Austria and

by Michael Bower,

by Alexander Istkovich,




Austria and Hungary

Michael Bower, April 2002


I. Introduction to Austria and Hungary


  From the Sixteenth-Century until 1918, Austria and Hungary were united under the rule of the Habsburg monarchy.  While they have been independent states for just over eighty years, the turbulent course of Twentieth-Century history has produced widely divergent social and economic conditions in both nations.  During the Second World War, both Austria and Hungary were occupied by Nazi Germany.  Soviet forces liberated Hungary, while Austria was divided into four occupation zones (like defeated Germany) controlled by the victorious Allied powers.  Under the influence of the Soviet Union, Hungary adopted a command economy and a totalitarian political system, becoming a Soviet satellite state in 1948.  Unlike Hungary, Austria became a fully sovereign (but neutral, as a condition allowing for the removal of Soviet military forces) nation and proceeded to develop a democratic political system and a social market economy, similar to other Western European nations.

The forty-two years, from 1948 to 1990, during which Austria and Hungary were separated by the so-called Iron Curtain, almost completely severed the two nations’ once close economic and cultural relationship that had developed over the centuries.  Since the collapse of communism in Eastern Europe in the late 1980’s, Austria and Hungary have worked to restore their traditional ties.  However, forty years of separate economic development has dramatically altered both their respective economies and the relationship between them.



Austria and Hungary are located in Central Europe and share a 220-mile long border.  The Danube River, which flows through both nations, has and continues to be an important link between Austria and Hungary as well as to the rest of the world, as both nations are landlocked.  Both nations have fairly similarly sized populations and land areas.  The United Nations Industrial Development Agency (UNIDO) estimated Austria’s 1999 population to be approximately 8.2 million, while Hungary’s was estimated to be approximately 10.1 million.[1]  Austria’s population is comprised of an ethnically German majority with minority Slovene, Hungarian and Slovak groups.  Hungary’s population is less homogenous than Austria’s, with sizeable Roma, German and Serb communities.  In terms of religious groups both Austria and Hungary are largely Roman Catholic nations.  According to the Central Intelligence Agency’s (CIA) World Fact Book, Austria’s total area is 83,858 square kilometers, while that of Hungary is 93,030 square kilometers.[2]      
 Democratically elected representative governments form the core of the political systems of both Austria and Hungary.  Austria’s federal political system closely resembles that of Germany, in that both nations’ laws delegate a greater deal of power to state governments than is typically allowed for under more traditional parliamentary democracies.  Hungary’s constitution was reformed in 1989 to include Western democratic principles and to allow for free elections to the National Assembly (the unicameral parliament).       



The great political, economic and social changes of the late 1980’s and early 1990’s which lead to the collapse of Communism in Eastern Europe and the break up of the Soviet Union provided new opportunities for Austria and Hungary.  For Austria, the end of the Cold War rendered the nation’s neutrality politically unnecessary.  In 1995, free from earlier Soviet objections, Austria joined the European Union (EU).  The collapse of the Soviet Union had an important impact on Hungary.  Hungary, like other former Soviet bloc nations, lost important export markets and faced the collapse of the Warsaw Pact defense alliance, COMECON and other international bodies that facilitated intra-bloc cooperation.  While the collapse of the Soviet Union caused many short-term economic and political difficulties, the 1990’s also provided Hungary with many opportunities.  Hungary began to actively seek entry into the international organizations that formed the core of the Western world, most importantly the North Atlantic Treaty Organization (NATO) and the EU.  Hungary officially became a member of NATO in 1999.  Currently, Hungary is considered to be a front-runner amongst Eastern European applicant states seeking membership in the EU.  A top priority of the government is ensuring that Hungary’s economy, political and legal systems meet the EU’s strict membership criteria.  Austria and Hungary are members of the United Nations (UN), the World Trade Organization (WTO), the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD).   




II. The Revolutions of 1848 


There are many political and cultural figures, literary and artistic movements and historical events that have shaped the national identities of both Austria and Hungary over their long histories.  A crucial series of events that have significantly contributed to the development of modern Austria and Hungary were the Revolutions of 1848.  The Revolutions of 1848 occurred across Europe, in France, the various Italian and German states as well as in many regions of the Habsburg Empire.  Although the Revolutions of 1848 began with the creation of the Second Republic in France, they reflected the long-term aspirations of the middle classes, students, workers and ethnic groups of Europe who sought to reform their societies for a variety of political, economic and nationalistic reasons.

The nationalist sentiments that erupted into the Revolutions of 1848 within the Habsburg Empire had probably been building gradually over several centuries.  The poly-ethnic Habsburg Empire, though centered in Austria, was comprised of German, Hungarian (Magyar), Czech, Slovak, Italian, Polish and other national groups.  Earlier in the Nineteenth-Century, the Napoleonic Wars had stimulated nationalist sentiments across Europe.  The peace agreed to at the Congress of Vienna in 1815 however, essentially returned Europe to its pre-French Revolution boundaries.  The Habsburgs and their government, lead by chancellor Prince von Metternich, sought to preserve the antiquated Empire against a tide of rising nationalist feelings amongst the Empire’s many ethnic groups.


 The 1847 elections to the Hungarian Diet reflected the growing political influence of nationalistic and reform minded opposition groups to the conservative Habsburg government.  Lajos Kossuth, today regarded as a national hero of Hungary, was an important leader of the opposition to the pro-Habsburg Magyar aristocracy in the Diet.  Kossuth and his supporters advocated a series of reforms that would increase the autonomy of Hungary within the Empire and would introduce popularly elected government.  The Hungarian Diet was however powerless to enact its proposed reforms and the Habsburg government largely ignored them.

With the spread of the Revolutions, which had begun in France, in March 1848 to Vienna however, the Habsburg’s power to refuse Kossuth’s reforms was greatly reduced.  In Vienna, revolutionaries demanded and received the resignation of Metternich as chancellor and forced the court to flee the city. 

Emperor Ferdinand I, the Habsburg monarch, had little choice but to allow Kossuth’s reforms to proceed.  Kossuth and the Young Hungary movement passed what became known as the April Laws and called for “immediate abolition of serfdom, for general taxation, equal political rights and popular representation, and for government by an independent, national ministry responsible to the legislature.”[3]  In effect, the April Laws established an independent Hungarian nation, which accepted Emperor Ferdinand as its legitimate sovereign.


Radical nationalist and democratic reforms in the Habsburg Empire were not limited to Hungary.  In ethnically German Austria, revolutionaries would force the abdication of Ferdinand in December 1848, and install his nephew, Franz Josef I, as Emperor.  Austrian reformers adopted a written constitution that formally abolished serfdom and created a democratic parliament.  Other ethnic groups within the Empire, including Italians, Czechs and Poles, joined the revolutionary movement to demand greater autonomy. The gains made by the nationalist revolutionaries of the Habsburg Empire would not endure forever.  In many regions, such as Hungary, the ultra-nationalist rhetoric of the revolutionaries alienated various resident ethnic minority groups.  Conservative, pro-Habsburg aristocrats and leaders would exploit the fears of these minorities as well as divisions within the revolutionary movements themselves to stage a counter-revolution in late 1848. Counter-revolutionary Austrian armies scored their first victory after crushing the revolts occurring in the Habsburg’s Italian provinces, and with the aid of Croat forces would re-capture Vienna in late October.  Of all the revolutionary movements within the Empire, Hungary’s was the longest-lived and most successful. Though many European nations and the United States were sympathetic to the Hungarian cause, none would provide military or monetary assistance to the aspirant nation. Initially, Habsburg attempts to re-conquer Hungary were largely unsuccessful.  The declaration of Hungarian independence announced in April 1849 threatened to bring about the collapse of the entire Habsburg Empire. 

Unable to re-conquer Hungary on their own, the Habsburgs appealed to Tsar Nicholas I of Russia.  Though Russia had not witnessed a revolution in 1848, the Tsarist government was concerned that the collapse of the Habsburg Empire could bring instability and the possibility of a mass anti-Tsarist uprising to Russia.  In June 1849, Tsar Nicholas pledged to provide some 200,000 Russian troops to aid the pro-Habsburg forces’ efforts to crush the Hungarian revolt, by August, Hungary had been defeated.  With control over Hungary and the rest of the Empire firmly re-established, Emperor Franz Josef formally abolished the constitutional governments that had been established in Austria and Hungary and returned the Empire to absolutist rule.  Interestingly, the invasion of Hungary in 1849 would not be the last time Russia would forcibly intervene in Hungarian affairs.  In 1956, Soviet troops would invade and crush the Hungarian uprising in order to prevent the spread of the anti-Communist movement to the Soviet Union and its Eastern European satellite states.


 Though ultimately, the Revolutions of 1848 throughout Europe were unsuccessful, they did succeed in influencing the long-term political and economic development of the continent.  Eventually, through a series of wars and revolutions, most European nations adopted democratic governments.  Nationalists in the Italian and German states were successful in unifying their people into single nation states.  In the Habsburg Empire, the influence of the Revolutions of 1848 was best reflected in the Ausgleich or Compromise of 1867, which established the so-called “Dual Monarchy” of Austria-Hungary.  “The Compromise Ausgleich of 1867 divided the Habsburg Empire into two separate states with equal rights under a common ruler, hence the term ‘Dual Monarchy.’”[4] 

 The political structure of Austria-Hungary consisted of two parliaments, one in Vienna for Austria and the other in Budapest for Hungary, which were united under an imperial government headed by the Habsburg monarch and common ministries for foreign affairs, finance and defense.  This basic structure reflected two important goals of the 1848 Austrian and Hungarian revolutionary movements, increased autonomy for the Empire’s German and Magyar ethnic groups and the establishment of parliamentary democracy.  In addition to incorporating some of the revolutionaries’ ideas, the creation of Austria-Hungary allowed the Habsburg Empire to survive.  According to Austria: A Country Study, 

By building on the two dominant nationalities in the empire, German and Hungarian, dualism enabled Austria-Hungary to achieve relative financial and political stability. It did not, however, provide a framework for other nationalities, in particular the Slavs, to achieve equivalent political stature. Indeed, the Hungarian state used its power to preclude such an outcome.[5]

 The experiences of both Austrians and Hungarians during the Revolutions of 1848 and the subsequent establishment of Austria-Hungary played a crucial role in shaping their national identities.  For Austria, the Revolutions of 1848 created the first democratically elected Austrian government and were an expression of a distinct Austrian nationalism.  In Hungary, the Revolutions inspired future generations of Magyar nationalists to strive for the creation of an internationally recognized nation-state.  For both societies, the Revolutions of 1848 signaled the end of the antiquated, poly-ethnic Habsburg state and heralded the eventual establishment of two independent nations.  Today, both Austrians and Hungarians look upon the Revolutions of 1848 as an important expression of nationalist and democratic ideals.



III. Observed Facts and Economic Statistics           


For most of their histories under Habsburg rule, Austria and Hungary were largely rural, agricultural economies.  The Industrial Revolution did eventually spread to the Habsburg Empire, but Austria-Hungary lagged behind most of the Western European nations and the United States in terms of industrial output, the percentage of its workforce employed by industry and other key indicators.  To a certain degree, Austria-Hungary’s relatively low level of industrialization during the late Nineteenth and early Twentieth Centuries can be explained by its instability.  Austria-Hungary did not conform to the Nineteenth-Century concept of the nation-state, in which a single national group formed the majority of the population and dominated the economic, political and intellectual life of the country.  The governments of nations such as France and Germany, whose populations were almost entirely comprised of a single national group, could focus on the economic development of the country through industrial policies.  In multi-ethnic Austria-Hungary, the government was primarily concerned with preserving the state from the secessionist movements of various national groups and could not therefore pursue an aggressive economic development policy.  Compared to most of the Empire however, the industrial economies of Austria and Hungary were extensively developed.

The defeat of Austria-Hungary in World War One lead to the Empire’s collapse and the creation of independent nation-states based largely along ethnic lines.  With the collapse of the Dual Monarchy, Austria and Hungary were free to pursue independent economic policies.  However, during the Second World War they were occupied by Nazi Germany, and the economies of both Austria and Hungary were devastated by both Axis and Allied war activities.

After the war, despite Austria and Hungary adopting different economic and political systems, a priority of the governments of both nations was the reconstruction of the housing, infrastructure and productive facilities that had been damaged or destroyed during the war.  In Austria, a great deal of reconstruction was accomplished through aid from the United States’ Marshall Program.  Hungary received economic aid for reconstruction from the Soviet Union.


Under Soviet influence, Hungary and other Eastern European nations adopted the Marxian economic policies modeled on those in use in the Soviet Union.  Agriculture was collectivized and the government invested heavily in the development of heavy industry.  Austria’s economy developed along a much different path than Hungary following the war.  In its social market economy, most of Austria’s large industrial firms, utilities and financial institutions were nationalized, but the small and mid-sized firms that formed the basis of the economy remained under private ownership.

Until the late 1980’s, the basic structure and economic policies of Austria and Hungary remained largely unchanged.  As a response to declining growth and the economic reforms instituted in the Soviet Union under Mikhail Gorbachev, Hungary introduced free-market reforms and began to encourage trade with and investment from the West.  In 1990, Hungary began its transition from its command economy to the free market; the new government instituted further market reforms and sought to attract Direct Foreign Investment (DFI).    The late 1980’s also brought economic reforms to Austria.  The government began to privatize many of the firms and economic sectors that had been nationalized after the war.

 Statistics are an important resource for comparing the performance of different economic systems.  Key economic statistics, such as Gross Domestic Product (GDP), per capita income, Consumer Price Index (CPI), unemployment and real GDP growth rates reveal a great deal of information regarding national economic systems.  The economic statistics of Austria and Hungary effectively illustrate the results of the over forty years during which these two nations had very different economic systems.


A nation’s GDP is generally defined as the monetary value of all the final goods and services produced within its borders during one year, and is a standard indicator of a nation’s wealth.  UNIDO estimated Austria’s 1999 GDP to be $208.2 billion, over four times larger than Hungary’s estimated $47 billion.[6]  Not surprisingly, given the large gap between Austria and Hungary’s GDP figures and similarly sized populations, their respective per capita incomes are also very different.  The CIA estimates that Austria’s per capita income in 2000 was approximately $25,000, placing it amongst the wealthiest nations in the world.  That same year, Hungary’s per capita income was around $11,200.[7]  While Hungary is a relatively wealthy nation compared to the former Soviet Union, other Eastern European countries and most of the world, it lags far behind the wealth of most EU member states.

  Consumer Price Index (CPI) is often used as an indicator of a nation’s inflation rate.  CPI tracks the price of a “market basket” of the consumer goods and services typically bought within a country, and compares this price level to that of an arbitrarily determined base year.  UNIDO estimates, using 1990 as the base year (CPI = 100), placed Austria’s CPI in 1999 at 123, while Hungary’s was determined to be 565.[8]  Over the course of the post-war era, Austria has enjoyed low inflation, largely due to the efforts of its independent central bank, the Austrian National Bank.  In 1999, Austria and eleven other EU member states adopted the Euro as its currency, placing monetary policy under the control of the European Central Bank (ECB).  Inflation has been a major political and economic issue in Hungary since it began its transition to a market-based economy in 1990.  The Hungarian government has made controlling inflation a top priority and has taken steps to increase the independence of the National Bank of Hungary.  Inflation in Hungary remains a crucial obstacle to its desires to become an EU member state.


 The CIA estimated the unemployment rate in Austria to around 4.5 percent in 2000, and that of Hungary to be approximately 9.4 percent over the same period.[9]  Hungary’s unemployment has decreased since it began its transition to the market economy, and is lower than the unemployment rates of EU member states such as France and Germany.  Austria’s unemployment rate is currently lower than the average of the EU, and significantly lower than that of the EU’s larger member states.

The end of the Cold War has provided both Austria and Hungary with significant opportunities for economic growth through East-West trade in Europe.  Initially, Hungary saw negative economic growth in the years immediately following its transition to the market economy as inefficient firms shut down and others downsized in order to increase their efficiencies.  Real GDP growth in Hungary has since recovered, and was estimated to be around 5.5 percent in 2000 by the CIA.  That same year, real GDP growth in Austria was approximately 3.1 percent, slightly above the EU average.[10]





IV. Ownership Structure

of the Austrian and Hungarian Economies           


A crucial aspect of any economy concerns its ownership structure.  Ownership structure considers the degree of private and public ownership of firms, firm size and the level of Direct Foreign Investment (DFI) in the economy. 

 For most of the post-war era, the ownership of nearly all large industrial firms, utilities, financial institutions and telecommunications in Austria lay in public hands.  In 1970, the government had established a holding company, the Österreichische Industrieholding Aktiengesellschaft (ÖIAG), to better manage state-owned firms.  In the 1980’s the Austrian government began to privatize many of the nationalized industries.  Today, most of the state-owned industries have been fully privatized in Austria.      

Most Austrians are employed by small and medium-sized enterprises (SMEs) that remained privately owned.  Typically SMEs employ up to 250 people.  Austrian SMEs have and continue to dominate the national economy.  According to UNIDO data, SMEs formed 99.8 percent of all enterprises, employed 75 percent of the workforce and comprised 97.5 percent of the industrial manufacturing sector during the 1990’s.[11]  Typically SMEs employ up to 250 people.  SMEs are major investors and have contributed to a significant proportion of the growth of the service sector in the Austrian economy.

Since 1990, Austria has been an attractive location for DFI.  Many foreign corporations have chosen to locate their European headquarters in Austria to take advantage of its geographic access to both the EU common market and Eastern Europe, as well as Austria’s well educated workforce and its highly developed infrastructure, financial markets and telecommunications network.  DFI has provided significant growth in Austria’s large service sector.


 Under communist rule, Hungary’s industry was nationalized and private firms were merged into industry-wide monopolies under state ownership.  Initially, Hungary saw relatively high economic growth, in the 1960’s however, growth slowed substantially.  In 1968, the Hungarian government initiated the New Economic Mechanism (NEM) to stimulate economic growth.  The NEM, which remained in place until the 1980’s, gradually market-based reforms such as private-ownership on a limited scale. 

 In 1990, Hungary began its transition to a market economy.  The initial years of the transition were painful for most Hungarians.  Many of the large, inefficient industries created under communist rule either shut down or scaled back their operations, leading to mass unemployment and a drastic drop in output.  In response, the Hungarian government encouraged the development of small businesses and provided tax incentives to attract DFI. 

 Today, Hungary’s transition to the market economy is largely complete and has been hailed as a general success.  According to Hungary’s Ministry of Economic Affairs, “prior to the political transformation, state-owned companies generated roughly 80% of the total economic performance in Hungary, while the private economy, acting overtly or covertly, shared approximately 20%.  This completely reversed (after the transition).”[12]

Several large industrial firms and the transport and telecommunications sectors remain to be privatized in Hungary.  The Hungarian government has chosen to delay the privatization of these firms until they are have become more efficient and therefore more attractive to domestic and foreign investors.  A greater number of SMEs are producing an increasing share of the goods and services made in Hungary and have contributed greatly to overall economic growth.


The modern Hungarian economy is characterized by a high degree of foreign ownership and investment.  Hungary has been the largest recipient of DFI in Eastern Europe, with 28 percent of total DFI in the region.[13]  The value of DFI in Hungarian was placed at over $23 billion invested by foreign firms by 2000 according to CIA figures.[14]  Foreign companies have been attracted to Hungary by its geographic location, tax incentives and its relatively inexpensive, yet highly skilled labor force.  Austria was the fourth largest source of DFI in Hungary, comprising 11 percent of the total amount invested in the 1990s, according to the Ministry of Economic Affairs.[15]

Until the late 1980’s the economies of Austria and especially Hungary shared a relatively high degree of public ownership, though under different economic systems.  In the 1990’s, both the Austrian and Hungarian economies were attractive locations for DFI.  Austria’s economy is now largely privatized and is dominated by a large number of SMEs.  Hungary’s economy continues to undergo privatization and the role of SMEs in it has become increasingly important. 



Works Cited

Central Intelligence Agency.  World Factbook 2002: Country Profile Austria.  February 16, 2002.  <>.

Central Intelligence Agency.  World Factbook 2002: Country Profile Hungary.  February 16, 2002.  <>.

Permanent Mission of the Republic of Hungary to the United Nations, New York.  Hungary’s Revolution and War of Independence of 1848-1849.  18 March 2002.  <>.

Republic of Hungary, Ministry of Economic Affairs.  Széchenyi Plan: Hungary’s Development Plan Summary.  16 April 2002.  <>.

Solsten, Eric ed.  Austria, A Country Study: Austria-Hungary to the Early 1900s.  19 March 2002. 


United Nations Industrial Development Organization.  Reference Information: Austria.  20 March 2002.  <>.

United Nations Industrial Development Organization.  Reference Information: Hungary.  20 March 2002.  <>.

United Nations Industrial Development Organization.  SME Policy Framework: SME Austria – A Comparative Analysis of SME Strategies, Policies and Programmes in Central European Initiative Countries.  19 March 2002.  <>.




            “Austria.”  Microsoft Encarta Encyclopedia.  2001 ed.

Freifeld, Alice.  Crowd Politics in the Hungarian Revolution.  10 March 2002.  <>.

Hildebrandt, Günther.  October Revolution in Vienna.  10 March 2002.  <>.

            “Hungary.”  Microsoft Encarta Encyclopedia.  2001 ed.

Miller, Robert.  Economic Reform in Former Communist Systems: the Problem of Privatisation.  22 March 2002.  <>.

Roberts, I.W.  Russia in 1848 and 1849.  10 March 2002.  <>. 


[1] UNIDO: Reference Information: Austria, Reference Information: Hungary

[2] CIA: World Factbook 2001:Austria, World Factbook 2001: Hungary

[3] Permanent Mission of the Republic of Hungary to the United Nations, New York: Hungary’s Revolution and War of Independence of 1848 - 1849

[4]Federal Research Division, Library of Congress: Austria: A Country Study

[5]Federal Research Division, Library of Congress: Austria: A Country Study

[6] UNIDO: Reference Information: Austria, Reference Information: Hungary

[7]CIA: World Factbook 2001:Austria, World Factbook 2001: Hungary

 [8] UNIDO: Reference Information: Austria, Reference Information: Hungary

[9] CIA: World Factbook 2001:Austria, World Factbook 2001: Hungary

 [10] CIA: World Factbook 2001:Austria, World Factbook 2001: Hungary

 [11] UNIDO: SME Austria – A Comparative Analysis of SME Strategies, Policies and Programmes in Central European Initiative Countries

 [12] Hungarian Ministry of Economic Affairs: Széchenyi Plan: Hungary’s Development Plan Summary

[13] Hungarian Ministry of Economic Affairs: Széchenyi Plan: Hungary’s Development Plan Summary

[14] CIA: World Factbook: Hungary

[15] Hungarian Ministry of Economic Affairs: Széchenyi Plan: Hungary’s Development Plan Summary






Austria and Hungary

by Alexander Istkovich,

April 2002




A comparison of Hungary and Austria is beneficial because of the vast similarities between the two nations. After WWII, the political environment in the two countries caused them to adopt different economic systems. Austria became a market economy following western trends while Hungary became a hybrid economy with the key elements being centrally planned (due to the political influence of the USSR). After the collapse of the Soviet Union, Hungary, no longer under military and political pressure, became a full fledged market economy. Now that it has made the transition, the two countries similarities in land area, population and terrain can help us better understand the effects of a planned economy. Furthermore, a comparison of the two can help us further interpret the next steps necessary to improve Hungary’s economy and take the steps necessary to close the gap with Austria.

When visiting Hungary, there are many names that will arouse emotions from local citizens. These include the likes of Liszt and Teller. One of Hungary’s most well known names is Arpad Goncz. An intellectual by any classification, he served as Hungary’s president for two terms. His tenure began in August of 1990 after which he was reelected in 1995. His second term as president came to a close in 2000. Arpad Gonz was a very active member of the 1956 revolution and went on to serve several years in prison for his role. He was released in 1963, when a general pardon for the revolution was given. During the 1990’s, he was responsible for the institution of many transitional programs that helped Hungary adjust to the market. Under his presidency, Hungary went from a GDP decline of 11.9 percent in 1991 to a 4.2 percent growth in 1999. Under his presidency, Hungary was able to privatize 75 percent of state owned industry, a big victory since only the Czech Republic, Slovakia and Albania have done as well. One of Goncz’s greatest political victories came about as Hungary was accepted to NATO, a national goal since the transition to the market economy began. In addition to his political role, Arpad Goncz is also an awarding winning novelist and playwright. He was recently succeeded by Ferenc Madz as the second elected president of Hungary.



When visiting Austria, few names will arouse as much interesting conversation as a local psychologist named Freud. Being one of the worlds most influential social scientists, he is regarded as one of the founding fathers of modern psychology. Sigmund Freud (1856-1939) is responsible for a variety of psychological achievements including the founding of psychoanalysis, the discovery of the significance of hypnosis, dream interpretation and memory analysis. His works, 24 volumes in all, have had a tremendous impact on modern life. From the firm to the individual, Freud’s techniques have influenced the way modern culture has developed and interacted. He is often remembered for describing the Oedipus complex (the competition between a young boy and his father over the boys’ mother) among his many other discoveries. Freud remains one of Austria’s crowning achievements till this day.

The people that now occupy the territories of Hungary and Austria have had a long standing history dating back nearly a millennium. In 1867,  the Austro-Hungarian Empire, a dual monarchy was created. It allowed Hungary to control its internal policies in exchange for a unified foreign policy with Austria. In the years preceding world war one, Austria-Hungary annexed Bosnia-Herzegovina, violating several international agreements and alienating Russia in the process. Because of anti-Austro-Hungarian sentiment in the region and a Serbian disdain for the Hapsburgs, Austro-Hungary found the Balkans a significant security threat. It pursued measures against the hostile territory but could do nothing politically. After the assignation of the Austro-Hungarian Arch Duke Ferdinand, the alliances in Europe took on a life of their own and thus began the First World War.


Austro-Hungary fell apart after its defeat in WWI. Large parts of the original empire, including Czechoslovakia and Hungary, became independent states. Austria too became a republic. The defeat suffered at the hands of the Triple Entente plagued the Germanic people for the two decades to come. Severe Economic troubles brought the rise of the Nazi party in Germany, a group concerned primarily with regaining German pride. What followed saw Hungary and Austria united once again. Anschluss or the political takeover and merger of Germany and Austria, broke several measures of the peace accords established at the end of WWI. Nevertheless, the states of Europe stood idly by as Germany continued to gain power. Shortly, German Panzers rolled through the streets of Budapest as Hitler’s Armies marched east toward Russia. Hungary and Austria were once again under one rule.

World War Two had begun. The defeat of Germany at the hands of the allies saw Hungary and Austria separated once again. At the end of World War II, Hungary was declared a republic and remained so until a closely knit communist network gained high office and made the dual party system illegal. In 1949, Hungary adopted a new constitution primarily based on the Soviet one. After the communists took power, they took over many of the nations industries as well as its agriculture. This led to a system of central planning which emphasized high industrial growth. The move toward industry caused Hungary’s agricultural sectors to fall significantly behind as the government did nothing to promote agriculture. Collective farms, very similar to those found in the Soviet Union, were established on the farmland that wasn’t privately held. In the following years, a lack of civil freedoms and communist rule caused Hungary to declare neutrality and revolt against Soviet political influence. The soviets crushed the 1956 revolution. The country was put under stern economic and political sanctions by the Russians and these weren’t let loose until the New Economic Mechanism referred to by Hungarians as “Goulash Communism” was introduced in 1968.


The 1968 measures introduced large aspects of the market back into Hungary. It gave managers more individual decision capabilities and removed a lot of the soviet type central panning from making supply-demand decisions. In the following years, Hungary joined GATT or general agreements on tariffs and trade. This allowed for significantly more western product to be introduced into the Hungarian market place. Hungary’s new policies, although slow to develop, began to cause some income inequality. As the unfeasibility of a planned economy became apparent, Hungary began the push for reform. In 1982, the legalization of small private ventures led the way for further economic reforms. It was becoming apparent that an eventual transition to a full fledged market would inevitably come. The transition period caused a severe downturn of the Hungarian economy but not to the extent of most former planned economies. The reforms taken in Hungary in previous years helped ease its economy into the transformation. Nevertheless, it is estimated that Hungary lost somewhere between 15 to 20 percent of its original GDP in the process. The difficulties of privatization in addition to corruption caused a wide array of problems in Hungary.

While Hungary was undergoing economic reforms, Austria was following the west in terms of market development. Its close economic ties to West Germany allowed Austria’s economy to substantially develop over the years of the cold war. Although it underwent its share of recessions, including a rather severe one due to the OPEC oil shocks, Austria has had consistent growth in its economy. Because of system differences before the fall of the Soviet Union, an economic comparison Between Hungary and Austria was difficult to make. Eastern European statistics could only be roughly estimated. After Hungary’s transition to a market economy, the analysis could finally be done.

 Located in central Europe, Hungary and Austria have very similar terrain. The countries can generally be described as having flat rolling plains. The only exception lies in the south and west of Austria where the region is dominantly mountainous (Alps). The two countries are modestly endowed with natural resources. Austria’s endowments include some iron ore, timber, magnesite, coal, copper and some hydropower due to its elevated regions. Hungary’s include bauxite, coal, natural gas and fertile soil. Austria and Hungary have similar land areas with Austria having 83,858 sq km and Hungary having 93,030 sq km. Additionally, the two share a 366 km border and have similar climate conditions outside of Austria’s mountainous regions. Hungary and Austria share a great deal of other similarities besides their actual territories. The populations of the two countries are quite similar with Hungary having 10,106,017 and Austria having 8,150,835. Both countries have literacy rates that exceed 98 percent and both contain predominantly Roman Catholic populations. These similarities, in addition to the countries close historical background, greatly benefit the comparative analysis.

Because of the vast similarities between Hungary and Austria, it’s surprising to see the economic differences that exist between the two. Austria’s overall GDP is 203 billion, slightly less then twice that of Hungary’s which is 113.9 billion. Furthermore, Hungary’s GDP per capita is 11,200 dollars while Austria’s is more then double at 25,000. These two factors suggest that Austria has a substantially higher level of income then Hungary. This is further supported by less obvious factors such as internet users in which Austria has a significant lead (Internet users: Austria- 2.6million, Hungary – .65million). The hypothesis that can potentially explain this difference is connected to the system differences between the two countries over the half a century in which their economic systems were divergent. In other words, the effects of the planned economy are to blame for such drastic economic differences. During Hungary’s transition into a market economy, its GDP took a big hit. According to the IMF, Hungary’s real GDP declined 11.9 percent in 1991, 3.1 percent in 1992 and .6 percent in 1993 before rebounding to growth in 1994 with 2.9 percent


During the same period Austria had sustained consistent growth averaging around three percent. Austria has continued that trend with growth levels of 3.3 percent in 1996, 2.8 percent in 1997, 3.5 percent in 1998 and 3 percent in 1999. Hungary’s growth during the same period has begun to outpace Austria with 4.6 percent growth in 1997, 4.9 percent growth in 1998 and 4.2 percent growth in 1999. One possible hypothesis to explain this high growth is Hungary’s substantial levels of foreign direct investment. According to Craig Beumont of the IMF, the inflow into the markets of the emerging European countries have been much larger then the average for the rest of the world. IMF statistics show that FDI reached slightly above 10 percent of the Hungarian GDP in 1995. Hungary’s FDI between 1995 and 1997 reached an astonishing one third of all fixed investment. This is amazing compared to the fact that the average for the world was approximately 6 percent and the highest in central and eastern European countries was Poland and Estonia, each with 18 percent.(1) In 1998 alone, Hungary saw inflows of 18,255 million dollars making it the highest FDI in central and eastern European countries. Several additional indicators exist to show Austria’s economic superiority. These include life expectancy, which differs by six years. In Hungary, the average life expectancy is 71.63 yeas (76.3 for women and 67.28 for men) while in Austria its 77.84 (81.15 for women and 74.68 for men). This difference indicates how backward Hungary is in medical care, which currently stands as a central issue in Hungary’s parliament. The problem does not lie in health care spending which is average for an economy like Hungary’s. According to the IMF, Hungary is inefficient in its health care delivery. The problem seems to lie in Hungary’s inability to have hospitals contain costs because they are dependent on a Health insurance fund “which does not act as a selective purchaser” (2). An indicator that further substantiates this hypothesis is the infant mortality rate, which stands at 4.44 deaths in 1000 in Austria and 8.96 deaths in 1000 in Hungary.


Trade between Hungary and Austria seem to be quite active. From a period of 1994-1999, Austria accounted for approximately 9.5 percent of Hungary’s imports. At the same time, it accounted for about 11 percent of its exports. Nevertheless, Austria’s import and export revenues are twice that of Hungary’s with imports in 2000 being 27.6 billion in Hungary and 65.6 billion in Austria. Exports for the same year were 25.2 billion in Hungary and 63.2 billion in Austria. Because Austria is a member of the European Union and Hungary very likely to become one in the near future, trade between the two countries is likely to increase. In addition, the process of becoming a member of EU is likely to change Hungary on a macroscopic level, as it did Austria before it was accepted in 1995. Before joining the EU in 1995, Austria had to spend a great deal of time and money meeting the specific requirements such as pollution controls and agricultural requirements. Furthermore, a great deal of legal adjustments had to be made in order to accommodate EU laws. In 2001, Hungary spent 2.6 percent of its GDP on EU related spending and financing. The spending is split into two categories. They are Legal approximation and Economic Development. These categories are then further split down into environmental requirements, agricultural requirements, regional development and several other similar categories. Hungary has spent 353.2 billion forints on the development of its 2001 EU financing and has a total of 5108 people hired for completing this complex task.

Although the EU projects to except Hungary in or around 2004, EU requirements will necessitate substantial investment which the IMF estimates to last anywhere from 10-20 years in Hungary. The Berlin European Council estimates that after Hungary has entered the EU, the common agricultural policy, structural fund and cohesion fund will bring in 2.5-3.1 billion dollars a year or 4.5 to 6.25 percent of Hungary’s GDP(3).

The general comparison of Hungary and Austria has shown that Austria is clearly economically superior. This is due to Hungary’s stint under communist influence and the transitional period after the Soviet Union’s collapse. When comparing the growth percentage of the two now modern economies, Hungary seems to have the advantage because of a great deal Foreign Domestic Investment. Nevertheless, Austria’s economic superiority is clearly visible. The Hungarian health care system seems to be quite subordinate to that of the Austrian. Both infant mortality and life expectancy statistics substantiate the hypothesis. Furthermore, Austria is a member of the European Union, an economic goal Hungary has set for itself in the next decade. Essentially, Hungary is now playing catch up because of its unfortunate political situation during the cold war. It is clearly visible that Austria is, today, a far more advanced country. Hungary’s only hope to lessen the economic gap is to attempt to hold sustained high growth and push for further economic stimulation.




Beumont,Craig, February 22, 2002, “ IMF HUNGARY – SELECTED ISSUES AND STATISTICAL APPENDIX”, approved by the European Union

(1) Pg 35, 53 and 58 in the work listed above. (2) Pg -10 (3) pg 9-10

IMF Staff Country Report number 00/124, September 2000, “Austria: selected issues and Statistical Appendix”, International Monetary Fund

Anna Szemere, 2000, “Politics of Arts autonomy and transition in Hungary”, University of Michigan Press page 160-161






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