Hungary WT/TPR/S/40 
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IV. TRADE POLICIES AND PRACTICES BY SECTOR 
(1) OVERVIEW  
1. The pattern of production and trade in Hungary h as altered considerably since the last review, 
as a result of contraction and selective recovery noted  in Chapter I.  In broad terms, production in 
agriculture and resource-based industry has dropp ed in relation to manufacturing and especially 
services; between 1991 and 1995, the share of the primary sector in gross value added fell from 11.1% 
to 6.6%, while the share of manufacturing remained  close to 20% and that of services increased from 
52.6% to 54% (Table I.4).  This shift reflects sever al factors:  the move away from a structure of 
ownership and planned productio n based on the former COMECON towards western European 
markets under the free-trade agreements with the EU  and EFTA (Chapter II); redistribution of land, 
leading so far to a sub-optimal structure of ow nership and production, a nd reduction of support to 
agriculture;  liberalization of services, notably financial and telecommunications services; and an 
active industrial policy1, linked to the new pattern of trade, which has encouraged some sectors at the 
expense of others. 
2. Within this active policy, average MFN tariffs are relatively high for imports of agricultural 
products and prepared food; preferential access fo r EU and EFTA sources is not accorded in these 
areas and all external sources are treated on an equa l footing.  Higher than average MFN tariffs (but 
with preferential access for EU, EFTA and CEFTA me mbers) also apply to textiles, clothing and 
footwear, and to automobiles; while NTMs in th e form of non-automatic licensing and/or the global 
quota on consumer goods (the latter now in the pr ocess of phase-out) have applied principally to 
textiles, clothing and footwear, new and used cars and precious stones.  Subsidies to agricultural 
exports are covered by a waiver under the WTO Agreement;  tax and non-tax incentives are also 
targeted at particular activities; and other domes tic measures, including regulations conceding a 
certain degree of monopoly or monopsony power, still apply to certain service sectors, particularly 
energy. 
3. The effects of these various measures give a mixed picture, but one which emphasizes the 
Euro-centred stance of Hungary's current trade and industrial policies.  For example, the relatively 
high MFN tariffs together with quantitative rest rictions on new and used automobiles favour 
Hungary's two domestic car producer s (Opel Hungary and Magyar Suzuki), which produce both for 
the domestic market and for export to the EU and EFTA, and other European manufacturers selling in 
the Hungarian market.  The application of the Eur ope Agreement and the similar free-trade agreement 
with EFTA has encouraged European and other fore ign manufacturers to locate in Hungary, with its 
low-cost, skilled labour force, for export throu ghout the European Ec onomic Area (EEA) under 
common rules of origin; these trends can be seen partic ularly in the automotive, textiles, and chemical 
industries.   
4. The redirection of Hungary's policies has been  assisted by the process of privatization 
(Chapter III) and the liberalization of commerc ial services such as banking, insurance and 
telecommunications, which have been among the most rapidly growing sectors of the Hungarian 
economy.  Liberalization of these sectors has generall y taken place on an MFN basis, with substantial 
concessions by Hungary under the relevant WTO Agre ements and protocols.  This has encouraged 
substantial foreign direct investment in , and modernization of, these sectors. 
                                                      
 
1 Ministry of Industry and Trade (1996b), p. 3.  
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(2) PRIMARY SECTOR  
(i) Agriculture  
5. During the early phase of Hungary's transition to a market economy at the beginning of the 
1990s, the agricultural sector went through a deep crisis.  This was caused by the loss of export 
markets in former COMECON countries as well as by severe droughts in 1991-93, and by uncertainties created by the rapid, albeit partial, pr ivatization and the consequent fragmentation of the 
ownership structure of arable land.
2  Unlike in other sectors, privatization in agriculture has not 
usually involved direct cash sales of large-scale estates.  Instead, a compensation-bill system was used as part of a restitution programme, with land being auctioned to compensation bill holders.  Arable 
land remains one of the few assets that ca nnot be acquired by corporate investors.
3  The outcome of 
the privatization process so far is that roughly half of  privatized arable land has been redistributed to 
800,000 Hungarian citizens, inter alia , whose property had been expropriated during the Communist 
period.  The other half has been sold to coopera tive members as well as to farmers who had been 
renting land from state-owned farms.  The outcome of the privatization process is that there are now around 2 million landowners, with very small hol dings; the average farm size is no more than 
3.5 hectares.  In most cases, such a situation reduces the scope for economies of scale in production 
and the mechanization of agriculture, thus hamper ing the sector's ability to improve efficiency and 
thereby increase its competitiveness and profitability.   One of the Government's main agricultural 
policy objectives is to promote the development of competitive land sizes by, among other things, 
providing landowners with financial assistance to merge plots of  land and supporting land purchases 
of up to 300 hectares of farmland per person. 
6. As a result of the fragmentation and decline in profitability of agricultural production together 
with the severe droughts in the early 1990s, the rela tive importance of agriculture in the economy has 
declined markedly.  Indeed, gross agricultural production in 1994 was only 65% of its 1989 level, a much greater fall in production than in the econom y as a whole.  Consequently, the share of 
agriculture (together with the food industry and forestry) in GDP dropped from 14.2% in 1991 to 11.6% in 1995.
4  This was accompanied by an even sharper fall in agriculture's share of employment 
from 18.5% in 1992 to 11.8% in 1996.5  Although still strongly export-oriented, agriculture's share of 
exports also declined, from 27.5% in 1991 to 21.5 % in 1996.  Nevertheless, agricultural exports 
remained three to four times as large as agri cultural imports during the period 1990-96.  The 
importance of agricultural trade with the EU is high lighted by latter's large share of Hungary's exports 
and imports (48% and 44%, respectively, in 1996).  
                                                      
 
2 Whereas 82% of the total agricultural area was cultivated by cooperatives and state-owned farms in 
1990, this proportion had dropped to 46% by 1996 (Ministry of Agriculture, 1997). 
 
3 Arable land cannot be purchased by corporations , whether domestic or foreign; it can be acquired 
only by natural persons.  The ban on foreign acquisition of land is justified by the authorities on the grounds that 
its ownership structure is still in transition and pri ces remain unrealistically cheap by western European 
standards.  It is feared that a lifting of the ban could lead to a foreign monopoly of the arable land market before realistic prices are established (p resumably, once Hungary accedes to the EU), ther eby depriving Hungarian 
citizens of the chance to acquire land in the future. 
 
4 The share of agriculture, excluding the food industry and forestry, fell from 8.6% to 7.1% of GDP 
during the same period (Ministry of Agriculture, 1997). 
 
5 Research and Information Institute for Agricultural Economics (1997). Hungary WT/TPR/S/40 
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7. Government assistance for agriculture is provide d by means of border measures and internal 
measures involving, inter alia , budgetary support, tax concessions a nd a system of guaranteed prices.  
Border measures affecting agricultural products in volve import tariffs for all products, tariff quotas 
for some products, and export licensing for grains and sugar beet.  As a consequence of tariffication of 
non-tariff measures in accordance with the WTO Agreement on Agriculture, the simple average 
applied MFN tariff on agricultural products increas ed from 22% to 45%, which is nonetheless low in 
comparison with some other European countries.  Lower rates apply within certain tariff quotas 
(Table AIII.4).  The average applied MFN tariff ha s since declined to 37% in 1997, which is more 
than four times the average for industrial products.  It will fall even further, to no more than 29%, 
once the reductions agreed under the Uruguay Round are fully phased in.6 
8. In exceptional cases, as defined in Article II. 2(a) of the Agreement on Agriculture, export 
restrictions are used to prevent critical shortages.  In this context, temporary restrictions on exports of 
some grains, cereal products and animal feeds were  introduced in August 1996 to prevent serious 
domestic shortages of the products in question and to avoid disruption of the domestic animal feed 
market.   
9. Export subsidies are granted for some agricultu ral products.  The rate of subsidization per 
tonne is fixed at the beginning of the calendar year and varies little with changes in world prices.  As 
discussed earlier (Chapter III(3)(iv)), as a result of an error in its Schedule of Commitments, export 
subsidies in 1995 and 1996 were considerably high er than Hungary's Uruguay Round commitment.  
The ensuing dispute with several WTO Members wa s resolved in October 1997, with Hungary being 
granted a waiver.  Under the waiver, the base value was set at the 1995 level of Ft 51 billion (less than 
half the 1986-90 base level), dropping to Ft 42 billi on in 1997 and subsequently falling in stages to 
Ft 22 billion in 2001.  Wheat, beef, pigmeat, poultry,  fruit, vegetables and wine currently account for 
the bulk of the export subsidies.  In addition, Hunga ry agreed not to enter non-traditional markets with 
subsidized agricultural exports during the transiti on period.  Unlike some other countries, Hungary 
has bound its export subsidy levels in  domestic currency rather than in U.S. dollars.  Given that it 
operates a crawling peg exchange rate system, whic h has resulted in a gradual depreciation of the 
forint vis-à-vis the dollar as a consequence of Hungary's  continuing high levels of  inflation, levels of 
export subsidization are expected to decline even f aster in dollar terms.  With the reduction in export 
subsidies pursuant to the WTO Agreement on Agricu lture, the Hungarian authorities indicated their 
intent to compensate producers partially by me ans of "green box" subsidies/support measures, 
including income support measures.  Veterinary co sts for pigs, chickens, cattle, sheep and game are 
partly defrayed by the Government;  these measu res are exempt from WTO reduction commitments.7 
10. Further budgetary support includes direct payments from various agricultural funds, which 
involved various types of grants as well as interest rate subsidies and amounted to over Ft 14 billion in 
1996, together with a 70% refund of the tax on diesel fuel (amounting to a further Ft 0.7 billion) in 
1996.8  Farmers with annual incomes below Ft 1 m illion also currently receive social insurance 
subsidies.  In addition, the Agriculture Market Re gulation Act of 1993, which came into effect in 
April 1994, directly regulates markets for wheat (for human consumption), feed maize, milk, live 
cattle and pigs for slaughter, by setting minimum guaranteed prices, paid up to a production quota 
limit, and government purchases in the event of ma rket instability.  Alth ough Ft 7.5 billion was 
                                                      
 
6 The overall simple average of bound tariff rates for all agricultural products is 29%.  
 
7 Green Box subsidies/support measures are those that  have "no, or at least minimal, trade-distorting 
effects or effects on production" and do not have the "effect of providing price support to producers". 
 
8 The refund was increased to 85% in 1997. WT/TPR/S/40 Trade Policies Review 
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budgeted for such payments in 1994 and 1995, in prac tice, no intervention purchases have ever been 
made because market prices have hitherto rema ined above the guaranteed prices owing to other 
measures, notably high import duties and export subsidies.  In 1997, however, the price of maize was below the minimum, which resulted in support amoun ting to Ft 660 million.  Hungary does not have 
any marketing boards.  Budgetary payments and ta x concessions are also provided for environmental 
improvement and rural development.  In acco rdance with the WTO Agreement on Agriculture, 
Hungary is committed to reducing domestic support ("amber subsidies") by 20%. However, it has not 
yet notified the WTO regarding current domestic  support measures and associated cuts therein.
9  
Hungary notified domestic support for 1995 as de minimis . 
11. According to the OECD, for 13 major agricu ltural products, which together account for 
around three quarters of the total value of agricultu ral production, the producer subsidy equivalent 
(PSEs) corresponding to total support fell from 23% in 1989-91 to an estimated rate of 11% in 1996, 
among the lowest of all OECD members.10  However, estimated PSEs for sugar, milk and sheepmeat 
                                                      
 
9 Hungary has notified domestic support measures  for 1995 only (WTO document G/AG/N/HUN/10, 
11 December 1997). 
 
10 OECD (1997c), p. 49.  More recent estimates for 19 96 (and 1997) indicate a slightly higher rate of 
15-16%.  The PSE is an indicator of the total value of monetary transfers to agriculture (per unit value of  
production) resulting from several broad categories of agricultural policy measures (market price support, direct payments, reduced input costs, general services and other support). Hungary WT/TPR/S/40 
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in 1996 were much  higher than the overall average.11  The drop in the overall PSE is largely due to 
the decline in market support, whose share in to tal support fell from 67% in 1993-95 to 24% in 1996.  
Assistance involving reduced input costs has acc ounted for a rising share of total support, 65% in 
1996 compared to 27% in 1993-95.  The share of di rect payments (other than those on inputs) 
increased from 5% to 11% over the same period. 
12. At the end of 1997, the Government implemente d new legislation concerning procedures for 
plant seed approval and certification, which is in acc ordance with EU laws.  The Government is also 
formulating new legislation concerning genetically  modified organisms, which will also be 
harmonized with EU laws. 
13. Undoubtedly, Hungary's future agricultural polici es will be dominated by preparations for its 
eventual integration into the EU.  An agenda for these preparations is  set out in the National Agrarian 
Programme introduced in 1997.  It includes a conti nuation of the process of bringing Hungarian laws 
and regulations into co nformity with those of the EU and the establishment of the necessary 
institutional framework.  The key question that ari ses in this regard is how Hungary's agricultural 
policies can be adapted to the EU Common Agri cultural Policy (CAP), which, judging from the 
magnitude of its overall PSE in 1996, provides rou ghly four times the rate of assistance currently 
prevailing in Hungary.  While significant reform of  the CAP, envisaged in the Commission's Agenda 
2000, may well reduce the overall rate of assistance in the EU, a cons iderable gap between the overall 
rates of assistance in Hungary and the EU is likely to persist in the near future.  In the light of such a 
gap, it remains to be seen whether Hungary's efforts to bring its agricultural policies into line with the 
existing or a reformed CAP overs hadows its attitude to future multilateral negotiations aimed at 
securing further liberalization of agricultural trade.12  These negotiations are expected to commence at 
the WTO in 1999. 
(ii) Mining 
14. With the exception of natural gas, production of  all raw materials has declined since 1990.  
Total mining output fell by more than half between 1990 and 1995.  Hungary is a net importer of most 
raw mineral materials apart from hydrocarbons , bauxite and some building materials. 
15. Coal mining is one of the main activities, ac counting for roughly one quarter of total raw 
mineral production.  During the period 1990-96, however, coal production dropped from almost 
18 million tonnes to 15 million tonnes, while its contri bution to total energy production declined from 
31% to less than 25%.13  This trend is expected to continue. In 1993-94, almost all coal mines 
(representing about 90% of coal production) were integr ated into the coal-fired electric power plants.  
Half of these enterprises have been privatized a nd negotiations are under way with potential investors 
with a view to privatizing the remainder. 
16. The remaining three mines, which are not economic ally viable, have been transferred to three 
regional public bodies with the intention of closing them down in the near future.  These three public 
bodies report to the Centre for the Restructuring of  Coal Mining (SZÉSZEC), which is responsible for 
restructuring, including the provision of government assistance.  The latter involves subsidies to cover 
                                                      
 
11 OECD (1997d), p.87. 
 
12 Hungary recently withdrew from the Cairns Group of agricultural exporters, whose primary aim is to 
press for multilateral liberalization of agricultural trade. 
 
13 Central Statistical Office (1997), p. 175. WT/TPR/S/40 Trade Policies Review 
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the costs of closing mines and cleaning up the envi ronment.  In 1997 these subsidies amounted to Ft 
3.2 billion.  There are no border controls on the export and import of coal other than special 
authorization, which involves licensing. 
17. On the basis of commercial considerations, exploitation of uranium ended in 1997 and the 
Government is now in the process of closing uranium mines, a process that is expected to take several 
years. 
(3) MANUFACTURING  
18. By virtue of the Europe Agreement and Hungary's agreement with EFTA and CEFTA 
countries, which abolished, or provided for the ph asing out of, tariffs and qua ntitative restrictions on 
Hungary's manufactured imports and exports, trade w ith these partners has grown considerably during 
the review period.  Part of this growth is the consequence of fore ign companies finding it 
advantageous to move the production of compone nts or finished goods to Hungary, where labour 
costs are relatively low, and for export to the EU/EFTA/CEFTA market.14  This so-called "outward 
processing trade" (OPT), which accounts for a quarte r of Hungary's exports, has proved to be 
particularly attractive for clothing and automo tive components.  OPT currently accounts for around 
15% of total imports a nd 21% of total exports15, although there are no special OPT provisions under 
the present agreements.  The Europe Agreements  have also provided firms from non-European 
countries with a relatively low-cost base from wh ich they can export to the EU, CEFTA and EFTA 
countries. 
19. The establishment of operations in Hungary has obviously necessitated a large amount of 
FDI.  Sectors with the highest export growth are those dominated by enterprises with foreign 
partners.16  Some foreign companies, in return for investment and employment guarantees, have 
occasionally negotiated with the Government a degree of protection of their local market or other 
forms of assistance.17  Such protection or assistance may entail tariff or non-tariff border measures or 
incentives, which are sometimes linked to export performance. 
(i) Prepared food and beverages 
20. Between 70% and 80% of  Hungary's agricultural production is processed by the domestic 
food industry, with the result that the development of agriculture and the food industry are closely 
related.  During the early 1990s, several branches of  the food industry faced problems, notably a shift 
in trade patterns, a decrease in domestic demand, in solvency of some large enterprises, changes of 
ownership, etc.  The volume of production dro pped considerably at the beginning of the 1990s, 
although during the past three years there has been a moderate increase.  The outcome was a fall in 
the industry's share of GDP from 5.3% in 1991 to 4.2% in 1995.  Nevertheless, processed food, 
beverages and tobacco products account for about 20%  of Hungary's total exports and 5% of imports. 
Around 40% of total exports are currently destined for central and eastern Europe as a result of the 
                                                      
 
14 As of 1 January 1998, Hungarian industrial exports to the EU and EFTA countries are free of duty 
and quantitative restrictions. 
 
15 OECD (1997a), p. 129. 
 
16 OECD (1997a), p. 68. 
 
17 Ministry of Industry and Trade (1996c), p. 7.  More specifically, tariffs were raised on passenger 
cars, fertilizers and colour T.V. sets in 1991 in response to requests from foreign investors.  (OECD, 1995). Hungary WT/TPR/S/40 
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industry's success in reclaiming markets lost followi ng the collapse of the former COMECON trading 
bloc.  
21. Privatization of the food industry was more succ essful and accomplished more rapidly than in 
other areas, and is now almost complete.  Less th an 10% of the food processing industry remains in 
State hands and nearly two thirds is foreign-owned, with multinati onals having invested a total of 
US$3 billion since privatization be gan, thereby providing significant improvements in technology as 
well as new marketing channels.18  In several branches of the industry (e.g., brewing and distilling, 
soft drinks, tobacco, canning, confectionery, and ve getable oil production), large-scale investment has 
contributed to significant modernization, renewal of product structure and quality improvement. As a 
consequence, productivity has greatly improved (by over 10% annually in recent years), especially in 
sectors where foreign ownership is above average. 
22. Prepared food and beverages are the products  most protected by MFN tariffs:  bound and 
applied tariff rates in 1997 were more than three time s the averages for all products (Chart III.1).  Not 
surprisingly, therefore, applied MFN tariff "spikes" ar e concentrated in this sector.  On the other hand, 
following the removal in 1995 of all food (except fish), beverages, confectionery and tobacco 
products from the global quota on c onsumer goods, non-tariff measures are currently less pervasive in 
this than in several other sectors (Chart III.3).  Fu rthermore, a large proportion of imports of prepared 
food and beverages were subject to tariff quotas that  provide a significantly lower level of tariff 
protection.  Investments in domestic food processing, like those in other industries, have qualified for various forms of tax and non-tax incentives, so me of which are aimed at export promotion. 
(ii) Chemicals and pharmaceuticals 
23. The chemical and pharmaceutical industri es have traditionally been among the most 
important manufacturing industries.  Following pr ivatization and intense restructuring, foreign 
involvement is especially high in these two indus tries.  As a consequence, foreign-owned firms 
account for nearly two thirds of domestic sales of cosmetics and household chemicals, including 
detergent and soap. Recently privatized pharmaceutic al companies, such as Gedeon Richter and Egis, 
are also prominent;  both of these companies depend heavily on exports to former COMECON 
countries. 
24. Applied MFN tariffs on imported chemical and pharmaceutical products are lower than the 
overall average.  Moreover, these products are re latively free from NTMs.  One notable exception, 
however, is household detergent, which is still s ubject to the global quota on consumer goods. In 
addition, narcotics and dangerous chemicals a nd explosives require import and export licences 
(Chapter III(2)(iii)(c)).  At the same time, some pharmaceutical products receive price subsidies under 
the social security system. 
(iii) Textiles and clothing  
25. The textile and clothing sector has been partic ularly affected by the collapse of former 
COMECON markets, which resulted in a sharp declin e in output and employment (Table IV.1).  On 
the other hand, attracted by relatively low labour cost s, FDI has brought about an increase in outward 
processing trade with the EU, whereby firms impor t goods, add value domestically, and then export 
the goods.  As noted earlier, activity in this regard  is concentrated in apparel and clothing accessories, 
                                                      
 
18 Some US$1.2 billion was spent on acquisitions and the remainder on technology and other general 
improvements (Eurofood, 29 January 1998, p. 9). WT/TPR/S/40 Trade Policies Review 
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where Hungary appears to enjoy a strong revealed comparative advantage (RCA).19  Higher value-
added activities (innovation, design and marketing) have tended to rema in in the EU, however.  About 
85% of EU textile imports from H ungary were due to OPT, thus ma king it the most important element 
of EU-Hungary textile trade.  Such trade was undo ubtedly greatly facilitated by the Interim Europe 
Agreement, which provided for the removal of EU  customs duties on clothing products manufactured 
in Hungary and re-exported under an OPT contract.  
Table IV.1 
Production and employment in the textile and clothing sector 1990-97 
 1990 1992 1992 1993 1994 1995 1996 1997 
Gross production (volume 1990 =100)         
 Textiles 100 69.3 50.9 51.8 53.0 52.7 49.6 50.6 
 Clothing 100 99.2 90.4 94.2 100.7 97.6 99.0 96.4 
Employment ('000 persons)         
 Textiles 75.3 62.0 52.0 50.8 49.9 45.8 38.0 38.0a 
 Clothing 61.6 58.6 58.9 58.7 58.2 57.5 55.1 55.7a 
a Preliminary data. 
Source: Hungarian Statistical Office, MITT, A ssociation of Textiles and Clothing Producers. 
26. While applied MFN tariffs on imports of textiles a nd clothing are close to the overall average,  
certain textile and clothing products are still among th e items subject to the global quota on consumer 
goods (Tables III.7&8).  Moreover, the sensitivity of tr ade in textiles and clothing is such that, in 
general, like the WTO Agreement, bilateral and regi onal trade agreements provide for a slower pace 
of liberalization than in other areas.  As of 1 Janua ry 1998, however, textile and clothing products are 
no longer subject to global quota.  Investments in  domestic textile and clot hing production facilities, 
like investments in other industries, have qualifie d for various forms of tax and non-tax incentives, 
some of which are aimed at export promotion.  Hungarian exports of textiles and clothing to the United States and Canada face quantitative rest rictions under the WTO Agreement on Textiles and 
Clothing. 
(iv) Cars and automotive components  
27. Under the previous regime, automobile producti on was virtually non-existent, with only a few 
automotive components being manufactured by Hunga rian companies.  These components included 
dash boards, windscreen wipers and batteries for Lada , Polski Fiat or Zastava cars.  By contrast, 
Hungary was central and eastern Europe's biggest bus maker through Ikarus.  During the early 1990s, 
however, the automotive industry was transformed,  becoming one of Hungary's fastest growing 
industries and thus one of the key elements in the restructuring of the manufacturing sector.  In 
particular, parts manufacturing increased two-and- a-half times and output of electric devices for 
vehicles rose five-fold between 1992 and 1995. At the same time, Hungary became an important 
producer of automobile parts and components for th e European market.  In 1995, for example, over 
60% of vehicle parts and more than 86% of car el ectric articles were destined for foreign assembly 
plants.  Consequently, exports of car parts increa sed ten-fold while imports increased four-fold during 
the period 1991-95.  This rapid growth is largel y due to FDI, attracted, among other things, by a 
highly skilled workforce, relatively low labour costs and, in the case of completely built-up passenger 
cars, a protected market.  More than half of the industry is now foreign-owned.  
                                                      
 
19 RCA indicators for women's and men's clothing (o f textile fabrics) are among the highest (OECD, 
1997c, p. 65). Hungary WT/TPR/S/40 
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28. In 1992, greenfield assembly operations we re established by two major foreign car 
companies, Opel and Suzuki, which dominate the mark et with a combined share of nearly 50%.  Opel 
only operates a rather low volume car produc tion facility, however, assembling around 10,000 cars 
from CKD (completely knocked down) k its supplied by its German plant.20  Production is planned to 
continue at least until the end of 1998, although its future may be somewhat in doubt, depending on 
whether Hungarian import tariffs fall.21  On the other hand, Opel is making Hungary one of its 
principal manufacturing locations both for engines and engine components. Production at its engine 
plant, located in a customs-fre e zone close to the border with Austria, has risen from around 
20,000 units in 1992 to nearly 400,000 in 1997, virtually all for export.  In 1996, Opel commissioned a new plant to produce cylinder heads (both machining and assembly) with a three-shift capacity of up 
to 460,000 units a year, a level that should be reached  in 1998.  Consequently, in less than five years, 
Opel Hungary has become Hungary's fourth-largest  company based on net sales, one of the top three 
exporters and among Hungary's most profitable compan ies.  (Like Suzuki, it currently enjoys a ten-
year tax holiday with regard to income earned on its  earlier investment.)  It had a workforce of close 
to 1,000 by the end of 1997 with a further 2,000 or so employed in its 63-strong franchized dealer 
network.  After the first phase of "screwdriver" investments of foreign car producers aiming at the local market, the Hungarian automotive industry is  becoming increasingly integrated into the 
international network of car  production and manufacturing. 
29. Suzuki established its factory with the dual aim of supplying the Hungarian market, and 
exporting cars to the EU. The company has gradually increased its local content from 25% to 53% with a view to meeting the EU requirement of 60% Eu ropean origin attached to duty-free importation.  
Production has risen from less than 1,000 cars in 1992 to over 50,000 in 1997, three quarters of which 
are exported.  Production is expected to double in 1998. 
30. Several other foreign companies, notably Au di, Ford and United Technologies Corporation 
have also opened plants (often in customs-free z ones) for the manufacture of automotive components, 
including engines.  Audi, for example, sends comp onents overnight to its engine plant at Gyór in 
western Hungary, where they are assembled and sent back by a train link which goes directly onto the 
factory floor.  It produced 600,000 engines in 1997 (triple the number in 1996) and expects to reach 
one million in 1998.  These engines supply 90% of all new Audi cars.   
31. Whereas tariffs on automotive components are re latively low (6-10%) and such products are 
free from quantitative restrictions, built-up passenger car s are subject to high levels of tariff and non-
tariff protection.  MFN tariffs on passenger cars curre ntly unbound in the WTO, with no commitment 
having been made by the Hungarian Government to lo wer them in the future;  in addition tariff rates 
are  high for cars with a large engine capacity as well as for those not equipped with a catalytic 
converter.  For example, a 43% MFN tariff applies to cars with an engine capacity exceeding 2,000 
cubic centimetres, and equipped with a catalytic conv erter.  Tariffs on imports of passenger cars from 
countries with which Hungary has preferential arra ngements are considerably lower, however, and 
will be abolished by 2001.  Furthermore, imports  of new and used cars are subject to quantitative 
restrictions, namely the global quota on consumer goods, and used cars over four years old are 
prohibited, ostensibly for reasons of envir onmental protection and safety (Chapter III(2)).  
Investments in domestic production facilities qualify for various forms of tax and non-tax incentives, 
some of which are aimed at export promotion (Chapter III(3)).   
                                                      
 
20 Judging from estimates of its real comparative advantage (RCA), Hungary still appears to have a 
strong comparative disadvantage as far as production of passenger motor vehicles is concerned (OECD, 1997c, 
p. 63). 
 
21 Financial Times "Survey - Hungary" 16 December 1996, p. III. WT/TPR/S/40 Trade Policies Review 
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32. In contrast to the thriving passenger car com ponent sector, commercial vehicle construction, 
Hungary's traditional automotive industry, is in a st ate of crisis, having unde rgone serious drops in 
production.  For example, less than 1,000 buses we re produced in 1996 compared to almost 8,000 
in 1990.  None the less, Ikarus Rt., the partly state-owned bus manufacturer, continues to be an 
important exporter, largely to the central and easter n European market.  Attempts are currently under 
way to privatize state-owned firms such as Rába, the truck maker as well as Ikarus, in order to make 
these enterprises viable.   
(v) Iron and steel  
33. Although currently moderate in size, iron and steel production faces serious economic 
problems and is among those industries in decline and in need of restructuring.  During the period 
1990-95, crude steel production dropped by 37%, wh ile rolled steel production stagnated.  State-
owned iron and steel producers have proved to be among the most difficult enterprises to privatize, 
and thus to modernize, because of their heavy losses and need of large capital injections.  At the same 
time, they are located largely in the depressed north  east of Hungary, where unemployment is high by 
national standards.  
34. In order to maintain employment, therefore, iron and steel producers continue to receive 
substantial subsidies from the Government;  these amounted to Ft 8.2 billion in 1995 and 
Ft 10.8 billion in 1996.  Subsidies have also been us ed to restructure and thus, in an attempt to secure 
privatization, as in the case of the Diósgyór steel wo rks (DAM) -  after two attempts failed, a majority 
stake in DAM was sold to VSZ Kosice for a nomin al sum of US$1, and the Government agreed to 
guarantee loans of Ft 2 billion and invest Ft 2.5 billion.22  By contrast, the iron and steel industry 
receives little assistance from tariff and non-tariff bor der measures.  Tariffs on iron and steel products 
are low in comparison with other industrial products  and no licensing or quantitative restrictions apply 
to imports from WTO Members. Quantitative restricti ons have been directed at imports from some 
non-Members (Chapter III(2)). 
(4) SERVICES  
35. The establishment of an efficient financial se ctor, particularly a banking system and stock 
exchange, lies at the heart of Hungary's transition to a market economy.  A well-functioning financial 
sector is essential both for the m obilization and the efficient allocation of savings and investment.  
The establishment of infrastructure on a commercial basi s is also an indispensab le aspect of transition 
because of its pervasive effect on the whole economy.  The services provided by such infrastructure, 
notably telecommunications, transportation and power, contribute to improvements in living 
standards, they are also used in the production processes of virtually all sectors and are necessary for 
the movement of goods, services, people and capital.  Telecommunications and transportation are also 
important for forging links between businesses, partic ularly within multinationals.  Together with 
financial services, they are also among the fastest growing sectors in Hungary. 
36. Under the previous largely command approach  to the economy, financial intermediation 
played a limited role in the allocation of savings  and investment.  Moreover, with the emphasis on 
industrial production, particularly heavy industry,  and production targets, there was a tendency to 
attach a low priority to the provision of most servi ces, particularly telecommunications, and certain 
types of infrastructure.  Among the exceptions w as energy, where usage was wasteful owing to 
unduly low and unsuitably structured prices.  Consequently, the service sector was largely deprived of 
                                                      
 
22 The Budapest Sun,"Steel Works sold at last", 18-31 December 1997, p. 10. Hungary WT/TPR/S/40 
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capital, and in the early 1990s, Hungary had a frag ile financial system, one of Europe's least 
developed telecommunications system, an aging tr ansport infrastructure and fleet, and a profligate 
energy sector.  The need for major capital inj ections into these and other sectors prompted the 
Hungarian Government to adopt an outstandingly li beral approach both to the privatization of the 
service sector and the participation of foreign inv estors.  As a result all major banks, almost three 
quarters of the Hungarian telecommunications company (MATAV Rt.) and most power companies 
have been privatized.  Moreover, encouragement of foreign participation in the privatization process 
was such that foreign investors now control more than half of the banking and insurance sector, the 
main telecommunications company, and several electric power generating companies.  
37. A further reflection of its remarkably liberal stan ce with regard to the service sector is the fact 
that Hungary made substantial international comm itments in most areas covered by the GATS during 
the Uruguay Round, with no or few sectoral limitations except in financial services, 
telecommunications and transportation (Tables AI V.1 and AIV.2).  Hungary has also signed the 
Fourth Protocol to the GATS on basic telecommunications services, and it took part in the Second Protocol on financial services.  In addition, only a few reservations were tabled in the OECD under 
the Code of Capital Movements and Invisible Oper ations.  Commitments for improving market access 
in services were also made in the Europe Agreem ent.  The prohibition on the supply of financial 
services in Hungary from branches, was removed as  of 1 January 1998 in accordance with Hungary's 
offer in the recently concluded WTO negotiations on  financial services.  This offer was among the 
most liberal of all countries.  The main broad rest riction remaining is that natural persons are not 
permitted to provide financial (or an y other) services in Hungary, a situation that is common in many 
other countries.  In addition, the revised MFN exem ption states that commitmen ts made with respect 
to commercial presence may still be subject to a reciprocity requirement. 
38. Given Hungary's geographical position and the rapi d modernization of its infrastructure, the 
Government has stressed the objective of becoming a "hub" for regional finance, telecommunications 
and transportation.  Promotion of the "hub concep t" will require reforms in sectors still closed to 
competition.  After the elimination of monopoly rights for international, long distance and local 
services granted to MATÁV (until 31 December 2002) and to local telephone operators (until 
31 December 2003), telecommunications services will be open to competition.  Further liberalization 
in financial services can be expected upon the entr y into force of the new commitments under the 
GATS, including the removal of restrictions on cross-border branching. 
39. Hungary's liberal attitude to foreign investme nt and the consequent strong involvement of 
foreign investors in the privatization process has a pparently contributed to the effective governance of 
privatized companies.
23  However, to improve the performance of these enterprises, privatization must 
be accompanied by effective corporate governance,  and by a stable and predictable regulatory 
framework where monopolies or exclusive rights are well regulated.  This is especially important 
because of the typically high capital intensity of infrastructure such as telecommunications, energy 
and transportation and the associated "sunk" costs; once the capital investment  has been undertaken it 
cannot be moved elsewhere.  This makes such inve stments especially susceptible to fears about the 
adverse effects of arbitrary regulatory decisions in the future.24 
                                                      
 
23 Török (1995). 
 
24 European Bank for Reconstruction and Development (1996), p. 62. WT/TPR/S/40 Trade Policies Review 
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(i) Financial sector 
(a) Banking 
40. Acompetitive banking and finance sector is cruc ial for the smooth functioning of a market 
economy.  In particular, it is needed both to ensure an adequate level of saving and to channel savings 
into those investments that contribute most to ec onomic welfare. Competition between banks ensures  
the highest possible returns on deposits, thus en couraging saving.  Competition also ensures the 
lowest possible lending rates to creditworthy borro wers, consistent with interest payments to 
depositors and overhead costs, thereby fostering investment.  At the same time, if they are to be competitive and financially sound, banks must, as fa r as possible, enforce prompt and full repayment 
of loans and thus impose "hard" budget constraints on those enterpri ses to whom they have extended 
loans. The importance of the banking sector in the transition was such that the Government attached 
the highest priority to the restructuring of st ate-owned banks, by means of recapitalization, 
restructuring, privatization and foreign investment.  It also quickly established the necessary legal and regulatory framework. 
41. The most formidable problem facing the Hungarian banking system in the early 1990s was 
the large build-up of non-performing loans associated  with the financial difficulties encountered by 
corporate customers and the implementation of a stri ct bankruptcy law in 1992 (Chapter III(4)(vii)).  
The build-up of non-performing loans threatened to eliminate the capital of most major banks.  
Indeed, an independent audit in 1993 concluded that  eight banks, including three of the five largest, 
were technically insolvent.  In order to address  the problem, the Government implemented several 
rounds of bank recapitalization during the period 1992- 94, which involved a total injection of Ft 360 
billion (8% of 1994 GDP) into the banking sector.  The resulting dramatic improvement in banks' 
balance sheets paved the way for the subse quent privatization of the major banks.  
42. Bank privatization began in 1994, with the sale of an approximately 80% stake in Magyar 
Kulkereskedelmi Bank, the Hungarian Foreig n Trade Bank, to Bayerische Landesbank.  
Subsequently, Budapest Bank was sold to GE Cap ital and the EBRD and the Magyar Hitel Bank was 
purchased by ABN Amro.
25  With the sale of the last of the five big previously state-owned 
commercial banks, Kereskedelmi and Hitel Bank, and of the smaller Penzintezeti Kozpont Bank 
1997, the Hungarian banking sector is now almost entirely privatized.  The State has retained 
substantial minority stakes or "golden shares" in some  of the largest banks and has also retained full 
ownership in two specialist banks, the Hungarian  Development Bank and EXIMBANK.  The State 
has a stake of 37% in the newly establis hed Land and Mortgage Credit Institution. 
43. One of the most striking features of bank priv atization has been the strong participation of 
foreign investors, who have acquired large stakes in the country's main banks.  New, 100% foreign-
owned banks, such as Deutsche Bank Ltd., Rabobank a nd Opel Bank, have also been established.  
The result is that foreign-owned banks' share of re gistered share capital is now 75 to 80%, compared 
to around 16% in 1991;  19 banks are completely foreign-owned. 
44. In order to meet international and especially European standards, the legal and institutional 
framework governing banking, established in the ear ly 1990s, was extensively modified in 1996 with 
the adoption of a new package of legislation.  Th e package consisted of the Act on Credit Institutions 
                                                      
 
25 The Government was heavily criticized by the opposition and a State Audit Office (ÁSZ) report for 
the Budapest Bank privatization because of the Ft. 10.6  billion buy-back guarantee for bad assets agreed by the 
State when it sold the bank (The Budapest Sun, "The great 10-year Hungarian sell-off nears the end of the line",  
Business Plus Supplement, March 1998, Issue 1, p. IV.) Hungary WT/TPR/S/40 
 Page 85 
 
 
and Financial Undertakings, the Act on Hungarian  Banking and Capital Market Supervision, as well 
as the Securities Act and the Act on Home Savings a nd Loan Associations, all of which entered into 
force in on 1 January 1997.26  The package was aimed at enhanc ing the transparency of financial 
institutions, ensuring a more secure banking system, more stringent monitoring of banking activities 
and the integration of money and capital markets. 
45. The Act on Credit Institutions defines two types of  financial institutions: "credit institutions", 
including banks, specialized credit institutions and cooperative credit institutions (savings 
cooperatives and credit cooperatives); and, "financial  undertakings".  Only credit institutions are 
allowed to collect deposits and other repayabl e funds exceeding their equity, whereas financial 
undertakings are only entitled to collect repayable funds up to the value of their capital.  While 
confirming the legal separation between the two types of entities, the Act provides for gradual 
increases in the powers of banks, with the long- term objective of establishing a universal banking 
system.  Since the beginning of 1997, banks have be en allowed to trade in government securities and 
derivative products, but not corporate securities (other than those that are privately placed).  As of 
1 January 1998, banks are allowed to  provide full investment services. 
46. The Act on Credit Institutions also introduced si gnificant changes to the system of licensing.  
In particular, the Government dropped its previous  discretionary powers concerning the licensing of 
foreign institutions.27  Authorization is subject to greater control by the regulator, however, 
particularly in respect of prudential requirement s.  The minimum registered capital necessary to 
establish financial institutions was also increased  for prudential purposes and to compensate for 
inflation.  The minimum capital requirement for ba nks, irrespective of the nationality of ownership, 
was doubled to Ft 2 billion, quadrupled to Ft 100 million for a cooperative credit institution, and for a 
financial undertaking raised to Ft 20 million.  Mo reover, rules concerning collateral, conflict of 
interest with respect to bankers in managerial positions, and the independence of external auditors 
were strengthened.  In addition, the maximum share th at can be held by an individual, the State, or 
economic entities other than financial institutions, investment firms or insurance companies was 
reduced from 25% to 15%. 
47. The Ministry of Finance has primary responsibility for the regulation of banks.  Its task is the 
preparation of laws and by-laws.  The National Bank of Hungary (NBH) and the State Money and 
Capital Markets Supervisory (SMCS) body, which ar e independent of the Government and supervised 
directly by Parliament, have the right to participate in the process, or to initiate a new regulation.  The 
NBH regulates the payments system and capital move ments while the SMCS is responsible for the 
issuance and withdrawal of licences, market entry,  inspection of operations  and prudential control.28  
The SCMS body was the product of a merger in 1997 of  the two supervisory authorities that 
previously regulated banking and financial mark ets (the State Banking Supervision and the State 
Securities and Stock Exchange Supervision, resp ectively), in accordance with the Act on Hungarian 
Banking and Capital Market Supervision.  The ne wly-created body was given greater independence, 
                                                      
 
26 The package also contained an Amendment to the Act on the National Bank of Hungary, and the Act 
on Mortgage Credit Institutions and Mortgage Bonds. 
 
27 The rules pertaining to ownership do not make any substantial distinction between residents or non-
residents or the State, or between natural persons and legal entities. 
 
28 The SMCS is also entitled to conclude cooperation agreements with similar foreign organizations in 
its field of competence. WT/TPR/S/40 Trade Policies Review 
Page 86 
 
 
and its authority was extended to the entire financia l market in order to facilitate the trend towards 
universal banking.29  Financial services may be provided only under licence from the SMCS. 
48. During the period under review, cross-border s upply of services by foreign banks was not 
allowed.  Moreover, foreign banks wishing to opera te in Hungary had to incorporate under its laws 
and be established in the form of joint-stock compan ies (or, in the case of savings banks, joint-stock 
companies, savings cooperatives or credit cooperativ es).  Foreign branches were not permitted.  
Branching is now allowed as a result of Hungary's commitments under the Fifth Protocol on Financial 
Services recently concluded at the WTO. 
49. As reflected in Hungary's GATS schedule of specific commitments attached to the Fifth 
Protocol, there are no foreign ownership limits to the acquisition of an existing Hungarian-based bank 
or for the establishment of a new institution.  The requirement of govern ment approval for the 
acquisition of over 10% of the registered capital has been abolished. 
50. The Hungarian banking system currently co mprises 46 credit institutions together with 
243 smaller savings cooperatives and 8 credit cooperatives.  The seven largest banks, three of which 
(National Savings Bank (OTP), the Hungarian Cred it Bank and the Credit and Commerce Bank) were 
previously state-owned, account for about two thirds  of all assets, compared to almost four fifths 
in 1993.  Furthermore, the share of OTP, which previously held a monopoly in deposit collection, has 
been reduced to less than one third of total deposits .  While the present degree of concentration is not 
high in comparison with other smaller EU count ries, spreads between deposit and lending rates do 
remain large, particularly in retail banking30, suggesting that competition is  not yet fully developed as 
a result of foreign investors' lack of interest  in this sub-sector where costs are usually high.31  On the 
other hand, the continuing consolidation of the ba nking system as a result of privatization together 
with strong foreign presence would tend to increase competitive pressure in the future. 
(b) Securities 
51. The Budapest Stock Exchange (BSE) was the first to be reopened in central and eastern 
Europe, in June 1990.32  It has since become one of the wo rld's best performing stock markets.  
Following the re-opening of the BSE, preparations began on a new regulatory framework as set out in 
Act XCI of 1996 on offering securities, investment se rvices and the stock exchange (Securities Act).  
The Act requires a minimum amount of start-up capital for the establishment of investment 
companies, securities d ealers and securities brokers.  For fo reigners, there is non-discriminatory 
access to brokerage licences issued by the Hungarian supervisory authority.  Moreover, in a marked 
                                                      
 
29 More specifically, banks headin g towards universality may deal in government paper, derivative 
transactions and privately issued securities as investment  service providers and may partially return to the stock 
exchange. 
 
30 According to OECD (1997a), p.51, the overall inte rest rate spread was 5-6%. The average spread in 
the highly competitive corporate sector is reportedly  down to 3% (compared to 7-8% two years ago), but 
spreads in retail banking remain at 7-8% (Financi al Times, "Hungary" page II, 9 December 1997). 
 
31 High costs are also partly due to a mandatory reserve requirement, which, although down from 17% 
to 12%, is still high by western European standards.  Once non-resident banks are  allowed to open branches, 
such a high reserve ratio places Hungarian banks at a disadvantage compared to non-resident banks (National Bank of Hungary, 1997). 
 
32 A commodity exchange and a derivatives and futures market were also established in 1989 and 1994, 
respectively. Hungary WT/TPR/S/40 
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departure from the past, when company accounts were  virtually secret, the BSE established strict rules 
concerning transparency and disclosure for listed comp anies, which contribute to effective corporate 
governance.  More specifically, category A companies are required to publish quarterly reports while 
smaller companies must publish biannual reports.  The Act also contains tighter rules on insider 
trading and bans price manipulation.  It does not include a take-over code, however;  rules on take-
over are instead established in the new Company Ac t, which will enter into force on 16 June 1998. 
52. By the end of 1997, the capitalized value of shares listed on the BSE reached Ft 3,058 billion, 
compared to Ft 38 billion in 1991 (Table IV.3), w ith foreign investors accounting for about two thirds 
of the total value.  The principal reason for this  increase was the unparalleled surge in share prices, 
although a rise in the number of listed shares (as a consequence of privatization) also contributed to the increase. 
Table IV.2 
Capitalized value of shares listed on the BSE, 1990-97 
(Ft billion) 
 1990 1991 1992 1993 1994 1995 1996 1997 
Value  16.4 38.2 47.2 81.7 181.5 327.8 852.5 3,058.4 
Index value (1990 = 100) 100 233 288 498 1,107 1,999 5,198 18,649 
Source: Hungarian authorities. 
(c) Insurance 
53. The development of a modern, private insuran ce market meeting international standards has 
been a priority in Hungary.  Like the banking sector, insurance has attracted significant foreign 
interest.  In 1998, 12 of the 20 Hungarian insura nce companies were 100% foreign-owned and six 
were partly foreign-owned. 
54. In January 1996, a new law entered into fo rce governing insurance institutes and activities 
(Act CLVI of 1995 on Insurance Institutes and Insu rance Activities).  The la w introduced a separate 
incorporation requirement for life and non-life insu rance branches.  The law also provides national 
treatment to foreign insurance investors.  The 1997 amendment to the Act allows foreigners to 
establish and operate branches in Hungary unde r the same conditions as Hungarian insurance 
companies;  financial guarantees, material and personnel requirements are the same as those for 
domestic insurers in connection with th e establishment and operation of branches. 
55. Established under the 1996 Insurance Law, the St ate Insurance Supervisory Authority (SISA) 
is an independent regulatory body overseeing adhere nce to the law and reporting to the Ministry of 
Finance.  It issues licences, after approving a re gulated business plan, and can also impose fines, 
restrict activity, withdraw licences and institute liquidation procedures.  Although SISA has not 
established any official actuarial rules for the calcula tion of premiums, the latter must be agreed by 
both SISA and insurers through a compulsory licensi ng system for new products.  Since 1996, permits 
to market insurance products, except life insurance products, are no longer required from the regulatory authority. 
56. According to the Act, a licence is required for, inter alia , commencing, terminating and 
amending insurance activity.  The applic ation for the licence must contain: 
 (i) the statutes (deed of association); 
 (ii) certification of the availability of the capital; WT/TPR/S/40 Trade Policies Review 
Page 88 
 
 
 (iii) a business plan;  and 
 (iv) certification of existence of  material and personal conditions. 
The business plan mentioned under (iii) must explain the scope of insurance activities as well as facts 
and information on: 
 - the name of the branch and the section or  risk group at which the insurer's operations 
are aimed; 
 - the definition of the field of operation; 
 - in case the product is subject to licensing, a description of the product;  - the value and composition of the capital required;  - a requirement for developing the administ ration, sales and claim settlement network, 
its estimated costs and financial instruments;  and  
 - a preliminary draft balance sheet. 
Until 31 December 1998,  a licence of the superv isory authority is required to commence the 
distribution or the amendment of some products, such as accident, sickness, life insurance and 
compulsory insurances defined by  law for private individuals, le gal entities and unincorporated 
economic associations. 
57. Prior to the conclusion of the Fifth Protocol, commercial presence (in the form of a joint-
stock company, insurance cooperative or insuran ce association) was required in order to offer 
insurance services in Hungary.  The cross-borde r supply of services was not permitted, although 
companies engaged in foreign trade could take insu rance abroad.  While there was no specific foreign 
ownership limit, for prudential reas ons the establishment of a wholly  or partially owned insurance 
company was subject to government approval and a minimum capital requirement (Ft  250 million).
33 
58. Insurers' choice of investments is closely circum scribed by the Insurance Law.   As a general 
rule, insurance reserves as well as the minimum solv ency capital of an insurer may be invested only in 
Hungary.  At least 30% of the sum of liquid assets se rving as collateral for their actuarial reserve and 
"security" capital must be invested in Hungarian  government bonds.  While this requirement, like 
others, is justified by the authorities on prudential grounds, it nevertheless ensures a flow of otherwise 
investable funds into the domestic market for government securities, thereby tending to reduce the 
cost of government borrowing and the returns that  insurance companies can obtain on their assets.34 
(ii) Telecommunications 
59. Since December 1993, MagyarCom, a joint ve nture between Ameritech Corp. and Deutsche 
Telecom AG, has acquired a total stake of 67% of  MATÁV Rt., the former state-owned monopoly.  
This was reduced to simple majority (50% plus one vote) in 1997, when MagyarCom and ÁPV Rt. 
(the state holding company), respectively, sold 17%  and 8% stakes in an initial public offering (the 
country's largest), which resulted in the listing of  MATÁV on the New York Stock Exchange, the first 
central European company to do so.  While the Gove rnment has hitherto retained a golden share of 
25% shares plus one vote in the company throu gh ÁPV Rt., this stake may well be reduced by a 
further international public offering in the future.  
                                                      
 
33 This minimum requirement has two elements: an "organizational" capital requirement of Ft 100 
million and a "security" capital re quirement of Ft 150 million. 
 
34 By contrast, much loos er limits are placed on pe nsion fund investments. Hungary WT/TPR/S/40 
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60. The privatization of MATÁV was accompanie d by the enactment in 1992 of a new 
Telecommunications Act (LXXII), which introduced limited and phased competition in the sector.  While, in principle, the Act does not preserve a monopoly for any sector, it introduced a system of exclusive territorial concessions for basic tele communications (including public telephony, public 
mobile radiotelephone, national public paging services and national or regional broadcasting of public 
radio and television programmes together with relate d frequencies) with similar effect.  In accordance 
with the provisions of the 1991 Concession Act, how ever, these concessions are granted on the basis 
of competitive tenders.  A concession contract (a legal instrument) is then drawn up between the 
successful bidder (the concession company) and the Ministry of Transport, Communications and Water Management (KHMV).  By contrast, value-added services such as facsimile, telex, data transmission and satellite services are not subject to exclusive concessions and are fully open to 
competition. 
61. MATÁV owns a 25-year concession (beginning in 1993) for the supply of international, 
national and, for most of Hungarian territory (3 6 out of 54 "primary" districts), local telephone 
services.  For these services, territorial exclusivity is guaranteed by the State in the first eight years of 
the concession.  National and international tele phone services will be open to competition on 1 
January 2002 and local services on 1 January 2004.  Th is exclusive right for a limited initial period, 
and the resulting monopoly profit, was accorded to th e foreign joint venture not only as an incentive 
to purchase its majority stake in the company but also  for it to undertake further investment.  Hitherto, 
the concession has allowed MATÁV to retain cont rol on the Hungarian telephone market (100% of 
the long-distance and international telephone market and 75% of the local market through exclusive 
rights, and 65% of the mobile telephony market).  In the remaining 18 "primary" (local) districts, 
concessions to provide local services have been gran ted to new privately owned companies.  In the 
field of mobile telephony, three licences were issu ed, one to a joint venture between MATÁV and US 
West Corp., which dominates the market.  For pa ging services, two licences were granted.    
62. Although concession agreements explicitly forbid cross-subsidization, such a practice cannot 
be ruled out within MATÁV, as the latter is a vertically integrated company providing local, 
long-distance and international services as well as  other non-concession services.  According to the 
authorities, however, it is very difficult to verify the degree, if any, of cross-subsidization owing to the 
lack of proper accounting or structural separa tion and the lack of rules for obtaining necessary 
information from service providers. 
63. There is no independent regulator for teleco mmunications services in Hungary.  Instead, 
regulatory functions, such as licensing, compliance with technical, quality and delivery requirements, 
frequency allocation, etc., are performed by the Communications Authority of Hungary (HIF), under 
the auspices of the Ministry of Transport, Comm unications and Water Management (Chart IV.1).
35  
The Telecommunications Act and a government d ecree on the rules regula ting network contracts 
guarantee non-discriminatory free access to the ba sic network for concession holders and regulate 
cooperation between the various concessionaires so  that the telecommunications network forms a 
single harmonized system.  The regulations in for ce allow any entrepreneur to participate in the 
enhancement and extension of Hungary's telecommunications infrastru cture.  Any entrepreneur is also 
permitted to provide services, such as data tran smission on public telecommunications networks 
(except those of sound-phones), provided it obtains au thorization from the HIF.  The latter authorizes 
the creation of telecommunication connections, the development, winding up or interconnection of 
networks, as well as marketing, implementation and ope ration of terminal equipment.  Manufacturers, 
distributors and equipment operators are required to a pply for this type of authorization.  There are no 
                                                      
 
35 The HIF also regulates broadcasting and postal services. WT/TPR/S/40 Trade Policies Review 
Page 90 
 
 
sector-specific laws or regulations that would fa vour the use of Hungarian equipment or services 
(other than preferences provided by government procurement regulations). 
64. Telecommunications prices are approved jointly by the Ministry of Transport, 
Communications and Water Management and the Minist ry of Finance.  In the case of liberalized 
services, operators are generally free to set th eir prices, although this freedom may in some 
circumstances be limited by the Prices Act (LXXX VII) of 1990.  As regards services subject to 
concession (in particular telephones), the Governme nt implements a price cap system, which is 
reviewed every four years  The original concessi on contract with MATÁV established a price formula 
whereby annual cost increases were  determined by cost increases minus  an efficiency factor, which 
was initially set at zero.  In 1996, the Government ha d the opportunity to adjust the efficiency factor, 
but did not do so.  While this pricing formula woul d have permitted prices to be raised by as much 
23.3%, the operator instead raised prices by 19.3%.  This suggests that the current regulated price 
formula may, in fact, allow the operator to char ge prices that considerably exceed the profit 
maximizing price.36  It might also be a reflection of competition on the local telecommunications 
market not only among local suppliers of traditi onal services but also wire-based and cellular 
technologies and service suppliers.  The tariff plans prepared annually by the service providers are 
approved and published by the Government. 
65. There is no competition law applying specifically  to the telecommunications service sector to 
prevent the abuse of market power;  competition issues fall under the Competition Act and are overseen by the Office of Economic Competition.   During the period 1991-97, the latter passed 13 
rulings in cases of abuse of dominant pos ition directed at six business entities in the 
telecommunications sector.  Eight of these rulings found infringements of the law. 
66. Stronger competition may be in the offing, howev er, as a result of the establishment of a new 
Hungarian telecommunications cons ortium, MKM-Tel, by Hungarian railways (MAV) and the state 
oil company (MOL).   MKM-Tel started offering business service in 1998 and from 2002 will compete with MATÁV across the board.  (The Gove rnment also recently injected Ft 3.5 billion 
(US$17 million) of capital into another potential comp etitor, the state-owned Antenna Hungária.) The 
Government's encouragement of the establishment of MKM-Tel may well reflect its concern over the 
dominance of MATÁV and its desire to satisfy EU competition laws. 
67. The outcome of privatization together with th e regulatory and competitive framework is that, 
after being long underdeveloped, Hungary's teleco mmunications infrastructure and services are now 
rapidly catching up to modern standards.  During the period 1994-96, capital injections from foreign 
partners helped MATÁV to invest nearly US$2 bill ion in network developmen t and modernization.  
As a consequence, the number of telephone lines has jumped from 1.3 million in 1993 to 2.4 million 
in 1997.  Concurrently, a telephone  waiting list of 800,000 customers has been virtually eliminated, 
raising main line penetration (teledensity) from 14%  in 1993 to 32% in 1997 (48% in Budapest).  In 
addition, judging from the increase in the number of phonelines served per employee, which rose from 78 in 1994 to 163 in 1997, MATÁV's productivity has greatly improved since privatization.  
Furthermore, 70% of the Hungarian network is cu rrently digitalized, and mobile telephone and value-
added services are expanding rapidly.   
68. Hungary signed the WTO Agreement on Basic Telecommunications Services in 
September 1997. The Hungarian offer is one of the most liberal in the region.  It has not imposed limitations to national treatment with respect to cross-border supply, consumption abroad and 
                                                      
 
36 OECD (1997a), p. 118. Hungary WT/TPR/S/40 
 Page 91 
 
 
commercial presence in any of the areas covered by its schedule.  However, it placed some limitations 
on market access, reflecting essentially its current do mestic regime, as described above.  Therefore, 
the main limitations concern the exclusive rights granted to MATÁV on international long-distance 
and domestic services until 31 December 2002 and for local calls until 31 December 2003;  the 
attribution of licences only to companies registered in Hungary; and a foreign-ownership limit of 75% minus one vote for MATÁV Rt. and Antenna Hungária Rt. 
69. Hungary is a Member of the International Telecommunications Union and implements the 
relevant regulations a nd conventions.  It is a party of EUTELSAT, Intelsat and INTERSPUTNIK. WT/TPR/S/40 Trade Policies Review 
Page 92 
 
 
Chart IV.1 
Institutional Structure of Hungarian Telecommunications
Source :  Data provided by Hungarian authoritiesMATÁV
75% PRIVATE
25% STATEOWNED
LTO
100% PRIVATE
OWNEDMOBILE
100% PRIVATE
OWNEDOTHERSÁPV RT GOVERNMENT GVH
KHVM
HIF
PUBLIC SERVICE PROVIDERS
Abbreviations:
KHVM Ministry of Transport, communications and Water Management
HIF Communications Authority of Hungary
ÁPV RT. Hungarian Privatization and State Holding CompanyGVH Office of Economic CompetitionMATÁV Hungarian Telecommunications CompanyLTO Local Telephone Operators
Notes:
Ownership relationship
Communication relationshipPARLIAMENT
 Hungary WT/TPR/S/40 
 Page 93 
 
 
(iii) Air transportation 
70. Long overshadowed by rail, road and water tr ansport, aviation is not a major mode of 
transport in Hungary.37  Its development was impeded in the past few decades by poor infrastructure 
and the relative isolation of the Hungarian economy.  International air traffic fell sharply in 1991 due 
to both the recession in Europe and the restructuring of the industry.  It has since recovered to reach a total of 3.3 million passengers transported in 1996 (an increase of 31% over 1990 and 13% over the 
1995).  In order to meet market demand, Malév, the state-owned national flag carrier, increased the 
number of its scheduled flights by 13% in 1996 and is planning further expansion. While Malév's 
share of passengers (and cargo) is more than ha lf, intensified competition on air fares by foreign 
carriers (mainly Lufthansa, KLM and Swissair) h as resulted in a 5% reduction of revenue per 
passenger and per kilometre. 
71. Conscious that internationalization of the H ungarian economy, the rise in living standards, 
and the development of tourism are likely to result in  future expansion of air transport activities, the 
Government and the industry have engaged in wide-ranging modernization of the sector.  This 
involves, inter alia , the recapitalization of Malév, including the purchase and leasing of new aircraft, 
the expansion of the Budapest-Ferihegy airport (t he only airport in Hungary capable of meeting 
international transport needs), and the transforma tion of the former Soviet military air-bases into 
domestic and cargo airfields.
38  Recapitalization of Malév is considered to be essential if the national 
carrier is to compete internationally and is theref ore a prerequisite for the complete opening of air 
transportation to foreign competition.  While no dir ect subsidies are given to Malév, it does receive 
other forms of assistance, including a reduction in customs duties on spare parts and equipment as well as a tax exemption for fleet renewal.  
72. Commercial air transportation is largely confined to international scheduled flights.  Domestic 
air passenger transport, which was suspended in 1964, was resumed only in 1994 albeit to a limited 
extent (a few services during the summer months).  The largest cities mainta in domestic airports for 
private aircraft, and the transfer of former military airports should provide additional capacity. Foreign participation in domestic air transport co mmercial activities is subject to authorization.  
According to the 1995 Act on Air Transport, licences for domestic transport of persons and goods are 
granted only to companies with Hungarian majority both in terms of capital and management control.  
The authorities justify this restriction on the ground s that there is a need to provide extensive air 
transportation services in a small domestic market and to foster domestic air transportation companies.  In the case of Malév,  while privatization is envisaged
39, the Government will retain a 
golden share of 25% plus one vote, and another 25% of the company's shares must remain in private 
Hungarian hands.  In order to reflect this situati on, Hungary has listed a reservation in the OECD for 
market access and national treatment in respect of the acquisition of a licence for domestic air transportation.  
                                                      
 
37 Air transport  has been selected here for a sect or-representation, given the pace of reforms and the 
potential for international expansion in this area. Aviati on is Hungary's fourth-largest transport sector, behind 
rail, road and water transport. 
 
38 A second terminal was completed at Budapest-Ferihegy airport in 1993.  Further expansion is under 
way, involving the construction of a third terminal , which will be operated by a foreign-owned company. 
 
39 A 35% stake in Malév was sold to Alitalia in 1992.  In 1997, however, the EU Commission forced 
Alitalia to sell its stake, which was subsequently purchase d by a consortium of two leading banks.  The next step 
in Malév's privatization process will be a substantial in jection of capital in 1998 with a view to complete 
privatization by 2000. WT/TPR/S/40 Trade Policies Review 
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73. Multilateral liberalization of air transport servi ces was achieved only to a very limited extent 
during the Uruguay Round;  consequently, Hu ngary undertook only the basic liberalization 
commitments (i.e. maintenance and repair of ai rcraft and computer reservation servers) under the 
GATS.  (See GATS Annex on Air Transport Services.)  International air transport is thus largely 
governed by a network of bilatera l agreements.  Hungary has signed such agreements with all EU 
countries and most members of the International Civi l Aviation Organization.  In general, agreements 
allow carriers of both parties to operate "fifth fr eedom" routes but not to conduct cabotage operation 
with the partner country.  Hungary is also nego tiating an air services agreement with the EU.  In 
addition, work is being undertaken with a view to  bringing Hungarian civil aviation law into line with 
EU requirements, particularly in the area of air safety and air navigation. 
74. The main regulatory body is the General Dir ectorate of Civil Aviation (GDCA), whose head 
reports to the Minister of Transport, Telecomm unications and Water Management through the Deputy 
State Secretary for Transport.  An independent Civil Aviation Authority (CAA) was established in 
Government Decree 142/1995.  The CAA is responsible for technical, health and administrative issues 
as well as matters of navigation, acci dent prevention and investigation. 
75. Access to Budapest-Ferihegy international airport remains subject to a number of restrictions.  
Airport slots are regulated by the 1996 Act (CVII) on the Prohibition of Unfair Restrictive Practices.  
Although slots are allocated by an independent Airport Coordinating Committee in accordance with 
EU Commission Decision 95/93, prime-time landing a nd take-off slots are largely reserved for Malév 
as a consequence of "grandfathering".  Such prefer ential treatment constitutes a "regulatory" subsidy 
for Malév.  Foreign airlines still have to petition to get their flight plans approved.  It remains to be 
seen whether the opening of the third passenger term inal at the Budapest-Ferihegy airport increases 
foreign airlines' share of prime-time slots.   
76. In accordance with the tendering procedure in Section 45 the 1995 Aviation Act Section, the 
Air Transport and Airport Administration (ATAA) is  authorized to provide ground handling services 
at Budapest-Ferihegy international airport, which it undertakes for general aviation flights.  All other 
flights are served by Malév on the basis of an agreement with the ATAA.  The resulting lack of 
competition for such services means that operationa l costs at the airport are relatively high.40  
Furthermore, the integration of ground handl ing and air services may provide opportunities for 
cross-subsidization.  It would appear that this  situation is about to change, however, with the 
inauguration of the new terminal, where the pr ovision of services will be exposed to greater 
competition.   
77. While Malév aims to develop its  international operations throu gh marketing or code-sharing 
arrangements (for example, with Delta Airlines), the maintenance of market-access restrictions and 
possible inefficiencies in the provision of ground handling services might, in a context dominated by reciprocity, ultimately limit the ability of Hungary's national airline to expand its operations abroad. 
                                                      
 
40 Competition is confined to tendering for the concession of exclusive rights to provide ground 
handling and catering services, in accordance w ith the provisions of the 1991 Concession Act. Hungary WT/TPR/S/40 
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(iv) Electricity and gas 
78. Prior to its transition to a market economy, Hungary, like other centra lly planned economies, 
attached a high priority to abundant supplies of  energy for industrial production and household 
consumption, with energy supply being shaped prim arily by quantitative planning requirements rather 
than attention to costs.41  The pricing structure was inverted in the sense that prices charged to 
households were often below those charged to industr ial users, whereas the cost of supplying energy 
to the former tends to be more than for the latter.42  Energy prices were often below levels consistent 
with cost recovery, resulting in a level of ener gy used per unit of output well above that in 
industrialized market economies.  Furthermore, Hungary has become heavily reliant on imports, 
which currently account for more than half of its en ergy sources.  In this regard, it is particularly 
dependent on Russia for oil and gas as well as for the uranium used by its Paks nuclear power plant 
that generates about 40% of its electricity.  In addition, the electric power sector was a major source 
of air pollution due to its high depe ndence on coal-fired generating plants. 
79. Following earlier failed attempts to priva tize the energy sector, in 1995 and 1996 the 
Government sold about 50% of public  shareholdings in electricity and gas distribution and four out of 
seven electricity generating companies (excluding the nuclear generator).  These shares were sold to 
foreign investors, many of them western Europ ean public utilities.  At the end of 1997, a tender 
procedure was initiated aimed at privatizing the thr ee remaining coal-fired electric power generators 
(Pécs, Vértes and Bakonyi), which account for 15% of total generating capacity.  Pécs and Bakonyi 
were privatized, but no offer was received for Vértes.   In 1995, the Government also sold a minority 
stake in the main producer/importer of oil and g as, MOL, a large portion of which was purchased by 
foreign investors.  Further privatization involving MO L is expected.  However, it is envisaged that the 
State will retain golden shares (25% plus one vot e in MOL and 50% plus one vote in MVM, the 
electricity distributor), thereby enabling it to veto  decisions on such matters as capital increases, new 
share issues, changes of activity, merger and de-merger.  
80. The legal and regulatory framework applying to the Hungarian electricity and gas sectors was 
established by the Electricity and Gas Acts adopted in 1994, prior to the above privatizations.  The 
Electricity Act identifies three types of actor in this industry:  generators, distributors and local 
suppliers.  The generating companies (power stations ) are obliged to offer their electric power for sale 
to the distributor, MVM, who must observe the pr inciple of minimum cost in procuring the electric 
power from competing generators.  MVM then provi des power to the suppliers, who are obliged to 
meet consumer demands.  The supplier has exclusive right of operation in its territory.  Export and 
import activities may be handled solely by the distribu tor.  Similarly, gas activities may be pursued by 
gas distributors and gas suppliers.  The latter have ex clusive right to supply gas to consumers in given 
geographical areas and must buy gas exclusively from the gas distributor.  Only a company with the necessary infrastructure and gas source, that is to  say MOL, may engage in the gas distribution 
activity.  Under the Gas Act, MOL is also the sole importer of natural gas and owner of transportation 
                                                      
 
41 European Bank for Reconstruction and Development (1996). 
 
42 The reasons include the higher distribution costs to households and the fact that households 
contribute disproportionately to peak-load demand, which is normally supplied by the production capacity with the highest marginal costs. WT/TPR/S/40 Trade Policies Review 
Page 96 
 
 
and storage facilities.43  The result is that, although access of producers to the electricity and gas 
networks is open, transmission/distribution a nd suppliers are treated as natural monopolies. 
81. The Hungarian Energy Office was created as the independent regulator in accordance with the 
1994 Electricity and Gas Acts.  The Office has the au thority to grant concessions for distribution areas 
and the construction of new power plants, and to  propose maximum prices and the price structure.44  
The Minister of Industry, Trade and Tourism reta ins responsibility for setting prices, however.  In 
August 1995 a Government decree was issued cont aining a series of price increases up to 1997 and a 
medium-term framework for setting prices.  This frame work was designed to ensure full cost recovery 
and to allow a real rate of return of 8% on capital from 1 January 1997.   
82. In the autumn of 1996, however, a great deal  of controversy arose when the Government 
decided not accept the price increase of 39% r ecommended by the Energy Office and requested 
energy commissioner to review the Office's recommendation.45  The commissioner scaled back the 
price increases to 24.5% for electricity and 18.8%  for gas, effective 1 January 1997, by ignoring a 
wide variety of costs that had been taken into account by the Energy Office.46  Subsequently, the 
Government asked the Office to incl ude these costs gradually over the next five years.  A number of 
firms in the energy sector considered the price revi sion a breach of contract and threatened to sell off 
or reduce their holdings despite a provision in the initial sales contracts prohibiting subsequent sales 
for five years.  Nevertheless, the Government ag reed to allow some firms to do so.  While price 
increases in 1997 of about 40% (more than double the rate of inflation), have gone a long way towards meeting the requirement of full cost recovery , the precise nature of the costs to be included in 
the price formula is apparently still under discussion.   Also under discussion is a new price structure, 
which would phase out cross-subsidization, par ticularly of household energy consumption. 
Uncertainty over prices tends to undermine investor s' confidence in the regulatory regime and deter 
long-term investment.  On the other hand, as a resu lt of their relatively high capital intensity, energy 
companies would tend to be among the main bene ficiaries of the various tax and non-tax incentives 
accorded to investment.   
83. Privatization of energy utilities together with a regulatory regime that allows pricing in 
accordance with all costs will undoubtedly contribute to the more efficient production and use of 
energy.  This, in turn, should substantially reduce sulphur dioxide emissions from coal-fired power plants and enable firms to meet stricter envir onmental standards.  Hitherto these standards have 
tended to be enforced only in the case of new inv estments in power plant.  Insofar as environmental 
(and safety) standards are applied less strictly to  existing power plants, a "regulatory" subsidy is 
involved.  Between 1990 and 1995, energy-rela ted carbon dioxide emissions dropped by 15%. 
                                                      
 
43 MOL also has a dominant position in oil imports, production and refining as well as a market share 
of roughly one third of the retail market. 
 
44 The Hungarian Energy Office is also responsible for overseeing business relations between 
distributors and suppliers, and consumer protection issues. 
 
45 OECD (1997a), p.p. 118-119. 
 
46 Among the costs disallowed by the commissioner were: insurance costs (estimated to account for a 
1 percentage point drop in prices), environmental costs (1.9 percentage points), accumulation of strategic 
reserves (1.1 percentage points), cost s associated with delayed maintenance (1.4 percentage points).  Increased 
efficiency accounted for 2.2 percentage points off gas and 1.6 points off electricity;  modifications to 
depreciation rules accounted for 1.9 and 2 points.  The halvin g of so-called guaranteed rate of return on capital  
to 4% accounted for a decline of 5.8 points.  Finally, producer growth equal to 19% instead of 14% added back 3 percentage points (ECONEWS, 26 November 1996). Hungary WT/TPR/S/40 
 Page 97 
 
 
84. Hungary is increasingly linking up its electricity  and gas networks with those of EU and 
CEFTA countries, thus facilitating cross-border trade in energy and therefore competition.  In 1992, 
Hungary together with the Czech and Slovak Republi cs and Poland formed an association, the Central 
European Electricity Network (CENTREL), which th en joined the west-European electricity grid 
(UCPTE) in 1995.  In October 1996, Hungary also est ablished a gas pipeline connection with Austria, 
thereby linking Hungary to the western-European g as grid and enabling it to reduce its dependence on 
imports from Russia.47 
85. It would appear that Hungary's energy policy objectives now correspond to those of the EU, 
which include security and diversification of energy  supplies, increased reliance on market principles, 
improved efficiency and environmental protection.  Moreover, the competition framework applied to 
the energy sector, notably the 1994 Electricity and Gas Acts, together with the 1996 Competition Act 
(Chapter III(4)(viii)), is moving in the direction of the EU directives pertaining to the internal energy 
market and EC competition law. 
                                                      
 
47 It is expected that by 2010, around 20% of natural gas imports will come from sources other than 
Russia. 
 Hungary WT/TPR/S/40 
 Page 99 
 
 
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Brussels. 
GATT (1991), Trade Policy Review - Hungary, Geneva. 
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