TRADE  

Trade Policy and Practice in Hungary

Eric Rothman

Foreign trade in the former Eastern Block countries was very controlled and constricted. Hungary was no exception to this rule. It took extensive measures to ensure a strong centrally controlled role in matters of foreign trade. In the book The Economic Mechanism in Hungary : How it Works in 1976, by G. Gado, there is a very detailed description of the interior workings of the Hungarian economy. Gado lends insight into the regulation and trade policies of the Hungarian government during the mid 1970s. For the most part, Hungary used the same instruments that the Western governments used to manipulate foreign trade, but with much greater liberty and frequency. Foreign trade was completely controlled, if at times only indirectly, by the central Hungarian planners and governmental agencies.

The first issue Gado addresses in his chapter on regulation of foreign trade is the exchange rate. There were two exchange rates in Hungary, the non-commercial exchange rate which was used for the sale and purchase of currencies used in small scale mostly private transactions such as the sale of currency to tourists; and then there was the commercial exchange rate, used in foreign trade transactions. This same commercial exchange rate was used for both imports as well as exports. Gado explains that the ratio of commercial to non-commercial exchange rates was about 2:1. He says that this was due to the relationship between consumer and producer prices. .The consumer prices were generally higher than the producer prices. He also cites discrimination on the international scene as a cause for the discrepancies in the two rates, complaining that Hungarian exports are discriminated against by the West. (Incidentally, Hungary joined GATT after the Kennedy round and did not grant preferential nor most favored nation status to the US [although the US did neither for Hungary]) The commercial exchange rate was determined not using a ratio of national currencies to each other respective of the price levels in each country (as the exchange rate is more or less determined by in the West), but rather it was determined by the cost of earning foreign currencies used to trade. To clarify, Gado explains "Thus, the commercial rate of exchange is determined by confronting the inputs (price sums) in terms of national currency into the export pattern of the given country with the total sales receipts in foreign exchange. In this way, the value of the import was a function of the price paid in foreign currency and the commercial exchange rate. No other price information was relayed by the import price. Hungary transacted trade mainly with one of two currencies, the Russian transferable Ruble, and the US Dollar. The transferable Ruble, a currency used only in the transaction of commercial accounts much like the non-commercial exchange rate for the Hungarian Forint as described above, was used when doing business with the CMEA and other Socialist countries. The Dollar was used when doing business with the West. Therefore, the task of the commercial exchange rate was to link the domestic and foreign prices.

Hungary maintained an active policy towards foreign trade. Hungarian officials feared losses to foreign as well as domestic speculation on currencies. It took many steps to insure that the exchange rate would not float, thus disallowing for speculation and losses or profits by either foreigners or Hungarians. They took many precautions to insure that the commercial exchange rate did not differ from the market rates. Another role the government played was to actively pursue the relative stability of the Forint. This was done to ward off inflation that was taking place on the international market place. Gado further explains by saying, "promoting that the imported products should be [sic] valued realistically among the socially necessary national inputs." Hungarian officials would intervene and change the exchange rate in the following situations. If foreign currencies were devalued, if foreign currencies were re-valued, export prices rise due to inflation, domestic producer prices rise. The latter is justified by the fact the imports may become more expensive. Consequently the cost of earning foreign currency is higher and therefore by definition, the commercial rate must be adjusted.

Exchange rates alone, however, can not be used to regulate all foreign trade. Regulation of exports was a method heavily used to control trade. Export promotion was pushed by the Hungarians. This was done so that there would be adequate supplies of foreign currency with which to buy imports. The manner in which exports were promoted was through preferential exchange rates, usually a few percentage points better than the commercial rate, and through export subsidies. Even exports that had to be subsidized so much as to bring the prices down to the world level, were subsidized out of the federal budget. The rationalization given for such a policy was to improve product pattern, to maintain the exchange rate, to fulfill interstate obligations that had been laid down in annual targets, quotas, plans and other long term agreements, and that it would eventually lead to better efficiency and more dynamic growth in the export sector.

Trade was highly regulated on the import side of the equation as well. Just as export subsidies were used to regulate exports, import subsidies were also used to regulate imports. Subsidies were given to the importers of certain goods so as to minimize the effects of cyclical inflation of import products on the domestic economy. For the most part, this policy was used when the exchange rate control was not significant enough to settle the differences between the external and domestic price levels. This subsidy was directly aimed at reducing the cost to producers of imported intermediate goods, thereby reducing inflation and in the eyes of the planners, increasing aggregate efficiency in the whole economy. Gado explains by saying, "It must be noted that the scope and extent of price subsidies change in harmony with the measures affecting producer prices."

Another instrument that all governments use, the tariff, was also employed by the Hungarian planners. There was an import turnover tax imposed on some goods imported from other socialist countries. This was done to equalize the price levels of the foreign good to the price level of the domestic market. Its primary use was not to regulate imports from socialist countries as a import duty would serve to do, but rather in the words of Gado "to make proportionate to each other the prices of materials substituting each other in the intricate web of utilization." Tariffs were not imposed on goods being exported and imported between CMEA countries. It was also done to reciprocate in situations where Hungary was discriminated against by another country with a tariff. The tariffs served to provide a basis for obtaining mutual advantages explains Gado. He further states that it "offers advantages to the developing nations," (I personally fail to understand the logic behind that notion) and that it "protects domestic industry from the harmful effects of competition." Regardless of the rationale given for these policies, they did function as a means of regulating foreign trade and allowed the central government to maintain a grip on the quantities of goods imported and exported.

In order to add stability and strong and continued funding to these instruments, there existed a series of "equalizing fund." Basically, the gains made by tariffs and other profits in one area of trade, were used to help cover the losses suffered and subsidies dolled out in the other sectors of trade. These funds also served as a buffer in the event that prices rose sharply on the world markets. The money in these funds helped to mitigate large surges in prices over a short period of time and thereby helped to add stability to the economy. They also served to send signals to the planners about the condition of the exchange rate. If the reserves ran either too low or too high over an extended period of time, they knew it was time to adjust the prices, tariffs, or subsidies in a particular sector, or they knew to adjust the commercial exchange rate.

The final and most restricting of all regulations concerning international trade, was the licensing and regulation of foreign trading companies. This system allowed the government to control not only what was traded and at what price and quantity, but who was able to trade as well. These foreign trading companies participated in Hungary's import and export market as commissioners, partners and even for their own benefit. These trading companies facilitated trade in the sense that they were giants and could better export and import huge quantities of goods at the most advantageous prices.

The final and most restricting of all regulations concerning international trade, was the licensing and regulation of foreign trading companies. This system allowed the government to control not only what was traded and at what price and quantity, but who was able to trade as well. These foreign trading companies participated in Hungary's import and export market as commissioners, partners and even for their own benefit. These trading companies facilitated trade in the sense that they were giants and could better export and import huge quantities of goods at the most advantageous prices.

The final and most restricting of all regulations concerning international trade, was the licensing and regulation of foreign trading companies. This system allowed the government to control not only what was traded and at what price and quantity, but who was able to trade as well. These foreign trading companies participated in Hungary's import and export market as commissioners, partners and even for their own benefit. These trading companies facilitated trade in the sense that they were giants and could better export and import huge quantities of goods at the most advantageous prices.

Source :

  • Gado,G.: The Economic Mechanism in Hungary: How it Works in 1976. Akadmiai Kiad : Budapest. 1976. HC 300.28 G2513 1976

 

 

 

OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses:

okyn@bu.edu --- okyn@verizon.net

This website contains the following sections:

General  Economics:

http://econc10.bu.edu/GENEC/Default.htm

Economic Systems:  

http://econc10.bu.edu/economic_systems/economics_system_frame.htm

Money and Banking:

http://econc10.bu.edu/Ec341_money/ec341_frame.htm

Past students:

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

Czech Republic

http://econc10.bu.edu/Czech_rep/czech_rep.htm

Kyn’s Publications

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

 American education

http://econc10.bu.edu/DECAMEDU/Decline/decline.htm

free hit counters
Nutrisystem Diet Coupons