Hungary Pushes On With Reforms

Country leads the former Eastern bloc in attracting investment, but change is not easy

EVEN 10 years ago, food and consumer goods were available in Budapest in greater quantities than elsewhere in the Soviet bloc.

With its "goulash communism," Hungary was for years well in advance of its partners in the now-defunct Council for Mutual Economic Assistance (Comecon).

Even so, two years after the country's first truly democratic elections, the change on Budapest's streets is palpable. Where Communist Party slogans once predominated, there are advertisements for Western firms. Gas stations sport BP and Shell insignia. Three McDonald's restaurants do a booming business and the only line a reporter saw during a recent week-long visit to the Hungarian capital was outside the just-opened Pizza Hut.

The feeling of bustle is everywhere, from new hotel and business construction in the center of Pest, to the brisk transactions being written in the lobby of the Thermal Hotel Aquincum on the Buda side of the Danube.

But the picture is far from entirely rosy. Like elsewhere in the former Comecon counties, a wide disparity is opening up between the well-off and those at the bottom of the economic scale. Unemployment has become a new fact of life for many who are not yet used to the idea. More economic disruption is in the offing as the government tackles the privatization of heavy-industry dinosaurs.

"The biggest problem in general is a very big drop in the domestic market," says Balazs Botos, undersecretary of state at the Ministry of Industry and Trade. "It's a problem of competitiveness and the general level of Hungarians' purchasing power," he says. "The majority of people can't afford to buy what they did two years ago."

Hungary's gross domestic product dropped about 8 percent last year, while consumption fell 6 to 7 percent. Industrial output dropped 21.5 percent, but the volume of private firms and cooperatives rose 50 percent. A new challenge

Unemployment is currently about 8 percent, or 500,000 people. "This is not too high relatively, but for Hungarian society, in which unemployment has been unknown, it is a social shock," Mr. Botos says. Government officials and Western diplomats agree that unemployment could rise to 12 or 13 percent by the end of this year as the government continues to privatize state-run heavy industry or as some factories simply go belly up under a new bankruptcy law.

Botos is optimistic about the future, however. He predicts that inflation will fall from last year's level of 35 percent to the 20 to 25 percent range in 1992. In addition, a senior Western diplomat says there is "a reasonable chance" that Hungary's economy will grow a bit in 1992.

Botos says that by 1993 there may be enough growth to begin reducing unemployment. "We have to have entrepreneurs and enterprises able to create new jobs," he says. "That is the first priority." So far, things appear to be going well. Registered private firms jumped 76 percent in 1991 to almost 52,000. More than 500,000 people work in the private sector.

The government's privatization program is another key element in Hungary's economic future.

The government's critics, here and in the West, charge that the State Property Agency (SPA) has proceeded too slowly in selling off state-run enterprises. After two years, 85 percent of the economy is still state-owned. The government is trying to give new impetus to the process. "A quick pace is natural in the first two years, when we could privatize the best enterprises," Botos says. "Now we must privatize the mediocre ones; there is not as much interest there."

The government's goal is to reduce state ownership to below 50 percent by the end of 1994. Botos notes that foreign capital is essential to the process, since Hungary does not have enough domestic capital to privatize on its own. What Hungary does not want, he says, is to privatize without capital, as has been done elsewhere in Eastern Europe.

The SPA started by grouping enterprises and selling packages. With this bogged down, the government privatized the privatization process itself. It has authorized enterprise managements to seek foreign partners for joint ventures on their own. The SPA has also delegated to about 80 private management and finance firms the right to privatize other enterprises. It will also consider direct proposals from potential buyers, as well as worker or management buyouts.

"Privatization is difficult," says the senior Western diplomat. "The will is there, but it's a hard thing to do." Investment leader

If foreign investment is crucial, Hungary's record in attracting it has so far been spectacular. Hungarian officials and Western diplomats estimate that 50 to 70 percent of all foreign investment in Eastern Europe has been here.

"The attraction of joint ventures and foreign capital is a success story," says Istvan Major, deputy state secretary at the Ministry of International Economic Relations. "At present there are about 12,000 joint ventures in Hungary, the overwhelming majority established in the last two years." Hungary received $1.7 billion in foreign investment last year, he says, up from $800 million in 1990 and $250 million to $300 million in 1989. About 65 percent of investment has been in production, with 30 to 35 per cent in services, Mr. Major says.

"The most striking thing is that the biggest capital investor so far is the United States," Major says. The US Embassy estimates that as of the end of January, 50 percent of total foreign investment was from the United States, with 40 percent from Western Europe and 10 percent from elsewhere. The biggest US investors are General Motors ($260 million), General Electric ($150 million), the Beacon companies ($150 million), Guardian Glass ($120 million), Ford ($80 million), and Sara Lee ($80 million).

"There is more US investment in Hungary than all the rest of Eastern Europe combined," says the senior Western diplomat.

Hungary's other success stories have been foreign trade and debt repayment. Major says that whereas 30 to 40 foreign-trade organizations used to have a monopoly, there are now 30,000 firms and individuals involved. Hungary's trade has shifted completely to the West: Under the old regime, 50 percent of foreign trade was with Comecon countries; that has fallen to less than 15 percent. Today Hungary does 50 percent of its trade with the European Community (EC), 20 percent with European Free Trade Associatio n countries, and 4 percent with the US, Major says. With an association agreement completed, Hungary hopes to become a full EC member within four to six years.

Hungary's hard-currency exports jumped 41 percent in 1991 to $10.2 billion, while imports rose 83 percent to $11.7 billion. Earnings from tourism and services, however, helped the country turn an expected $1.2 billion trade deficit into a surplus of $300 million to $400 million.

This has greatly helped Hungary service its heavy foreign-debt burden, the highest per-capita debt in the region. "Despite high debt of $20 billion, the Hungarians have met their payments and have not asked for relief," the senior Western diplomat says. Hungary's foreign reserves rose $2.6 billion in 1991 to $3.9 billion at the end of January. Growing stratification

This success, however, has not put an end to grumbling among average Hungarians. Observers, including some in the government itself, say that the government's popularity has plummeted. While there are between 40,000 and 100,000 hard-currency millionaires in Hungary, "the bottom 20 percent are below the poverty line," the senior Western diplomat says. "It's especially hard on pensioners.... The government has had to impose a tight fiscal and monetary policy. It's not surprising that it's not loved."

Hungarians are notoriously pessimistic, however, the diplomat notes. According to an old story, a Hungarian will say the world is ending in three months, but he will still be building a new house. "I doubt there is a threat of regression to totalitarianism," the diplomat says. "Democracy is not in trouble in Hungary."