Academic journal article East European Quarterly

Comparisons of Effects of Lending to Central European Countries

Academic journal article East European Quarterly

Comparisons of Effects of Lending to Central European Countries

Article excerpt

Introduction

One of the as yet unresolved aspects of the planned unification within the European Union (EU) has been the full coordination of monetary systems and authorities, using a single currency and one central bank. A great amount of progress has been achieved recently though, in the coordination of the flows of goods, services, and capital, due to the reduction of barriers between the member countries. The EU expects enhanced growth and bargaining power for all members. Membership has increased in the 1990's to sixteen due to the additions of Austria, Sweden, Finland, and Norway.

Newly independent Central European countries that have signed association agreements with the EU and await membership, possibly by the year 2000, include Hungary, Poland, and Romania. These countries have undergone extreme changes in the last fifteen years, such as dealing with their debt problems and attempting to transform their economies from state control to privatized market systems. Borrowing heavily, they sought monetary stability and access to private international capital markets in order to promote smooth flows of trade and finance.

Successful economic and political reform in Central European countries, partially achieved through various sources of external capital, should be reflected in the growth indicator, real gross national product (GNP) per capita. The objective of this paper is to study the impacts of borrowing by Hungary, Poland, and Romania from the International Monetary Fund (IMF), World Bank (WB), Bank for International Settlements (BIS), the EU, the European Bank for Reconstruction and Development (EBRD), government sources, and private sources on economic growth and welfare, represented here by real GNP per capita. Different sources of lending lead to different effects on growth and the standard of living, and the decisions of policy makers and official and private lenders, resulting in the efficient and humane use of funds, depend on understanding these.

Future EU Members

Hungary

Hungary has always emphasized education and training skilled workers and made efforts while still under the communist regime in the 1980's to reintroduce aspects of the market system and privatization. Agriculture was promoted as a leading export sector though, while manufacturing was neglected and inefficient, until it began to gain strength, along with the service sector, in the early 1990's. Hungary signed an association agreement with the EU in 1991, as well as with the Central European Free Trade Association (CEFTA), the European Free Trade Association (EFTA) in 1993, and the Organization for Economic Cooperation and Development (OECD) in 1996, all in order to promote trade. Before 1990, COMECON/ CMEA (Council for Mutual Economic Assistance, the former socialist country trading bloc) had provided seventy-five percent of Hungary's trade, now OECD countries make up seventy percent. After trade flows began to shift to the west, export sales increased by thirteen percent in 1995, with the current account deficit expected to decline to below five percent of GDP in 1996.

Much of Hungary's recovery may be attributed to its austerity programs after 1990 to stabilize and privatize the economy. Seventy to seventy-five percent of its GDP will be contributed by the private sector in 1996. The growth rate of real GDP is predicted by some sources to be 3.5% in 1996, after only 1.5% during the 1995 slump. Inflation remains a problem, although tight fiscal and monetary policies aim at reducing it from 31% in 1995 to below 20% in 1996. Hungary's open investment climate has resulted in its leadership among Central and Eastern European countries in foreign investment inflows, which, since 1989, amount to about fourteen billion dollars. The Budapest Stock Exchange has boomed and the country has recently received investment grade credit ratings.

The Hungarian currency, the Forint, became fully convertible in 1996, with monthly devaluations and is pegged to a dollar/European Currency Unit basket, which will become a dollar/Mark basket in 1997. …

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