135. Stunted Growth In Hungary, Croatia, and Slovenia

By
Keith Crane and Paula Bailey Smith

Over the past two years, the economic performance of three of the most prosperous East European countries, Hungary, Croatia, and Slovenia, has in some respects been disappointing. In an effort to understand the reasons, Keith Crane analyzed their monetary and fiscal policies and evaluated the progress of their privatization programs.

Crane opened his presentation by pointing out similarities among the three economies. Hungary, Croatia, and Slovenia have small populations and are trade dependent. With a population of approximately ten million, Hungary is the largest, followed by Croatia at approximately four million, and Slovenia around two million. All three populations are aging. Nineteen percent of Hungarians and Croatians are over 60 years old, as are 16 percent of Slovenians, which means that there are many retirees dependent on poorly designed pension systems, now seriously overextended. As a result, all three countries face the challenge of reducing the role of government in the economy while honoring commitments to pensioners. They are adopting variations of the American system of self-financing in which government pensions provide some assets, but individuals must assume primary responsibility for their retirement income.

Beyond these similarities are some rather dramatic differences. Crane cited the fact that the Croatian and Slovenian currencies appreciated sharply in 1996, raising dollar-wage rates. In Hungary, by contrast, the dollar-wage rated declined because of a currency devaluation. As a result, exports fell in Croatia and Slovenia and rose in Hungary. Crane was quick to point out that the Hungarians have another advantage. Their industrial sector was restructured through large inflows of foreign investment, while those of Croatia and Slovenia remained dependent on commodity exports, making Hungary much less sensitive to exchange rate fluctuations. Foreign investors who have built facilities in Hungary will continue to purchase the output regardless of the dollar-wage rate. But if dollar-wage rates rise in Croatia and Slovenia, foreign buyers operating on the basis of contracts with local entrepreneurs will shift their business to lower-cost markets elsewhere.

As a result, the Croatian economy turned inward in 1996 and Gross Domestic Product (GDP) growth was driven by domestic demand. While exports fell, retail sales were up 11.6 percent, and investment rose by 21 percent. But the decline in exports, coupled with a large increase in imports, left Croatia with a substantial balance of payments deficit. Its current account surplus of $103 million was transformed into a $1 billion deficit. The pattern in Slovenia was similar. Investment rose to 25 percent of GDP, and retail sales were up by approximately 4 percent. But industrial output, hard hit by the over-valued exchange rate, rose by only 0.5 percent and the current account deficit exceeded 2 percent of GDP.

Crane stressed that this is not an unusual pattern in transforming economies. Hungary experienced a similar import surge in 1993-94. While Croatia's balance of payments position deteriorated, the Hungarian government cut its balance of payments deficit by slashing spending and raising taxes early in 1995. As a result, Hungary's current account deficit was halved in two years, and the government share of GDP fell from 75 percent to 55 percent. But these austerity measures caused a 6 percent drop in personal consumption and a 15 percent decline in retail sales.

Turning to rates of inflation, Crane reminded his audience that Croatia moved from hyperinflation in 1994 to a single-digit level in 1996. In his opinion, the current Croatian inflation rate is too low, and the overvaluation of their kuna is inhibiting the growth of exports. Slovenia has also maintained single-digit inflation, despite a devaluation of the tolar which increased inflation somewhat but also stimulated exports. Hungary is still experiencing persistently high inflation, on the Polish pattern. In 1994 its rate of inflation was 20 percent, rising to 30 percent in 1995, and despite the austerity measures was 20 percent in 1996.

Crane concluded with an evaluation of privatization's progress. He noted that although small-scale privatization has advanced well in all three countries, they are experiencing varying degrees of difficulty privatizing larger industries. Primarily because of the war, Croatia has made the least progress. At the end of the war, Croatia established the Croatian Property Fund, a move which initially stimulated privatization by placing the process under the control of a single, central authority. Of late, however, this fund has been slow to dispose of assets, a process further complicated by the creation of a separate Ministry for Privatization and by the government's commitment to compensate war refugees.

Although the war in Slovenia was less devastating, large-scale privatization has proceeded slowly. The Slovenian government has adopted a program of worker self-management under which privatization is accomplished through worker buyouts. Crane noted that while this approach is politically popular, it inhibits restructuring inefficient industries. Hungary has been by far the most successful of the three. The Hungarian economy is now as privatized as that of the Czech Republic, and in 1997 the Hungarian government will sell shares in the energy, automotive, and banking sectors.

Keith Crane and Paula Bailey Smith spoke at the Wilson Center on March 19, 1997.

EMAIL UPDATES

Upcoming Events

Experts & Staff

  • Christian F. Ostermann // Director, History and Public Policy Program; Global Europe; Cold War International History Project; North Korea Documentation Project; Nuclear Proliferation International History Project
  • Kristina N. Terzieva // Program Assistant
  • Emily R. Buss // Program Assistant