, and in total 49 airports. Out of the 7,875 km railways 2,628 km is electrified.

Hungary`s transportation system is good. It provides easy access to every main populated area. In the country side it is not built out as well as in and around the cities, but it is sufficient enough to get you anywhere, it is only more time consuming.


8. Education: 4.0

The education system is good and reliable. Primary and high school are free. A child between the age of 6 - 16 has to be enrolled in school. The universities are more or less are free also. The standard of education is as good as anywhere else in Europe. The good education has helped to have and maintain a 99.4% of population literacy.


personal information

9. Social mobility: 3.5

The Hungarian Constitution says that all men are equal regardless of gender, race, class and deserve the same opportunities. In life it is different, though. The higher economy class one born into, the easier it is to move forward. The higher ranked people one knows, the better his/her chance of getting the positions he/she wants.

Recently a law has been passed that lowers the university entry point for minorities, giving them the opportunity to get a higher education. The government want to help and increase social mobility by this law. Low-income families are also in need of help to move forward which they haven`t received yet.

SOURCE: personal information

10. Freedom from outside control: 5.0

Hungarian citizens are subject to the rules of the Hungarian Constitution. They freely vote whether they want to form alliance with any other country or organization (UN, NATO). They are completely free of outside control.

SOURCE: personal information

11. Foreign currency transactions: 4.5

In Hungary all transactions are made in Forint, the national currency. Starting from May 2004, when Hungary will join the EU, the Euro will be the currency used in the country, which will make transactions in other European countries much easier. As the time of the joining approaches big shopping malls, elegant restaurants are already accepting Euro as well Forint. Some touristic places take other currencies (US Dollar, German Mark), but these usually small souvenir-shops.

SOURCE: personal information

12. Border control: 4.5

Hungary is located in East-Central Europe. She has borders with Austria, Slovakia, Ukraine, Romania, Serbia, Croatia, and Slovenia. The border control is strict and well organized. Recent years` catchings of all kinds of smuggling are a good proof of it. Although, from May 2004 at the joining of the EU, the borders will open to EU countries and only for fighting against smuggling will border patrols be placed out.

SOURCE: personal information

13. Cultural, language homogeneity: 4.5

Hungarian (a very special language, originating from the Finn-Ugric tribe of languages) is the national language, 98.2% of the Hungarian population speaks it. The population is just over 10.0 million of which the 89.9% is Hungarian, 4% Roma, 2.6% German, 2% Serb, 0.8% Slovak, and 0.7% is Romanian. Hungary is a mainly catholic country with 67.5% of the population Roman Catholic, 20% Calvinist, 5% Lutheran, and 7.5% atheist and other religious groups (Muslim, Jewish, Baptist).

In the rural areas there is complete cultural homogeneity, only in the biggest cities, especially in the capital can some diversity to be seen.

(The population of Hungary is 10 million and there are almost 5 million living in other countries who declare themselves as Hungarians.)


14. Political effectiveness: 4.0

The Orban government (1998-2002) has been a rather effective, fast-acting force. It solved problems relative quickly. In their time natural disasters hit the country, mostly heavy flooding. It always acted appropriately and quickly. At the time of its stepping into office, it had promised to fight against corruption, organized crime, attack tax evasion, and to gain membership into the NATO and the EU, which it relatively well completed.

The Meggyesy government (2002- ) has been slower in deciding, and in problem solving, but they have been quite closely follow their promises.

SOURCE: personal information

15. Institutional stability: 4.0

Hungary is a democratic republic. A few years after the communist system has been changed the in 1990 the country stabilized. The country has a stable government, justice and education system. Businesses who import their basic material are in a bit of trouble as the Hungarian forint is depreciating. Businesses who got credit in euro are also paying more for their loan.

SOURCE: personal information

16. Honest government: 2.0

Throughout the 90` investigations uncovered the ongoing bribery and corruption in the government. Very recent investigations of government ministers have resulted in the accusations of main party leaders of peculating money. Of course the reason is always personal profit.

Unfortunately, Hungarian government is very corrupt.

SOURCE: personal information

17. Common law: 3.5

The Hungarian laws on paper are equally valid for everybody throughout the county but unfortunately in life it is a bit different. The legal system is reasonably effective and fair, but of course with more money, with a better lawyer the one can go away with more. Minorities are also handled more unfairly than the rest of the population.

SOURCE: personal information

18. Central bank: 4.0

The National Bank of Hungary ( hereinafter referred to as NBH) is the central bank of the Republic of Hungary.

It is the first independent Hungarian central bank and it commenced operations on June 24, 1924, in the form of a company limited by shares. The Act on the National Bank of Hungary, passed in October of 1991 and amended several times since then, reinstated the independence of the Bank and re-established its range of duties.

The president of the NBH have to report to the parliament about the activities and monetary policy of the NBH annually. The state is a shareholder of the bank. Its duty is to achieve and maintain price and national currency stability by defining and implementing the right monetary policy. It has the exclusive right to issue banknotes and coins which are the legal tender of the Republic of Hungary. It is manages the official reserves as well as the foreign exchange reserves and operations and also controls the flow of credit in the country and influences the operation of the banking system. The Bank maintains the state's accounts and managing its debts.

The NBH has extensive relations with national central banks of the world in the area of bilateral meetings and co-operation and assistance. It has been a shareholder and active member of the Bank for International Settlements since the founding of this institution in 1930. It has an established relationship with European System of Central Banks which will result in membership and hopefully it will also become the member of the Eurosystem.

The central bank doesn`t manages the country`s commercial banks, it only sets the interest rate to which they adjust.


19. Domestic budget management: 3.5

In 2002 the Hungarian revenue totaled 4.37 billiard HUF (Hungarian Forint), in 2003 it is estimated for 4.75 billiard HUF. The deficit was 1.5 billion HUF in 2002 and 0.57 billion in 2003, showing a decreasing deficit. The inflation was 5.3% in 2002, and 5.2% in 2003.


20. Government debt: 2.5

The government debt was 61.9% of its GDP in 1998, 61.0% in 1999, 55.4% in 2000, and 53.2 in 2001. This shows a slowly decreasing debt, but unfortunately the debt grew in the past two years in spite of the government efforts of reducing it.


21. Private property: 4.0

Private property is well protected by the Hungarian Constitution and a number of laws that have been made to secure one`s property. In Hungary, only a lawyer can write a contract of sale and it has to be signed in front of a lawyer or a public notary. It also has to be authenticated by a public notary. Material as well as intellectual property rights can easily be protected.

The Hungarian Constitution does not make comment on the power of copyright, but Hungary has signed all the international treaties for protection of intellectual properties and copyrights, and by this has adopted the international copyright laws. This shows that even though Hungary doesn`t have copyright laws in its constitution, it excepts and respects the idea of intellectual copyright.

SOURCE: personal information

22. Economic statistics: 5.0

The Hungarian Central Statistics Office ( Magyar Statisztikai Hivatal) is the largest information provider in the country. It provides a bridge between statisticians and the media. It is in constant contact with journalist and editorial offices who use large amounts of statistics data in keeping the public informed. The HCSO works under the direct supervision of the government.

The ECOSTAT, the Institute for Economic Analysis and Informatics, is one of the most prominent institution in Hungary for economic analysis. It is an organ of HCSO and it is also co-operates with other Hungarian research institutes.

Beside these prominent institutions there are many private organizations that doing statistical and analytical researches to which anybody can easily gain access.


23. Protection of public health and safety: 4.0

Hungary has a good health system. Most people have health insurance as most of it paid by the employers. It is free or quite cheap to see a doctor although as the result of the widespread privatization of hospitals and increase of private practices the cost rises.

The Hungarian authorities encourage regular TB and cancer screening, systematic pre- and post-natal check-ups. Health campaigns and health education have been emphasizing the damage caused by smoking and heavy drinking and the prevention of AIDS. The workplace health and safety regulations have been made stricter in the past few years. The infant mortality rate was 9.87 in 1998, 8.4 in 1999, and 8.58 is the 2003 estimate. The life expectancy is 66 years for men, and 75 years for women and it is increasing.


24. High wages policies: 3.5

Hungary`s joining to the EU also require her to join up with the wages people receive. In 2002 wages have been raised by 18%, the minimum wage has been raised by 25%, and the wages of people in public service by 50%. Despite of the high-percentage raises, Hungarian wages are still far below the EU level even though an average Hungarian family has a relatively good standard of living.

SOURCE: personal information

25. Environmental protection: 3.0

The Hungarian environment hasn`t been looked after very long and it is needs a lot of improvements.

The Hungarian Ministry of Environment and Water is a young ministry. It has been founded in 1998. Ever since it has been continuously improving its protection of the environment.

Environmental education one of its greatest tool. The government puts great emphases on educating the children about the environment and the importance of its protection.

Hungary needs to improve and invest a lot in overall environmental protection. The joining of Hungary to the EU requires a raise in Hungarian environmental standards. She needs to improve on its waste disposal, energy efficiency, as well as in air, soils, and waters pollution.


26. Strong army: 3.0

The Hungarian army under went series of reforms and reorganizations in the past 20 years which caused its downward spiral of failures. Since the political system change, the government had great difficulty to define the status and role of the Hungarian Defense Forces in society and in the alliance it belongs. It is realized that the state borders cannot be defended on ground and also there is no need for it as it is highly unlikely any border threat against Hungary. It is a member of the NATO and all the surrounding countries are or expressed intentions of joining it. The defense of the country is centralized more on the air force. Although one of the latest reforms aims to achieve well-skilled, full-equipped, combat-capable, combat-ready units which will be able to compel Hungary`s security interest.

The Hungarian military consist of the ground and air forces. The size of its armed forces decreased by nearly 60% the past years. The Hungarian military expenditure is around $1.08 billion, 1.75% of the national GDP (2002 est.).


27. Foreign trade impact: 4.0

Foreign ownership of and investments in Hungarian businesses are widely spread all across the country. The foreign direct investments cumulated since 1989 surpasses $23 billion.

The Hungarian export and import have been steadily increasing in the past decade, resulting in an average 3.5% GDP growth in the past 6 years. In 2002 import was $33.9 billion, the export was $31.4 billion, and the GDP was $134.7 billion. In 2002 the foreign trade made up the 48% of the national GDP.


28. Protection of foreign currency earning enterprises: 4.5

The government in Hungary helps its export industry by giving corporate tax relief. The corporate tax is 18% which is good in European standards.

A Hungarian taxpayer who operates his/her enterprise abroad has only had to pay 3% of the positive tax base. Foreign participated associations can in cases have 100% tax relief, up to the extent of their corporate tax. In addition they may also claim 70%, at the most, of all their other taxes. Offshore associations cannot claim tax relief, but they can change their tax base.


29. Management of foreign currency budget: 3.5

The Hungarian import has been exceeding the export. The disperse of import in 2001 was: machinery and equipment 51.6%, other manufactures 31.0%, fuels and electricity 8.2%, food products 2.9%, raw materials 2.0% (CIA World Factbook 2003). Even though commodity exports have been increasing (especially in the past months - 1-3 quarts of 2003) thanks to the growing demand, the import still significantly exceeds export.

The import estimate $32.079, the export $28.092 billion in 2000.

The import estimate $33.682, the export $30.498 billion in 2001.

The import estimate $37.612, the export $34.337 billion in 2002.

The deficit has been around $3-4 billion for the past decade.


30. Layers of collective action: 4.0

The executive power, exercised by the government, has the highest control level in public administration in which the Prime Minister plays a dominant role. The National Assembly ministers are elected by popular vote under a system of proportional and direct representation to serve for four years.

There are 19 counties, 20 urban counties, and 1 capital city. The Hungarian citizens exercise local governance at the place of their residency whether it is a village, town, city or borough. They can assembly, elect representatives and pass regulations and preform administrations independently. They can also adopt local by-laws.

There are many very different political and non-political parties in the country. Anybody and everybody can be represented or represent anything. Although there are limits placed on local governing by the central government.


31. Pro business climate: 4.5

In Hungary the business climate positively pro business. This is well observable in the growing number of small and medium businesses. The government has different loan plans ( preferential interest, medium- and long-maturity development credit grants, several-stage credit programs) to help to invest or to create new or expand already existing businesses and enterprises. It is relatively easy to get access to the loans.

The government`s economic policy`s aim is to create conditions for lasting, rapid, balanced, investment and export dominated economic growth. Their main devices are: helping in investing, middle enterprise increasing businesses` and enterprises` competitiveness, direct and indirect help of micro-, small, and medium businesses, enterprises, improving infrastructure and expanding human capital with training helping programs and income policy tools. The Hungarian economic ministry main purpose is to stimulate investments, ensure the already existing businesses`, enterprises` development and to help create new ones. They implement this by helping to invest by providing the conditions for advantageous credit granting (credit programs, capital programs) with direct (contests) and indirect (taxes) subsidizes.


32. Government enterprises: 3.0

The Hungarian government has privatized or sold most of its enterprises to foreign investors in the past years. It is very unclear at the moment what is in government hands and what is not. There are not any industries, activities in which the government has maintained full control. It controls the education system although there are more and more private schools. The health system is largely privatized. Most doctors have private practices, most hospitals are privatized and only subsidized by the government. There is still considerable ownership in the telecommunication industry, the government is owning some significant companies. The Hungarian post office system and the media (television and radio) are privatized and the government is a small part-owner in them.

It has 13% ownership in the national electricity company and 16% in the gas company which use to be government property. It still has 8 state farms and the Hatvani sugar factory. The Hungarian government shareholder in the National Bank of Hungary.

The remaining government properties are also likely to privatized in the future. The government has not have to pay to run privatized enterprises but the lack of certain government owned businesses does not help Hungarian economy.

SOURCE: personal information

33. International security agreements: 4.0

Hungary is the full-scope member of the North Atlantic Treaty Organization (NATO) since 1999 which purpose is to safeguard the freedom and security of all its members by political and military means. Its strategy greatly shifted in the past years from territorial defense to peace keeping missions and averting the terrorist threats of recent years. As a member, Hungary participates and supports NATO in all its missions. At the moment, KFOR and MFOR troops are stationed in Taborfalvan and a U.S. SFOR air fores unit is also stationed in Hungary.

Hungary`s NATO membership, defense agreements with protector states, and commitments to other organizations (United Nations, Western European Union, etc.) make Hungary a well-secured country.


34. Protection of domestic enterprises from government mandated costs: 2.0

The Hungarian tax system offers a small amounts of tax refunds, which are very helpful, especially for smaller businesses but not enough help after all the taxation enterprises have to pay.

The basics of the Hungarian tax system were created about15 years ago and the modern tax system has been operational since 1998. The government imposes a complicated system of direct and indirect taxes on enterprises. The personal income tax (the employees` wages and salaries and the earnings of individual entrepreneurs) is calculated by the taxpayer or his/her empowered representative. It has a 20% annual rate if the entrepreneur income is 60,000 Forint (Hungarian currency) or less, 30% if it is under 1,300,000 Ft and 40% above that. Trading companies are also subjected to the corporation tax with an annual rate of 18% and the general turnover tax (VAT). The present effective rate of VAT is 25% which is a considerable burden for small and family enterprises. These taxes are collected by the Tax and Financial Control Administration (APEH). As of 1st of January, 1999, APEH also collects social contributions (TB) which comprises payments into pension funds and health care contributions. Its rate is 10% and most of it paid by the employers for the employees. Another health contribution which is fully paid by employers is 3450 Ft per employee. There are some other smaller taxes like the trading tax with 2% annual rate which is collected by the local authority.

Enterprises have the alternative to pay all their taxes in one monthly lump sum of 45% of their gross income and balance the difference at the end of the year.

There is an opportunity for VAT reclamation for enterprises. They can receive refunds of taxes for price of products and services and for fuel used for vehicles registered under the name of the entrepreneur.

SOURCE: Internet,

Interview with Gaborne Pesti, Hungarian business owner


All the information and conclusions in each country analysis are solely the responsibility of the individual student and have not been verified, corrected, checked for copyright infringement or evaluated in any way by MIEPA or Mike P. McKeever. You are solely responsible for the results of any use you make of the information and conclusions in these studies. Use them at your own risk as interesting supplemental information only instead of seasoned judgements about the policy factors contained herein. Each student has granted permission for his or her work to be displayed here under his or her own name or wishes to remain anonymous and have either created a pen name or used no name at all; if you wish to contact them for any reason, forward your request to MIEPA and the student will be notified of your interest.

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