25 study"<sup>1</sup> shows that price elasticities of air freight demand are fairly high, ranging from -0.8 to -1.6, while price elasticities of air transport for passengers on vacation stretch from -1.1 to -2.7. This points to the tremendous rewards that any policy of air transport cost reduction could have for Hungary.

# (ii) Tourism

The abolition of all exchange controls in most EC countries by 1990 is bound to increase travel. Tourism to Hungary is also likely to be affected by changes in the internal market for production factors. A unified factor market will facilitate intra-European labor mobility, which in turn will lead to a convergence of labor costs in the iC-12. In other words, the cost of laborintensive activities, like tourism in Southern Europe (particularly in the new member countries), is bound to rise substantially. Moreover, Spain and Portugal must adjust themselves entirely to the Common Agricultural Policy by 1996, a move implying a substantial increase in the price of food in the two countries. Both trends are bound to lead Northern and Central Europeans to travel further south and east. Hungary should be able to capture some of the increased demand. This is only possible if the relative price of air transport between EC countries and Hungary in terms of the price of North-South intra-EC routes does not increase, thus canceling the favorable impact of the completion of the Internal Market listed above.

# VI. Hungary's Future Trade Reaime with Western Europe

Hungary is considering strengthening its ties with Western Europe since the CMEA is disintegrating; transferable-ruble trade will soon be eliminated. Hungary's position is a difficult one. As an economic partner of the USSR up to the mid-1980s, it could obtain its energy and raw materials at very good terms, in view of the low-quality manufactured goods it was able to use to pay its CMEA partners. This has been changing. On the one hand a growing share of imports have had to be paid with "hard goods," including agricultural products or manufactured goods with import content from the West (e.g., electronic consumer goods, measuring instruments and metal-working machinery). On the other hand, the USSR has been using an increasing share of "soft goods" in its barter trade with Hungary (e.g., iron-ore with low iron content, coal aiid lumber which when delivered are frozen, so that they cannot be ignited easily; gas and crude oil have been delivered erratically). One result has been that Hungary has accumulated unconvertible ruble surpluses which cannot be used in trade with other CMEA partners and which are hard to use in future trade and payments agreements." Thus they must be considered as a non-interest bearing loan with undetermined maturity to the USSR. The government limited exports to the USSR on a temporary basis beginning January 18, 1990, after cutting subsidies to firms exporting to CMEA countries in July 1988.45 These restrictions have led to the temporary closing of plants or layoffs in plants whose output is mainly for export to the USSR. Economic adjustment will be painful and likely to create mass unemployment.

If trade with the USSR, an important trade partner, is less desirable for Hungary, it has apparently no other realistic option than to turn to the West, 41 Oum, T.H. et al.(1990).

44 **This happened for the first time in 1988, when the surplus reached 424** million TRe.

I EIU, nr.4,1988. **Interestingly, subsidies and other incentives schemes given to exporters to the West have not been cut.**