Hungary’s Economy Setting the Pace in Eastern Europe
As the Cold War was coming to a close, American manufacturing executive George P. Loranger visited a Soviet military base here in 1990 to check out investment opportunities. His timing was good in more ways than one.
A Soviet officer “told me that the year before, if I was standing on the same spot, I’d be shot right then and there,” Loranger recalled. “I said, ‘Thank God times have changed.’ ”
The Soviets were on their way home, abandoning their Scud missile, tank repair and helicopter facilities here, and Loranger was gearing up for talks with the Hungarian government on turning the base into a commercial enterprise.
Today, Loranger’s Pennsylvania-based family firm is co-owner, with a Hungarian partner, of the 650-acre Loranger Sosto Industrial Park, on the outskirts of this city about 90 miles east of the Austrian border. Twenty-five companies from around the world have invested about $500 million in businesses at the former Soviet base, providing jobs for 4,000 Hungarians.
Investors such as Loranger are one reason Hungary has emerged as the most successful of the post-Soviet economies of Eastern Europe, outpacing Poland, the Czech Republic and others in transition from the state-run economic models that predated 1990.
During the decade, foreign companies invested $21 billion--the equivalent of about $2,000 for each man, woman and child in the country--the highest per-capita rate of foreign investment anywhere in the former Soviet bloc.
The inflow of capital is reminiscent of Hungary’s economic golden age of 1867-1914, said Gyorgy Bobok, an investment and trade official in the Ministry of Economics. That period began with the establishment of a Hungarian government within the Austro-Hungarian Empire and lasted until the outbreak of World War I.
The last decade’s rush of foreign investors to Hungary has played a key role in upgrading technology, bringing in market-oriented management, providing global links to customers and smoothing the privatization of state-owned industry.
Foreign-owned or -controlled companies now account for about 35% of this nation’s total economic output, with the Hungarian-owned portion of the private sector producing about 45% and the rest coming from the state sector, said Andras Vertes, chairman of GKI Economic Research Co. in Budapest, the capital. The economy is strong, with 4.5% growth projected this year, matching growth rates between 4% and 5% during the last three years. About 75% of exports go to the 15 nations of the European Union.
The result of all this is that Hungary appears best positioned among former Soviet bloc countries to quickly enter the EU, perhaps as early as 2003.
Hungary wasn’t always in the lead. The Czech Republic began the 1990s widely seen as the favorite for early EU entry, but it ran into difficulties with voucher-based privatization of its economy in the mid-1990s. The voucher program left old state-run industries largely in Czech hands but often failed to bring in dynamic management and outside capital. Since 1998, the Czech economy has been stagnant.
Poland, another leading contender for EU membership, has shown strong economic growth in recent years and won praise for its reform policies. But it has a large agricultural sector badly in need of modernization, and that could delay EU entry. Other former Soviet bloc nations, such as Romania and Bulgaria, are much farther down the scale in terms of reforms and economic strength.
Hungary’s success is reflected not just at foreign-funded companies, but also at those such as Videoton Holding, also headquartered here. Under Communism, Videoton was a major manufacturer of military electronics for Soviet bloc weapons. But it filed for bankruptcy in the early 1990s as its markets collapsed.
Three Hungarian entrepreneurs with experience in a computer business bought out the company, financing the purchase largely through bank loans. When they took over in 1992, Videoton had 6,000 employees and was bleeding money.
“Videoton was by far the largest bankruptcy in the economic history of Hungary, and nobody except maybe us believed this could be turned around,” said Vice President Otto Sinko, one of the owners. “It was very hard in the first years. We were living from one day to the other. We had huge loss-making capability, without products. We just had manufacturing capacity, nothing else at all.”
The firm concentrated on producing components for multinational manufacturers using its own factory sites and workers, but with investment from its customers. The approach worked.
Employment, which bottomed out at 4,300 workers in mid-1993, has soared to 17,000, thanks mainly to contract work for major global firms such as IBM Corp., Philips Electronics, Sony Corp. and Matsushita Electric Industrial Co. Videoton now makes everything from IBM computer hard drives to components for videocassette recorders and DVD players.
The company’s sales in 1999 were about $200 million, with 80% for export. It focuses on making components for computers, autos and consumer electronics, but aims to expand into making telecommunications equipment. The role of foreign companies as customers and investment partners continues to be crucial to its success.
There are more than 25,000 companies in Hungary that are fully or partly foreign-owned, said Laszlo Prager, assistant state secretary for European integration. U.S. and German firms are the leaders, with each accounting for about 30% of the total foreign investment, he said.
Foreign firms can apply for their factories to be registered as free-trade zones, which eliminates duties on imported components to be used in export production. About 100 such zones have been set up around the country. In 1998 they accounted for 42% of Hungary’s $23 billion in exports, Prager said. Companies with foreign owners or investors account for about half the country’s manufacturing output, he added.
The sale of much of the country’s industry to foreigners was not without critics, especially in the first half of the 1990s, when both privatization and unemployment peaked.
“In Hungary, the right-wing or left-wing parties who are strongly and definitely against foreign ownership are quite small,” Vertes said, putting their combined share of support among voters at 10%.
Hungary sold about $1 billion of state assets to foreign firms in 1993 and $3 billion worth in 1995, the peak year, but privatization fell to insignificant amounts in the parliamentary election years of 1994 and 1998.
Some Hungarians wanted state assets to be redistributed to citizens in schemes such as the voucher system used in the Czech Republic.
But Hungary “opted for privatizing at the market price, selling the capital goods, and it was a good decision,” said Bobok of the Ministry of Economics. “It made us leading edge compared to our neighbors.”
Control of the government shifted during the 1990s from the right to the left and back again, but all three governments stuck to this policy. The goal was to sell off state assets at the best possible price, and if that meant many companies went to foreign hands, the government saw that as acceptable, Bobok explained.
In places such as Szekesfehervar, the proximity of foreign companies to one another helped feed growth. Loranger’s firm, Loranger Manufacturing Corp., came because one of its key customers, Ford Motor Co., set up an engine factory here in the early 1990s.
“Ford said, ‘If you want this five-year contract, you will show up in Hungary,’ ” Loranger recalled.
Loranger’s local operation turns out $15 million of products annually, including engine parts for the Ford factory on the other side of town.
The Loranger factory is in a huge warehouse-style building once used for repairing Soviet tank engines, with usable cranes from that era still attached to the high ceiling. Machinery to stamp metal parts is in a room that has soundproofing and strong ventilation because it once was used to test the repaired tank engines. For setting up his metal-stamping operations, Loranger said, it was ideal.
“You can have a country that may have low labor costs, but unless they have the right tools in place to do the job and the right type of capital behind them, they’re not going to be able to compete in the world,” Loranger added. “Here you’ve not only got that, but now you have people who are also very smart. That’s a very strong combination that made Hungary the front leader of this whole transformation.”
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Hungarian Rhapsody
Foreign investment has boosted Hungary’s economic growth, making it the most robust of the post-Soviet economies of Eastern Europe. Annual percentage growth of gross domestic product:
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1999 (estimated): +4.2%
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Source: International Monetary Fund
