2009 Index of Economic Freedom

Quick Facts

Population:

• 10.1 million

GDP (PPP):

• $184.0 billion
• 3.9% growth
• 4.3% 5-year compound annual growth
• $18277 per capita

Unemployment:

• 7.3%

Inflation (CPI):

• 7.9%

FDI Inflow:

• $6.1 billion

Hungary's economic freedom score is 66.8, making its economy the 44th freest in the 2009 Index. Its score decreased by 0.8 point, reflecting declines in four of the 10 economic freedoms that outweigh improvements in three others. Hungary is ranked 22nd out of 43 countries in the Europe region, and its overall score is well above the world average.

Hungary has transformed its economy from a centrally planned system to a more market-oriented one, building a robust private sector and attracting substantial foreign direct investment. With economic growth of slightly over 4 percent over the past five years, Hungary boasts strong trade freedom, business freedom, property rights, investment freedom, and financial freedom. Investing is easy, and foreign capital and domestic capital enjoy virtually the same protections and privileges. The rule of law is strong, and corruption is perceived as moderate.

Challenges include the need for 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 labor market also could be improved.

Background Back to the top

Though the Hungarian Revolution of 1956 was brutally suppressed by Soviet troops, Hungary eventually emerged from 40 years of Communist rule more politically and economically open than its Eastern Bloc neighbors. Hungary held its first multi-party elections in 1990 and has transformed itself into a market economy. It joined the European Union in 2004. The ruling coalition of the Hungarian Socialist Party and the liberal Alliance of Free Democrats collapsed in April 2008 over disputes about reform measures, dismissal of the health minister, and a major defeat in a referendum organized by the opposition, and the Socialists now govern with a parliamentary minority. Despite progress in 2007, Hungary still has the EU's largest budget deficit: 5.5 percent of GDP. The opposition FIDESZ party is running on a populist platform.

Business Freedom 77.4 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Hungary's regulatory environment. Starting a business takes much less than half of the world average of 38 days, but obtaining a business license requires more than the world average of 18 procedures. Closing a business is relatively easy and costless.

Trade Freedom 85.8 Back to the top

Hungary's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Food and feed products are subject to restrictive biotechnology regulations. Ten points were deducted from Hungary's trade freedom score to account for non-tariff trade barriers.

Fiscal Freedom 70.6 Back to the top

Hungary has a high income tax rate but a low corporate tax rate. The top income tax rate is 36 percent, and the top corporate tax rate is 16 percent. Other taxes include a value-added tax (VAT), a property tax, and a community tax. In the most recent year, overall tax revenue as a percentage of GDP was 37.3 percent.

Government Size 19.2 Back to the top

Total government expenditures, including consumption and transfer payments, are extremely high. In the most recent year, government spending equaled 51.9 percent of GDP. The private sector has grown substantially, but the government remains directly involved in such sectors as agriculture, electric power, and transport (railways). The fiscal deficit is high, partly because of large expenditures on government wages and social transfers.

Monetary Freedom73.8 Back to the top

Inflation is relatively high, averaging 6.5 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also regulates prices for energy, telecommunications services, and subsidized pharmaceutical products, among others. Ten points were deducted from Hungary's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom80.0 Back to the top

Foreign capital receives domestic legal treatment, and foreign companies account for a large share of manufacturing, telecommunications, and energy activity. The government allows 100 percent foreign ownership with the exception of some defense-related industries, some types of land, airlines, and broadcasting. Bureaucratic procedures can be lengthy, and the investment code can be non-transparent. 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, but there are some reporting requirements.

Financial Freedom70.0 Back to the top

Hungary's financial institutions still do not offer a full range of services, but banking is increasingly competitive. As of February 2008, there were 31 commercial banks and eight special credit institutions. Banks provide over 70 percent of credit, and the 10 largest account for about 80 percent of total assets. The government has been withdrawing from banking. Most remaining state-owned assets were privatized in 2003 and 2004, and over two-thirds of the sector is now foreign-owned. In August 2007, the state became a minority shareholder of FHB Land Credit and Mortgage Bank by selling half of its remaining 54.11 percent stake. Capital markets are relatively well developed, and foreign investors participate freely. The Budapest Stock Exchange has low volumes of trading and lacks liquidity, with about 60 companies listed. Foreign investors held more than 70 percent of listed shares in 2007.

Property Rights70.0 Back to the top

The judiciary is constitutionally independent, and the government respects this 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, but more needs to be done.

Freedom From Corruption53.0 Back to the top

Corruption is perceived as present. Hungary ranks 39th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Despite anti-corruption laws, non-transparency leads to persistent rumors of corruption in government procurement.

Labor Freedom68.4 Back to the top

Hungary's relatively flexible labor regulations enhance employment and productivity growth. The non-salary cost of employing a worker is burdensome, and dismissing a redundant employee is relatively costly. Regulations on work hours are not flexible.