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Hungary
Hungary’s economic freedom score is 66.1,
making its economy the 51st freest in the 2010 Index. Its score has
decreased by 0.6 point, reflecting declines in six of the 10 economic
freedoms that offset improvements in three others. Hungary is ranked 24th
out of 43 countries in the Europe region, and its overall score is well
above the world average.
Greater openness and flexibility have led to robust
entrepreneurial activity and substantial inflows of foreign direct
investment. The overall business environment is aided by strong trade
freedom, business freedom, property rights, and investment freedom.
Investing is easy, and foreign capital and domestic capital enjoy
virtually the same protections. The rule of law is respected, and
corruption is perceived as moderate.
Hungary needs fiscal consolidation and better
management of public finance. The size of government is Hungary’s
biggest weakness, with its score far below the world average. The fiscal
deficit is high, and economic competitiveness has declined somewhat with
worsening economic fundamentals and a growing tax burden. The global
financial turmoil led to immediate financing difficulties for the
government, with its already high levels of official debt.
Background
Hungary emerged from 40 years of Communist rule more
politically and economically open than its formerly Communist neighbors.
It rapidly transformed itself into a market economy and in 2004 joined the
European Union. The ruling coalition of the Hungarian Socialist Party and
the liberal Alliance of Free Democrats collapsed in April 2008, but the
Socialists have continued in power as a minority government with slightly
less than half of the seats in Parliament. With Hungary hit hard by the
global financial crisis and the economy contracting, Socialist Prime
Minister Ferenc Gyurcsany resigned in May 2009. Former economy minister
Gordon Bajnai took over as prime minister and has enacted spending cuts
and other reforms intended to enhance competitiveness.
Business freedom 76.8%
The overall freedom to start, operate, and close a
business is relatively well protected under Hungary’s regulatory
environment. Starting a business takes four days, compared to the world
average of 35 days, but obtaining a business license requires more than
the world average of 18 procedures.
Trade freedom 87.5%
Hungary’s trade policy is the same as that of other
members of the European Union. The common EU weighted average tariff rate
was 1.3 per cent in 2008. However, the EU has high or escalating tariffs
for agricultural and manufacturing products, and its MFN tariff code is
complex. Non-tariff barriers reflected in EU and Hungarian policy include
agricultural and manufacturing subsidies, quotas, import restrictions and
bans for some goods and services, market access restrictions in some
services sectors, non-transparent and restrictive regulations and
standards, and inconsistent regulatory and customs administration among EU
members. Restrictive biotechnology regulations, non-transparent government
procurement, and weak enforcement of intellectual property rights add to
the cost of trade. Ten points were deducted from Hungary’s trade freedom
score to account for non-tariff barriers.
Fiscal freedom 68.6%
Hungary has a relatively high income tax rate but a
relatively low corporate tax rate. The top income tax rate is 36 per cent,
and the top corporate tax rate is 16 per cent. Other taxes include a
value-added tax (VAT), a property tax, and a gift tax. In the most recent
year, overall tax revenue as a percentage of GDP was 39.9 per cent.
Government spending 25.9%
Total government expenditures, including consumption
and transfer payments, are high. In the most recent year, government
spending equaled 49.7 per cent of GDP. The government remains directly
involved in agriculture, electric power, and railways.
Monetary freedom 74.1%
Inflation has been relatively high, averaging 6.3 per
cent between 2006 and 2008. As a participant in the EU’s Common
Agricultural Policy, the government subsidises agricultural production,
distorting the prices of agricultural products. It also regulates prices
for energy, telecommunications services, and subsidised pharmaceutical
products, among others. Ten points were deducted from Hungary’s monetary
freedom score to account for policies that distort domestic prices.
Investment freedom 75.0%
Foreign capital receives domestic legal treatment, and
foreign companies account for a large share of manufacturing,
telecommunications, and energy. The government allows 100 per cent foreign
ownership with the exception of some defense-related industries.
Deterrents include bureaucracy, inadequate judicial capacity, and a
non-transparent investment code. Residents and non-residents may hold
foreign exchange accounts. There are no restrictions or controls on
current transfers or repatriation of profits and no restrictions on issues
or sales of capital market instruments; there are some reporting
requirements. Only private Hungarian citizens and EU citizens resident in
Hungary and engaged in agricultural activity may purchase farmland; others
may lease it.
Financial freedom 70.0%
Hungary’s financial sector is dominated by banking.
There are 29 commercial banks and eight special credit institutions. The
government has largely withdrawn from banking, and over two-thirds of the
sector is foreign-owned. Capital markets are relatively developed, and
foreign investors participate freely. The Budapest Stock Exchange has low
volumes of trading and lists about 60 companies. After years of robust
growth, banking expansion has slowed considerably, and profitability is
down. With mutual funds heavily exposed to the real estate market, the
financial sector has been severely strained by the global financial
crisis.
Property rights 65.0%
Secured interests in property are recognised and
enforced, but there is no title insurance. The judiciary is
constitutionally independent, and this is respected in practice. The
threat of expropriation is low. The courts are slow and severely
overburdened, and a final ruling on a contract dispute can take more than
a year. Protection of intellectual property rights has improved somewhat.
Freedom from corruption 51.0%
Corruption is perceived as present. Hungary ranks 47th
out of 179 countries in Transparency International’s Corruption
Perceptions Index for 2008. There are persistent reports of corruption in
government procurement. Hungary is a party to the OECD Anti-Bribery
Convention and has incorporated its provisions into the penal code, as it
has with subsequent OECD and EU requirements on the prevention of bribery.
Labour freedom 67.6%
Labour regulations are relatively inflexible. The
non-salary cost of employing a worker is burdensome, and dismissing an
employee is relatively costly. Regulations on work hours are not flexible.
— Courtesy: The Heritage Foundation
Quick Facts - (2010)
Population
10.0 million
GDP (PPP)
$194.0 billion
0.6% growth
2.4% 5-year compound
annual growth
$19,330 per capita
Unemployment
7.8%
Inflation (CPI)
6.1%
FDI Inflow
$6.5 billion
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