"Dual Economy" -Aspects of Hungary´s economic transformation process

Seminar Paper, 2001

16 Pages

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1 Introduction

The focus of this paper is to describe the origin of spatial differences in Hungary’s present economy often referred as the “Dual economy“. The spatial dualism is the difference between rural areas and urban areas as well as the geographic divergence between the more developed regions in the Northwest and around Budapest and backward regions in the Northeast and East. In the first part of the paper I will introduce briefly the main elements of Hungary’s transformation policy. In the following part I will present the effects of these measures in the spatial dimension. This chapter is divided in three parts. The first deals with the early transformation period from 1989 to 1995, referred here as the “transformation crisis“. The second is the period the “transformation stabilisation“ from 1995 to 1999. Finally I will give a brief outline of the present situation.

The economic transition and transformation1 process in Hungary changed all areas of economic life. Being understood as the change from state control and state ownership into a control mainly by the “invisible hand of the market“ and in majority possession in private hand the Hungarian transition process already started before the political change in 1989. Hungary had a favourable position in the Eastern Block due to the economic liberalisation measures introduced in 1968 and continued in the 1970’s and 1980’s. Basing on the studies of Bartlett the change from central planned economy to “socialist market economy“ started in 1979.2 In this paper I will only focus on the events since 1989 the transformation from the hybrid “socialist market“ economy to a free market economy. The main aspects of economic transformation are liberalisation of trade and prices, privatisation of the economy and macro-economic stabilisation. These activities must be accompanied by the introduction of legal arrangement ensuring and supporting the economic activities, convertibility of the currency and anti-monopolistic moves to restrict the omnipotent position of the state in economy and to prevent other forces to distort the market mechanism.3 The results of these measures vary in sectoral and the spatial dimension.

2 Spatial dimension of the transformation process

Looking at Hungary’s post-communist economic development one can differentiate three major periods. The first period begins with the market reforms of the socialist Prime Minister Németh and ends in 1995 as the economy stopped to decline. This time was characterised by the “transformation crisis“ with soaring unemployment, macro-economic instability and decline of industrial and total economic output. The second time begins in 1995 and goes to the year 2000. In this time the austerity policy shows its effects and the economy starts to grow again. In this time the economic growth is driven by foreign direct investments, attracted by the government’s active policy. Also other economic indicators improve and show signs of stabilisation and improvement. This period will be described as the “transformation stabilisation“. Since 2000 the year in which the country’s GDP exceeded the 1989 level Hungary is in a “late transformation“ or even “post-transformation“ period.4

2.1 Spatial aspects of the transformation crisis (1989-1995)

The Hungarian attempt of early transformation can be categorised neither as “gradual“ nor as a “shock therapy“. The Polish way was rejected because it was argued it might do more harms than good, since Hungary’s high level of economic development and its relative openness. In sphere of foreign trade and exchange Hungary undertook liberalisation measures, like sharp tariff cuts, liberalising imports and gradual introduction of full currency convertibility. In case of monetary policy Hungary went the way of real currency appreciation. The reason for this was that Hungary, which had an unblemished record as a debtor did not ask for a debt relief. With a devaluated Forint the continuation of payments would not have been possible. In comparison with Poland Hungary undertook a gradual stabilisation. The reason on the one side is that she never experienced a three- digit inflation. Due to the high supply with goods there was little demand-push inflation. The missing fiscal stabilisation, the continued subsidiaries for basic foodstuff and high social welfare expenditure brought enormous budget deficit. Hungary’s high standing as a debitor was used by the government for changing the high interest debts into cheaper bonds and to lure foreign direct investment.5

Abbildung in dieser Leseprobe nicht enthalten

Table 1: Development of main economic figures from 1990-19996

The regional effects cannot be understood fully when the aspect of privatisation and commercialisation7 are not taken into account. The first steps in this direction were already undertaken under the old regime. Since the early 1970’s small sized private enterprises could be established. Most of these enterprises were sole proprietors and as “bi-professionals“ they had an income from the state and the private sector. They were active in small-scale manufacturing and services. Also the number of joint ventures with Western companies increased. The private share in the economy reached in 1989 already 20%. The introduction of a strict bankruptcy law was an important step for the commercialisation of state owned enterprises that forced companies to cut their expenditures. The top-down privatisation began with “spontaneous privatisation“, when the former managers privatised parts of the enterprises into own hands mostly for prices under value. The majority of privatisations in Hungary were direct sales of the enterprises into, in the case of large enterprises, foreign hands and in case of small and medium sized enterprises into domestic ownership. Also liquidation and selling of assets played a major role in changing ownership of enterprises.8

Before 1989 one of the main goals of Hungary’s structural policy was to even the differences in economic development and income between the different regions out. The difference between GDP per capita between the capital region and the poorest region (Northern Great Plains) of the country decreased from factor 1,5 in 1962 to 1,2 in 1982. The increase of agricultural wages, industrialisation and urbanisation of the backward regions led to this equalisation. Beside Budapest the southern region of Baranya was the richest county, due to the high share of mining. The traditional industrialised region in the north west of Hungary with the cities of Györ and Szekesfehérvár did not enjoy such a as rural and backward regions, because work force was scarce and salaries lower than in the new build factories.9 With the change of the economic system the different economic sectors were confronted with new challenges. As first liberalisation and gradual introduction of convertibility had effects on the economy. This led in the to a boom of trade in the private shops and also of “suitcase trade“ and the “Polish markets“. Many Hungarians used their savings to purchase Western goods, which were affordable due to the high value of the Forint. The regions in vicinity of the Austrian borders and the Budapest gained the most of this boom. Many business people were able to make a fortune in the early hours of the free market whereas many of the small entrepreneurs failed to adapt to the new conditions. With the introduction of modern business and financial services in the capital foreign engagement became the growth centre of the whole country. It also became the centre of migration from the whole country.

For state owned companies and their management gained independence in their undertakings. This created possibilities to use internal resources to improve the performance and undertaking entrepreneurial risk. To prevent moral hazard a strict bankruptcy law was introduced. This law even becomes more crucial as heavy indebted companies were confronted with interest rates rose up to 50% to keep the inflation down. Externally they were forced to re-orientate their sales from the CMEA countries to the West. Many Hungarian companies were successful to find new markets for their products therefore in 1989 and 1990 the volume of exports increased. The competitiveness of Hungarian consumer and semi-finished goods was based on comparable lower labour costs and cheap import of raw material from the neighbour countries. At the same time machinery and equipment declined in large scale because their low quality was not competitive and the previous markets were lost. Also the reorientation of purchase led many companies into deep crisis. With the German-German currency union in June 1990 and the dismantling of Yugoslavia two of the main purchase markets broke down. Alternatives were high priced Western goods or domestic purchase. This led despite trade liberalisation to a reduction of imported semi-finished goods. Trade liberation combined with currency appreciation increased the inflow of foreign goods especially in machinery and consumer goods. Therefore the competition in the domestic market became very fierce10

Albeit stabilisation and liberalisation were applied in the same way in the whole country their effects were different in the spatial aspect. The northwestern area with its focus on mechanical and electronic industry was first hit from the liberalisation. Here companies had to lay off workers or whole enterprises were liquidated. In the newly industrialised East chemical and food industry were predominant and did not suffer so much in these years. The de-industrialisation of Hungary (share of industry of the declining GDP shrank from 27 % to 23% from 1991 to 1995) revived the rural-urban disparities. The first workers laid off were weekend commuters from rural areas, as many were employed in simple words like construction or had a second income from their private plots in collective farms. The most serious hit were rural Romai communities were unemployment exceeded 50%. Privatisation was firstly successful in the West as the industrial enterprises were smaller and the workers generally higher skilled. This brought the inflow of foreign investment in to this region. Also green-field investments were firstly located close to the Austrian border and along the main transport routes from Austria to Budapest.11

The main victim of the early transformation was the agriculture. The highly developed and mechanised Hungarian agriculture with free-market experience from the NEM policy were neglected by the first government due to ideological reasons. The domestic consumption declined and import of food from the EU increased exports to the traditional markets in Yugoslavia and the Soviet Union declined. The trade of agricultural products could not be re-oriented to the West because Hungary’s government was not able to bargain better conditions in the Europe Agreement in 1991. The situation of the collective farms was aggravated by their heavy indebtedness. A moratorium of loans was not possible as the government kept to all foreign financial commitments. The Smallholder Party and the ruling Hungarian Democratic Forum did not give support to collective farms. The new situation even became worse as land was used for restitution, taken from the farms without compensation. This led finally to a decline of output in agricultural production but also in productivity since agricultural equipment could not be used so efficient anymore. This development led to increasing unemployment and decreasing wages for agricultural workers in rural areas.12

As a last point I want to show the regionally different effects of the governments policy of institution building. One of the main issues was the recreation of local self-government. Due to ideological reasons the conservative allowed each village to form a municipality with tax authority. As for cities this opened the opportunity to shape actively the economic and social life, many villages, especially micro-municipalities with less than 500 inhabitants had even problems to offer basic services like schooling, kindergarten or maintaining community centres. For many towns the situation became worse as with commercialisation factories freed themselves from non-productive social obligations, like day-care, canteens, libraries and sport-clubs. The municipalities did not have the financial means to take over these activities. The middle level authorities of the county were stripped of their financial resources and political influence. Together with the budget constrains this hindered formulation any kind of regional policy to counteract the differences in development and increased political centralism. Only in the last year before the elections the government undertook short-term support programmes for big strategic enterprises, farms and villages. These measures did not help to overcome the structural weakness delayed the restructuring process. These measures unbalanced the budget and increased the external debt.13

2.2 Spatial aspects of the transformation stabilisation (1995-1999)

The elections in 1994 brought a change from a conservative government to a coalition of the post- communist MDSzP and the liberal SzDSz. This government started with a strict stabilisation policy. The “Bokrós package“ an austerity programme the government undertook budget reforms and devalued the Forint. Despite the Socialists were elected by the transition losers, they agreed in this monetarist policy. Despite the changes in exchange rate and fiscal policy this government continued the liberalisation policy and sped up the privatisation process. The burden of the welfare system was moved from the budget to the employers. The enterprise tax was reduced for enterprises, especially for foreign green field investments, the following increase of led to a decline of take home pay.14

The taxation and exchange rate policy improved the competitiveness of Hungary’s export industry. For most Hungarian enterprises this change came to late, as many of the companies have not been able to undertake re-investments they used up their assets in the previous year. They could not meet the demanded quality they were pushed from foreign market. Foreign investors purchasing privatised companies and established green-field investments use this. The regional pattern continued with investments in the Northwest and Budapest was continued and therefore the differences fostered. Slowly more investments were undertaken in Central Transdanubia (around Lake Balaton). These investments were the motor of modernisation. The most important field of investment was manufacturing. These plants were engaged in labour intensive but low added value process, like assembling and basic mechanical work. The production in Hungary presents only a small part in the production chain. Therefore most of the parts of these products are imported and thereafter exported for further processing or distributed to their final markets. The linkage of these companies with the Hungarian economy is limited to work force and basic services. The number of domestic sub-contractors reached in 1998 only 20%. These enterprises located in custom-free zones represented “islands of modernisation” in a “sea of outdated economy”. The re-industrialisation of Hungary’s economy is a process is also known as “peripheral Fordism“. Other main areas of foreign direct investment were utilities and financial institutions, which led to modernisation process in the cities.15

Hungarian companies mostly of small and medium size are limited to the domestic market (their contribution to exports was only 30% in 1999). They employ 56% of all employees and 70% of worker but contribute only to 45% of the GDP, showing their low level of productivity. Many of the self-employed entrepreneurs are involuntary entrepreneurs undertaking own business instead of being unemployed. The effects of the austerity policy hampered the SME development as private consumption decreased. The budget cuts reduced on the one hand the social welfare expenditure and on the other hand increased the individual contribution to it. The increase of wages being below the inflation rate reduced the purchase power in real terms to 85% of the level of 1989. As the access to capital is very limited for households and domestic enterprises, they had to finance all kind of investments via savings. The economic situation in the capital region and in Northern Transdanubia improved earlier due to the inflow of foreign capital. There also SME find better conditions. This can be seen as in the area around Budapest were the number of SME is threefold compared to the north-eastern region. (see Table2)16

The strict budget policy increased social disparities. The groups hit strongest by the policy were pensioners, unemployed and families with many children. These three groups have a higher share in rural communities. Therefore the economic depression continued in these areas also the overall economy started to grow again. The mobility of the rural population was reduced as the state and municipalities cut subsidises for public transport. The already poor situation of the agriculture became worse and the output declined further. The limitation for foreigners to invest in agriculture (arable land can not be sold to foreigner or foreign owned enterprises) hinders the modernisation of this sector. As the state did not restructure the state-owned farms many of them went bankrupt and were divided among the members of the co-operative. Whereas many of them were by-professionals in previous times have to live from subsistence farming. Only villages being able to utilise their natural advantages were able to gain from the transformation process. The free-trade arrangements with the EU and the CEFTA countries gave the possibilities to export high value added products like wine, vegetables and processed food. Also agro-tourism became increasingly a possibility for rural households to get second income. This is limited to regions with special endowment like national parks, lakes or mountains.

From 1996 on regional development policy came on the governments agenda. The main issues were improvement of infrastructure especially building of new motorways from Budapest to the South and the Northeast. Also increasing means were available for areas in the restructuring process, backward areas and border regions. The support was given for improving local infrastructure, like sewage systems and re-training of unemployed. To receive this support, municipalities had to form associations. This reduced the fragmentation in local administration. Also regional development councils and agencies were formed, which had to make development strategies and plans. Therefore the regional and rural development policy changed from “fire-fighting-like“ crisis management to EU conform policy with the aim to improve competitiveness of the weak areas.17 In the second half of the 1990’s the regional and spatial disparities became worse, despite the achieved macro-economic stabilisation and growth of GDP and industrial output. For many areas especially in the East but also rural areas close to growth centres the situation became also worse in real terms.

2.3 Dualism of the Post-Transformation Economy

In 2000 the Prime Minister Victor Orbán declared the transformation period being over as Hungary’s GDP exceeded the level of 1989. He also said that Hungary has now to face the challenges of the information society. The inflow of foreign investment is still going on also the privatisation process has finished. These investments are still the main driving force for the stable economic growth in Hungary. The present investments can be divided into three main groups. Firstly there are still factories establishment attracted by Hungary’s cheap labour. As workforce is becoming scarce and increasingly expensive North and Central Transdanubia as well as around the capital, these investments are more and more located in North Hungary and the Southern Great Plains. These new enterprises absorb the he high unemployment in these regions (see Table 2The second group of industrial investments is in more sophisticated production and the establishment of R&D centres of multi-nationals. As these investment need a good infrastructure, highly qualified capital and high standard business environment they are located in the North East.. The businesses there become increasingly linked with domestic subcontractors and the local market. The increasing networking leads to the build up of industrial clusters. The industrial structure is now slowly turning from “peripheral Fordism“ to post-Fordism. Salaries for workers are in average 15% higher than in the eastern areas. The last group of investments from abroad is placed in the service branch. This includes retail trade (hypermarkets and franchise), business services and tourism. These investments are concentrated in the capital and are now spreading into the cities as well as Lake Balaton. The increased competition in these areas accelerates the modernisation process also of domestic enterprises. These developments now led to that a higher share of the population take part in the economic growth. The economic growth is still very uneven in the regional dimension. In the areas with the highest GDP per capita also the growth rates are the highest. Not only foreign investment is high also the share private domestic investments is increasing. This leads to a further widening of the existing regional discrepancies. One has to imagine that the difference in GDP/capita between the central region and the Northern Great Plains is more than twofold. This is not only a difference like in the 1930’s this is also the difference in between the NUTS2 regions Greater London and Central Makedonia, just on a lower level.18

Abbildung in dieser Leseprobe nicht enthalten

Table 2: Regional differences of main economic factors19

It is obvious that the urban areas are the winners of the transformation process and that in the rural areas the situation turned to worse. Especially the situation in agriculture is suffering from the changes. The conditions on the market improved again for agricultural products. The domestic consumption is increasing due to the rising purchase power of the polulation. Hungary was the first of the candidate countries being able to signing of an agreement with the EU in May 2000 arranging free trade for agricultural products. The situation on the domestic market improved also, since this agreement does not allow the EU anymore to subsidise its exports to the EU. With other countries also the conditions of export were improved like with Israel and the trade conflict with Poland was settled. Despite these positive developments the output still shrinks. The reason for this is that many plots are to small to be cultivated in a efficient way and that many of the small farmers do subsistence farming. This leads to a further decline of income in rural communities. Beside the economic situation the social situation in villages is becoming worse. Households, which belonged to the middle strata ten years ago, are becoming more and more marginalised. In some villages a sub-culture of poverty is developing which limits the peoples ability to use to the opportunities given by the economic growth and economic help. If the ethnic dimension, mostly the case of Romani villages is added it is hard to imagine a way out of the decay. The following table illustrates the differences between different regions in south-west Hungary. All of these regions are in circle of no more than 50 km from the regional centre Pécs. This shows that also in such a small area the differences between centre and periphery are as big as on national level or between the richest and poorest areas in the Union.20

Abbildung in dieser Leseprobe nicht enthalten

Table 3: Urban - rural differences of main economic factors in Baranya21

The spatial dualism is at the moment on of the main political issues in Hungary. Therefore it is no wonder that this has high priority in the governments agenda. In 2000 the government presented a new national development plan, the so-called “Szechenyi-plan”. This plan combines and co- ordinates sectoral and regional programme of an amount of about 1 billion USD. The main points are development of traffic infrastructure and house building programmes. Also SME development programmes are included. The aim is to improve their R&D potential and to bridge the gap between the foreign large-scale enterprises and the domestic SME. To overcome the problem of limited financial resources the governments establishes regional venture capital funds together with foreign financial institutions. The regional development policy changes from subsidises to loans and increasing co-financing from other institutions. Also the pre-accession help from Phare, SAPARD and ISPA from the EU will be channelled in this programme. The Szechenyi-plan is also a meant for preparing institutions to the requirements of EU’s cohesion policy, which will be the main instrument to overcome the spatial dualism of Hungary’s economy.22

3 Conclusion

In this paper I outlined that the regional discrepancies are an inevitable part of the transformation process. Also it is important to take the spatial dimenshion into account to understand the performance of a country. Many social and political issues (for example the success of extreme rightist and leftist parties in Hungary) can only be understood taking these different developments into account. It is visible that the process aggrevates existing differences in developments existing in communist time but also wipe out als effords of the socialist economy to equalise the differences in development. The flagships of planned economy like collective farms, mines and steel factories are among the industries not able to survive at all or will continue on a much lower level. The social costs for the weaker areas espescially rural and remote to the European Union border are the highest and that the people their can be seen as the losers of the transformation process. It will take a long time untill that these areas reach the level from 1989 again. It is also visible that the delay of shocks for specific sectors and regions also delayes their transformation process. This is the case in Hungary’s delayed stabilisation policy, which worsend the situatioin in the East. This means that measures undertaken to buffer the effects worsen the situation inthe long term as they have to adapt later to the new situation. This does not mean that the state should be passive, rather an active competition oriented goverment policy is essential for the recovery of these backward and disadvantaged areas.

In this paper I also wanted to show that beside privatisation, stabilisation and liberalisation the instituion building is a main factor influencing the spatial dimension. The agricultural policy driven by an ideological and clientelist agenda worsend the situation in already disadvanteaged areas. Also public administration and the creation of self-governemnt units is very influential for the economic performance urban and rural communities. Also the Hungarian model is shining example of direct democracy it failed completly its economic function. It is politive to note that Hungary is the most advanced EU candidate country usind modern and market conform instruments to increase the regional cohesion.

4 Bibliography

Adam Jan, The Transition to a Market Economy in Hungary, in: Europe-Asia Studies, Volume 47, Number 1995, September 1995,Glasgow

Agh Attila, Hungary: in the midst of systematic change , in XX1

Bartlett David, The Political Economy of Dual Transformations, 1997, Ann Arbour

Csaba László, Between Transition and EU Accession: Hungary at the Millenium, in: Europe-Asia Studies, Volume 52, Number 5, July 2000, Glasgow

Csatári Bálint, New Factors in the differentiation of the Hungarian Settlement Network, in: Dur ó Annam á ria (ed.) Discussion Papers: Spatial Research in Support of the European Integration, 1999, Pécs

EBRD, Transition Report Update, April 1999, London

ECE, Economic Survey of Europe, No. 2, September 1999, Geneve, New York

European Commission, 2000 Regular Report from the Commission on Hungary ´ s progress towards accession, 08/11/2000, Bruxelles

European Commission, Directorate General VI, Sixth Periodic Report on the social and eoconomic situation and development of the regions of the European Union, ( http://www.europe.eu.int /comm/regional_policy/document/radi/radi_en.htm), 1999,

Farkas György, Transition and the adjustment of businesses, in: Hungary on the path to Europe (Nr. 4), 2000, Budapest

Hegedüs Miklós, The competitiveness of the Hungarian Economy, in:Economic Trends in Hungary, Nr. 2, August, 2000, Budapest

Horváth Gyula, Hrubi László, Restructuring and Regional Policy in Hungary, in: Hrubi L á szl ó (ed.), Discussion Papers, No. 12, 1992, Pécs

Kapoor Michael, Nicholls Ana, Growing trouble - Agriculture is an increasing social problem,in: Business Central Europe, December 2000, Praha

Központi Statisztikai Hivatal, Terület Statisztikai É vkönyv 1999 (Regional Statistical Yearbook 1999), 2000, Budapest

Központi Statisztikai Hivatal, Baranya Megyei Igazgatoságá, Baranya Megye Statisztikai É vkönyve 1999 (Baranya County Statistical Yearbook 1999), 2000, Pécs

Ministery of Agriculture and Regional Development, Regional Development in Hungary, 1998, Budapest

Ministery of Economic Affairs (1), Mentor - Subcontracting Programme,

( http://www.gm.hu/kulfold/english/sme/subcontract.htm ), 28/04/2001

Ministery of Economic Affairs (2), Sz é chenyi Plan - Hungary ’ s Development Summary, ( http://www.gm.hu/kulfold/english/economy/szechenyi.htm ), 28/04/2001

Mohorovice Denis, “ Szechenyi “ Plan detailed, in: Budapest Business Journal, ( http://www.bbj.hu/common/article.asp?site=3&id=72913 ), 03/04/2000

Pálné Kovács Ilona, Gegenwaertige lage und Zukunft der territoralen Selbstverwalung in Ungarn - Regionen anstatt oderüber Komitate? Dillemas der Regionalentwicklung in Ungarn,in: Trtützschler v. Falkenstein Eugenie (ed.), Regio ‘ 98, Section C: Regionalisierung in den Laendern der Visegr á d-Gruppe sowie in Slowenien udn Georgien, 1998, Erfurt/Plzen

Pest Megyei Kereskedelmi és Ipar Kamera, Ki í rt á k a Szech é nyi-terv p á ly á zatait (Invitation for the Szech é nyi Plan tenders), http://www.pmkik.hu/world/pmkikweb.nst/all/ kiiratak_a_szechenyi_terv_palyazait.htm, 05/02/2001,

Rave Simone, Regional Development in Hungary and Its Preperation for the Structural Funds, in: G á l Zolt á n (ed.), Discussion Papers, No. 29, 1999, Pécs

Reichnitzer János, The Features of the Transition of Hungary ’ s Regionial System, in: G á l Zolt á n (ed.), Discussion Papers, No. 32, 2000, Pécs

Rudolf Tökés,,Political Transition and Social Transformation in Hungary, (http://www.cidob.es/Castellano/Publicaciones/Afers/tokes.html) , 1997, Boston

Serényi Péter, Rising in the East, in: Business Central Europe, March 2001, Praha


1 Transition: The system is in ecomic and political change to the Western modell. Transformation: The legal and political framework is already changed and the processes of change are under the influence of internal and external market forces.

2 Bartlett David, The Political Economy of Dual Transformations, 1997, Ann Arbour, pg. 8

3 Zukrowska Katarzyna, lecture Economy of the Soviet Successor States, 23/02/2001, Kraków

4 see: Bartlett David, pp. 170-175,: Agh Attila, Hungary: in the midst of systematic change , in XXI, pp. 158-162 and Reichnitzer János, The Features of the Transition of Hungary’s Regionial System,in: Gál Zoltán (ed.), Discussion Papers, No. 32, 2000, Pécs, Centre of Regional Studies of the Hungarian Academy of Sciences, pp. 22 -25

5 see Bartlett David, pp. 165-167, Adam Jan, The Transition to a Market Economy in Hungary, in: Europe-Asia Studies, Volume 47, Number 1995, September 1995, Glasgow and Agh Attila, pg. 157

6 in the table only ratios were used and no total numbers, because the statistics are in USD, Forint and ECU/Euro. For 1990- 1998: First three indicators, ECE, Economic Survey of Europe, No. 2, September 1999, Geneve, New York, following data EBRD, Transition Report Update, April 1999, London, for 1999 see European Community, pg. 15 and pp. 99-101

7 In this paper privatisation is understood as changing the ownership from the state into private ownership. Commercialisation is understood as changing the legal entity of the state owned companies in to stock-joint companies or limited company without or minor change of ownership. Commercialisation was often the first step to prepare companies for privatisation.

8 Tökés Rudolf, Political Transition and Social Transformation in Hungary, (http://www.cidob.es/Castellano/ Publicaciones/Afers/tokes.html), Boston

9 Ministery of Agriculture and Regional Development, Regional Development in Hungary, 1998, Budapest, pg. 19

10 Bartlett David, pg 226-227, Adam Jan, The Transition to a Market Economy in Hungary,in: Europe-Asia Studies, Volume 47, Number 1995,September 1995,Glasgow, pg 997

11 see Horváth Gyula, Hrubi László,Restructuring and Regional Policy in Hungary,in: Hrubi László (ed.), Discussion Papers, No. 12, 1992,Pécs pp. 21-25, Rave Simone,Regional Development in Hungary and Its Preperation for the Structural Funds,in: Gál Zoltán (ed.), Discussion Papers, No. 29, 1999, Pécs, Centre of Regional Studies of the Hungarian Academy of Sciences, pg. 4-6

12 Farkas György,Transition and the adjustment of businesses, in: Hungary on the path to Europe (Nr. 4), 2000, Budapest pg. 5 and Ágh Attila, pg. 160-161

13 Pálné Kovács Ilona, Gegenwaertige lage und Zukunft der territoralen Selbstverwalung in Ungarn - Regionen anstatt oder über Komitate? Dillemas der Regionalentwicklung in Ungarn (Present situation and future of territorial self-government in Hungary - Regions instead or above counties - The Dilema of regional development in Hungary), in: Trtützschler v. Falkenstein Eugenie (ed.), Regio ‘98, Section C: Regionalisierung in den Laendern der Visegrád-Gruppe sowie in Slowenien und Georgien (Regionalisation in the countries of the Visegr á d Group as well as Slowenia and Georgia), 1998, Erfurt/Plzen, pp 2-3

14 Ágh Attila, pg. 165-167

15 Ministery of Economic Affairs (2), Széchenyi Plan - Hungary’s Development Summary, (http://www.gm.hu/kulfold/english /economy/szechenyi.htm), 28/04/2001, pg. 5 and Ministery of Economic Affairs (1), Mentor - Subcontracting Programme, (http://www.gm.hu/kulfold/english/sme/subcontract.htm), 28/04/2001, pg. 6

16 Ministry of Economic Affairs (2), pg. 7

17 Rave Simone, pp. 9-11 and Pálné Kovács Ilona, pg. 15

18 Serényi Péter,Rising in the East,in: Business Central Europe,March 2001,Praha, pg. 23, Ministry of Economic Affairs (2), pg. 16 and European Commission, Directorate General VI, Sixth Periodic Report on the social and eoconomic situation and development of the regions of the European Union, (http://www.europe.eu.int/comm/regional_policy/document/radi/radi_en.htm), 1999, Table 43

19 Source: own calculations based on Központi Statisztikai Hivatal (Central Statistical Office), Terület Statisztikai Évkönyv 1999 (Regional Statistical Yearbook), 2000, Budapest

20 European Commission,pg. 7 and 30,Kapoor Michael, Nicholls Ana,Growing trouble - Agriculture is an increasing social problem,in: Business Central Europe,December 2000,Praha, pg. 59-60

21 Characteristics of the selected NUTS4 regions: Komló: dominated by mining, mostly closed down, Pécs: city with regional central function in education and also tourism, FDI manufacturing plants, Pécsvarad: small town with small and medium size industry, Sásd (backward agricultural area), Séllye (backward agricultural border region without border crossing and high share of Romai population), Siklós: rural peripheral area with border crossing, a spa and specialised agriculture (wine and agrotourism). This region has a high share of Croatian and German minority. Source: own calculations based on Központi Statisztikai Hivatal - Baranya Megyei Igazgatoságá, Baranya Megye Statisztikai Évkönyve 1999 (Baranya country statistical yearbook of 1999), 2000, Pécs

22 Minstery of Economic Affairs (2), pp. 8-11, 24-26, European Commission, pg Pest Megyei Kereskedelmi és Ipar Kamera, Kiírták a Szechényi-terv pályázatait (Invitation of Szech é nyi plan tenders), http://www.pmkik.hu/world/pmkikweb.nst/all/kiiratak_a_szechenyi_terv_palyazait.htm, 05/02/2001,

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    Please mention following source when you quote the paper:
    Robert Pernetta (2002) "The dual economy - spatial aspects of Hungarys economic transformation" in K. Zukrowska "Economic papers no. 32", Szkola Glówna Handlowa, Warszawa, pg. 93-106

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