HUNGARY'S ECONOMIC STRATEGY IN DEALING WITH THE INDUSTRIAL WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030110-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: October 27, 2011
• Sequence Number: 110
• Publication Date: August 1, 1970
• Content Type: IM

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V r? ` V4+IL. r :!c r i~..?a- ? r v
JN G li 16
(f C/--%-~
DIRECTORATE1 OF
INTELLIGENCE
Intelligence Memorandum..
Hungary's Economic Strategy In Dealing With The Industrial West
ER IM 70-110
August 1970
Copy No. 43
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WARNING
This document contains information affecting the national
~efcnse of the United States, within the meaning of Title
18, sections 793 and 704, of the US Code, as amended.
Its transmission or revelation of its conte.lts to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
E.dud.d bon, .ul.mollt
d.wnprodinp and
d.d.u{rmtlon
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RF.C;R F'T`
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1970
INTELLIGENCE MEMORANDUM
Hungary's Economic Strategy
In Dealing With The Industrial West
Introduction
As East-West trade has expanded, the East Euro-
pean countries* have developed distinctive approaches
to it, adapted to their own political and economic
circumstances. Probably the most sensible and suc-
cessful policies have emerged in Hungary. The Hun-
garians in the 1960s have managed to expand their
trade with the West greatly while staying out of
serious financial difficulties -- a considerable
achievement in view of their heavy dependence on
foreign trade. This memorandum will examine Hun-
gary's strategy -- and its results -- in trade and
financial dealings with the industrial West.**
* Eastern Europe refers to Bulgaria, Czechoslovakia,
East Germany, Hungary, Poland, and Romania.
** For purposes of this memorandum, the industrial
West refers to Belgium-Luxembourg, France, West
Germany, Italy, the Netherlands, Austria,, Denmark,
Norway, Sweden, Switzerland, the United Kingdom,
Ireland, Canada, the United States, Japan, Australia,
and New Zealand. Finland and South Africa are ex-
cluded.
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current In-
teZZigenee.
SECRET 25X1
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^ SLUK.b J.
Problems
1. in the mid-1950s, Hungary was seriously
overextended in trading with the industrial West..
The Hungarian National Bank owed well over $100
million to principal trading partners in Western
Europe. With lagging export earnings, Hungary was
hard pressed to meet the relatively short-term
maturities on its Western obligations. But after
the abortive revolution of 1956, the regime was
able to make a fresh start with Soviet help; in
1957 the USSR paid off 90% of Hungary's hard cur-
rency debts. Because the USSR was willing to
accept, goods in repayment for the hard currency
loan, Hungary found itself in a.tenable financial
position vis-a-vis the industrial West.
2. The regime learned its lesson. In the
1960s, even though sales to the industrial West
grew rapidly -- exports tripled from 1959 to
1969.-- the leadership remained highly realistic
about the uncertainty of exports to the West.
About one-half of these exports are agricultural
.and food products, for which export prices rose
substantially in the 1960s. Unfortunately they
are subject to erratic fluctuations in domestic
crops; they also face variable demand conditions
and trade discrimination in a. West European market
increasingly saturated with protected agricultural
output.. Hungary's industrial exports -- especially
intermediate manufactures -- benefited considerably
from the boom in Western Europe during most of the
1960s. But, as the Hungarians realized, their in-
dustrial enterprises are mostly marginal suppliers,
which are bound to suffer heavy losses in sales
during periods of slowing growth or recession in
the West.
3. This realistic view of Hungary's export
position, together with fears of further West
European integration and protectionism, has led
the Kadar regime to adopt a highly selective trade
and financial policy, which has been in many ways
unique in Eastern Europe. Hungary has been no less
eager to import from the West than other East Euro-
pean countries, but has been more cautious than
most in buying on credit from the West.
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Import Policy
4. Although the Hungarians have run imbalances
in trade. with the industrial West and have incurred
substantial indebtedness in the process, they have
consistently tried to gear imports to the erra,:':.ic
growth of their exports. As shown in Table 1, the
rate of growth of imports fell sharply in 1962 after
exports had sagged in 1961, rose sharply in 1963-64
after exports had picked up in 1962-63, fell again
in 1965 after exports had slackened in 1964, and
moved roughly in step with exports throughout the
rest of the 1960s. For the 1960s as a whole, ex-
ports rose at an average annual rate of 11.6% and
imports at 10.8%. Other East European countries,
on the. other hand, especially Bulgaria and Romania,
allowed imports from the West to rise not only
rapidly but also consistently for several years in
the 1960s in,apite of erratic export earnings.
Table 1
Year
Pxports
Im
orts
p
1960
7.5
30.9
1961
0.6
10.4
1962
12.8
-1.3
1963
27.3
24.2
1964
9.7
21.2
1965
11.7
0.6
1966
17.2
4.6
1967
4.0
12.4
1968
-2.7
-3.6
1969
33.0
13.6
5. Another distinctive feature of Hungary's
import policy has been the relatively small scale
of purchases of machinery and equipment from the
West. Hungary apparently has been less caught up
in the race to broaden its industrial base and to
diversify and upgrade its capital stock by infusing
Western plant and equipment. Machinery imports
Growth in Hungary's Trade
with the Industrial West
Percentage Increase over Preceding Year
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from the West have not been insignificant; in
1966-68 they were worth $285 million. But in the
same period, Bulgaria bought $400 million, Czecho-
slovakia $562 million, and Romania $885 million.
Only Poland had as low a-per capita import of
Wes'-.ern machinery and equipment in this period.
6. Imports of machinery account for a smaller
share of total imports from the industrial West in
Hungary than elsewhere in Eastern Europe. In 1968,
imports of machinery made up one-fourth of Hungarian
purchases in the industrial West; the next lowest
share was Poland's, at 31%; Romania's was highest
with 56%. Moreover, Hungary has purchased a smaller
range of equipment and in smaller individual orders,
especially compared with Bulgaria and Romania, a
large part of whose machinery imports are purchases
of complete plants. Hungary has tended to stress
imports that help in modernizing and expanding
existing plants.
7. Although importing less Western machinery,
Hungary imports relatively more Western industrial
materials. Bilateral trade with the Soviet bloc
has largely supplied Hungary's needs for imports
of coal, iron ore, oil, wood, and fertilizer, but
Hungary has turned to the West for large imports
of chemical raw materials to support the rapid
growth of its petrochemical industry and for sizable
imports of dyes, tanning and coloring agents, and
textile materials to support its large textile in-
dustry. Imports of chemicals, textiles, and other
raw and semifinished materials currently make up
over 60% of total imports from the industrial
West -- a far larger share than in most other East
European countries. Imports used directly as in-
puts by the chemical industry represent an un-
usually high percentage of the value of output,
rising to 30% of the output of mineral fertilizers
and inorganic chemicals (in 1965). Industrial
development has probably been less oriented toward
import substitution in Hungary than in most other
East European countries. Even so, the Hungarians
lead in lamenting the ineffectiveness of import
substitution as a policy and the part it has
played in the long-run deterioration of Hungary's
trade balance with the West.
8. Under the economic reform of 1968, which
allows enterprises partial freedom to import what
they want, the regime has continued to decide the
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composition and level of imports from both East
and West through selective "indirect" controls.
These include credit restrictions and deposit re-
quirements for some imports, differential exchange
rates of 40 forints to the ruble and 60 forints to
the dollar to encourage ruble imports (and dollar
exports), and sharply differentiated tariffs which
are directed solely at the West -- a point that
the Hungarians avoid talking about.
9. Tariff rates vary a good deal. For example,
the rate for railroad rolling stock and buses is
65% of the basic import price; for electric gener-
ators, 50%; and for machine tools, 35% to 50%. The
Hungarians have stated that the purpose of these
admittedly high rates for machinery is:
... to protect domestic products and so-
cialist Imports against relatively inex-
pensive machines from capitalist countries,
to limit temporarily capitalist machine
imports, and to keep. the foreign currency
outflow for this purpose below a certain
level.
The tariffs, combined with the high forint/dollar
rate, should help a good deal in controlling im-
ports from the West.
10. The Hungarians continually dispute over
the economic effect of high tariff rates -- and
more or less liberal exemptions. But the regime
must either keep to sharply differentiated tariffs
as part of the elaborate system of "indirect" con-
trols or else revert to systematic central control
of trade. One way or another, the regime intends
to direct foreign trade to desired ends.
Cooperation Agreements
11. The Hungarians have been far more forward
about cooperating with Western firn:,3 than about
buying from them. Hungary has been the leader in
the Soviet bloc in undertaking licensing and coop-
eration agreements with the industrial West. The
returns from license purchases have been disap-
pointing, with directly attributable export earnings
in the West amounting to barely $1 million annually
thus far. Still, cooperation agreements have en-
abled Hungary to deepen economic relations with
advanced Western firms in a number., of useful ways,
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including the domestic assembly of foreign parts,
raw materials processing, joint production for
third countries, and even joint companies. For
example, Hungary's Gyor works has arranged with
Renault-MAN-Ferrostahl to purchase plant and equip-
ment and two licenses to manufacture MAN diesel
engines; 60% was to be repaid by supplying engine
spare parts and 40% in hard currency. Volkswagen
and Shell have agreed to set up service stations
in Hungary; in 1969 Shell agreed to set up 10 more
stations and to accept forints as well as hard cur-
rency.in payment. The stations will be supplied-
with Hungarian gasoline processed to Shell specifi-
cations. A joint company called Technotrans has been
established between the Compagnie Francaise des Fer-
railles and Technoimpex, with 60% of the capital
put up by the French and 40% by the Hungarians.
The company is to promote the sale of Hungarian
machine tools, electric motors and electric appli-
ances in France and to export French products to
Hungary.
12. Hungary has been negotiating with two
American firms -- Control Data Corporation and Ford
Motor Company -- re n proposals for investing
capital in Hun gar
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Soviets have given tacit approval to Hungary to
grant minority foreign ownership to Western in-
vestors, on a selective basis. Regulations con-
cerning foreign investment are expected later this
year. The level of activity in this field will
probably depend, as in Yugoslavia, upon the poten-
tial of projects for earning hard curroncy, and
the terms of repatriation of profits and capital.
Financial Dealings
13? Hungary's prudent trade policy has been
complemented by a conservative financial policy.
The regime's preference for buying Western machinery
and equipment in small quantities instead of buying
complete plants has required bankers and trade
officials to know their business. They have made a
serious effort to grasp the complexities of Western
markets and the ins and outs of Western business
and financial methods. As a result-, Hungarian
officials have gained a reputation for shrewd
financial dealings with the West. They have been
adept at arranging switch deals, engaging in Eurodollar
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transactions, and otherwise getting the most for
their deposits in Western money markets. And they
have been hard-nosed bargainers, refusing to follow
Bulgaria and Romania down the road of heavy borrow-
ing in the West.
14. The quest for bargains has many times
taken precedence over the desire for capital equip-
ment. Hungarian trade negotiators, compared with
those in some East European countries, have been
less willing to accept inferior credit terms and
excessive prices. As early as 1959, Hungary was
trying to switch as much trade as possible away
from West Germany to other Western European coun-
tries due to a "difficult credit situation" in
West Germany. Several deals fell through in 1959
solely because of high West German credit charges.
In 1963, Hungar.'y was obtaining one-year credits at
a respectab'? 3% interest rate for raw materials
imports from Western Europe, but was still pushing
for terms of five years on purchases as small as
$150,000. The Hungarians have frequently played
one Western supplier against another, claiming a
better deal elsewhere, and in general trying to
heighten Western competition for East European
business. It is likely that the rapid improvement
in East European credit availabilities in Western
Europe in the 1'60s can be traced in part to Hun-
gary's stubborn efforts.
15. Financial conservatism on the part of
bankers and trade officials is reflected in the
gradual rise in Hungarian indebtedness. Since
1964, when indebtedness rose some $80 million,
partly as a result of a 300,000 ton ($15 million)
grain purchase, the increments have not run above
10% of the value of exports -- that is, about, the
average expected increase in the value of exports.
.In other words, Hungary has apparently decided to
maintain indebtedness at roughly one-half the value
of exports, a fairly conservative policy by East
European standards. This policy has kept Hungary
from the imprudent conduct of Bulgaria, which in
1968 owed double the amount of its exports and had
to call on the USSR for help and guidance. Nor can
Hungary afford the heavy purchas3s of Romania,
which now owes 140% of its annual exports. And
Hungary has been less willing to take risks than
Czechoslovakia and Poland -- both of which owe well
over one-half the value of their annual exports to
the industrial West.
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16. As trade with the industrial West has evolved
from bilateral clearing agreements to multilateral
hard currency trade, and as Hungary's credit worthi-
ness has been established in Western Europe, the mode
of its import financing in the West has changed
markedly -- as it has for other East European coun-
tries. Hungarian short-term indebtedness has changed
from 180 day to 360 day overdrafts on swing balances,
to short-term hard currency acceptance credits and
current account supplier credits, as well as other
types of facilities which can readily be converted
into medium-term facilities as the need arises.
Medium and long-term credits formerly secured by
gold are now financed in most cases merely on the
basis of East European central bank guarantees,
The development of trade also has been promoted by
the liberalization and expansion of Western export
credit guarantee services. Since the late 1950s,
Hungarian commercial. paper has moved rather freely
in Western money markets, at respectable and stable
discount rates. It-has generally not suffered the
periodic loss of confidence (as reflected in high
discount rates) to which the commercial paper of
Yugoslavia (in the 1950s), Bulgaria, and Romania
has been subjected.
17. An important factor in the expansion of
East-West trade has been the activities of Soviet-
owned banks in Western Europe, which have encouraged
and taken part in Western lending to Eastern Europe.
Hungary has made extensive use of short and medium-
term credit facilities offered by the Moscow Narodny
Bank (MNB) in London, and the Banque Commerciale
Pour L'Europe du Nord (BCEN or Eurobank) in Paris --
the, two largest such institutions. Since the early
1960s, Eurobank has been far less active in direct
lending than has the MNB. By the late 1960s, prob-
ably over three-fourths of East European di.-eat
borrowing from the two banks was,conducted with
MNB. Until the mid-1960s, these banks dealt almost
exclusively with short-term financing (18 months or
less) serving as an outlet. for East European gold
as collateral or for sale, and otherwise bridging
the business communications gap between the East
and the West. Since the mid-1960s, the two banks
have offered small amounts of medium-term credit,
most of which has come from the MNB. Other Western
financial institutions -- in Italy, West Germany,
France, Austria, the United Kingdom, and Switzer-
land -- have supplied most of Eastern Europe's needs
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for medium and long-term credit. At the present
time, the share of the BCEN and the MNB in total
East-West trade financing is not very large. Never-
theless, their discounting and Eurocurrency opera-
tions play an important role in assuring a smooth
flow of credit to Eastern Europe.
18. Hungary generally has conducted gold trans-
fers and Eurocurrency dealings as well as deposit
banking business with the BCEN (which offered better
rates) and has conducted credit operations through
both banks, using the BCEN for most business in
Continental Europe, Africa, and Asia, and using
the MNB for dealings within the sterling area.
Until the early 1960s, Hungary's dealings with the
MNB were fairly limited; relations had never been
particularly good and there often were difficulties
By early 1966, about 70% of Hungary's imports from
the sterling area were transacted through the MNB.
Hungary is currently channeling a significant part
of its short-term business through both the BCEN
and the MNB, with total deposits (assets) and credit
liabilities amounting to an average of perhaps $75
million to $100 million at any one time. As with
other East European countries, however, most of
Hungary's medium and long-term indebtedness is owed
to other financial institutions in the West.
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Balance of Payments with the industrial West
19. Hungary' probably owes less money in the West
than does any other East European country except
Bulgaria which, with Soviet assistance, has substan-
tially reduced its indebtedness since 1968. At the
present time, Hungarian indebtedness on medium (under
5 years) and long-term (over 5 years) is roughly $260
million to $270 million, of which roughly $200 million
is owed to NATO trading partners in the industrial
West; and $60 million to $70 million is owed to.
non-NATO partners.-- Austria, Switzerland, Sweden, and
Japan. This does not include $60 million to $70 million
on short-term, most of which must be turned over yearly.
In contrast, Romania owes about $700 million, Czecho-
slovakia, about $400 million, Poland, $600 million
(excluding US PL-480 credits), and East Germany, about
$700 million (including overdrafts on its swing
balance with West Germany).
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Current Account
20. Balances on current account with Western
partners seem to bear little relation to purchases
on credit from them. Austria, France, ai:d the
United Kingdom have large cumulative surpluses in
trade with Hungary. Hungary, on the other hand,
has cumulative surpluses of over $100 million with
both Italy and Switzerland. Trade with West Ger-
many has very nearly balanced out; Hungary has a
cumulative deficit of only $23 million. The Hun-
garian.,,z have bought on credit from both groups of
partners and from West Germany, as well as from
all of their significant trading partners in Europe.
In other words, trade with these countries is truly
multilateral; convertible surpluses with some coun-
tries are freely used to settle deficits with
others. This flexibility doubtless helps Hungary
to maintain liquidity.
21. Hungary's trade with Western bilateral
soft currency trading partners who, by definition,
are not part of the industrial West has been a
significant source of non-monetary medium-term
credit for Hungary, and thus a further means of
increasing liquidity and flexibility. Since 1964,
Hungary has incurred a trade deficit of about
$100 million with these countries, including
India, Finland, Greece, Turkey, Spain, and Brazil.
This figure dues not include less developed hard
currency trading partners, the net earn:.ngs from
whom are included in the current account balance
as a probable source of hard currency. In 1969,
Hungary ran a small surplus in bilateral soft-
currency trade and appeared to have begun an
effort to bring it into balance.
22. As shown in Table 2, Hungary's cumulative
trade deficit with the industrial West in the
period 1959-69 was $460.8 million. Except for
1959, 1966, and 1969, annual trade deficits in
this period exceeded $40 million. in 1969, exports
increased $124 million, and Hungary ran its only
trade surplus of the 1960s -- amounting to $19 mil-
lion.
23. The data given for commodity trade are
official Hungarian statistics, which follow c neral
Western practice in showing exports f.o.b. and im-
ports c.i.f. the Hungarian border. Consequently,
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Total
1959
1960
1961
1962
1963
1964
1965
1'166
1967
1968
:1969
1959-69
Commodity trade
Exports f.o.b.
166.1
178.6
179.7
202.7
258.1
283.2
316.4
370.8
385.6
375.2
499.0
3,215.4
Imports c.i.f.
172.7
226.0
249.6
246.3
305.9
370.9
373.0
390.0
438.5
422.9
480.4
3,67C.2
+18.6
-460.8
Tourism ,
0.6
1.3
1.7
1.9
1.1
2.3
7.2
11.2
10.7
10.6
13.1
61.7
Transportation
4.5
4.8
4.9
5.5
7.0
7.6
8.5
10.0
10.4
10.1
13.5
86.8
Remittances
6.2
6.3
5.7
7.3
3.5
3.5
3.3
3.5
3.7
3.8
4.7
51.5
Compensation payments
-1.3
-1.6
-1.6
-0.9
-1.1
-1.4
-1.2
-1.3
-1.7
-1.6
-1.5
-15.2
Subscriptions to international
organizations
-0.6
-0.6
-0.6
-0.8
-0.8
-1.2
-1.2
-3.4 b/
-1.4
-1.4
-1.4
-13.4
Net interest income
-3.4
-4.0
-4.5
-4.8
-6.1
-10.4
-14.6
-15.7
-17.4
-20.9
-24.1
-125.9
Net hard currency trade with less
developed countries
+3.2
+8.0
+7.6
+1.5
-2.6
-8.8
+1.4
-3.8
+6.0
+9.7
Balance on current account
+2.6
-33.2
-56.7
-33.9
-46.8
-96.1
-53.2
-18.7
-42.6
-37.4
Cn
Capital account
C)
Short term borrowing
Drawings
20
24
23
25
32
39
42
47
53
56
60
Repayments
-20
-20 '
-24
-23
-25
-22
-47
-51
-46
-50
-56
Medium and long-term borrowing
NATO drawings
18
24
22
27
34
70
51
47
45
54
45
Other drawings
3
5
3
5
8
13
11
9
10
L3
13-
Repayments
-6
-7
-16
-21
-21
-19
-29
-34
-41
-45
-50
Net foreign investment, west
15
26
8
13
28
82
28
18
21
28
10
276.0
'Repayments on 1958 Chinese loan c/
0
-3
-3
-3
-3
-3
-3
-3
-3
-3
-3
-30.0
Total net foreign Investment
15
23
5
10
25
78
25
15
18
25
7
246.0
Monetary gold and foreign exchange
reserves
--
-1.0
-2.0
-2.0
-2.0
?2.0
--
--
--
-
-25.0
-34.0
Clearing account balances
1.6
7.6
12.7
21.0
36.6
2.3
-3.3
-15.1
13.2
4.2
-11.1
69.7
Other transactions and errors and
omissions
-19.2
3.6
41.0
4.9
-12.8
17.8
31.5
18.8
11.4
8.2
-9.2
96.0
Ba
lance on capital account
-2.6
33.2
56.7
33.9
46.8
96.1
53.2
18.7
42.6
37.4
-38.3
377.7
a. Including international fare payments and visas.
b. Including $2.1 million in hard currency subscription to the CEMA Bank which fell due in 1966.
c. A hard currency loan of $30 million, assumed to have been paid off in equal instaZZments during 1960-69. Estimated interest
on this loan is included in the current account.
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transportation charges for imports are included in
the trade statistics, The Hungarians earn something
on balance from other transportation -- net receipts
from expot deliveries and fees for freight trans-
iting Hungary. These earnings, which are included
under service transactions, are estimated from a
Hungarian figure for gross hard currency transport
earnings for 1969 -- $43.2 million or 8.7% of ex-
ports in 1969. Gross earnings are partly offset
by Hungarian payments ?o_ transport fees on exports
to the West such as shipping and port charges.
These fees are substantial, averaging about 6% of
Hungarian exports to such countries as the United
Kingdom, West Germany, France, Belgium, the Nether-
lands, Sweden, and Norway. Thus a net percentage
of 2.7% of exports is estimated to represent
transport earnings for 1959-69.*
24. The other large source of hard currency in
the services account now is net tourist earnings,
reflecting intensive efforts since the mid-1960s
to expand tourist accommodations. Hungarian hotels
reportedly even discriminate against tourists from
other Communist (that is, soft currency) countries
in favor of Westerners with dollars, in order to
maximize earnings in hard currency. Net tourist
earnings in 1959-65 are taken from a Hungarian
tourism publication,** and earnings for 1966-69
are estimated from Hungarian data on tourist traffic
and on average spending of Western and Hungarian
tourists. Remittances -- hard currency earned
abroad and sent to Hungary -- dominated invisibles
earnings through the early 1960s, but have declined
in importance since then. Estimated remittances
are based on. data from the United States, which is
believed to account for 40% of total remittances
from the industrial West.
25. Net interest payments on outstanding in-
debtedness have been smaller than for most other
East European countries not only because the Hun-
garians have owed less money over the years than
most other East European countries but also because
they were more particular about interest rates in
* If the transport cost included -in imports is
counted, however, the Hungarians incur a substan-
tial deficit in net transport earnings -- probably
exceeding $25 million in 1969.
** Idegenforgalmi Adattar, 1966.
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incurring debts. Interest payments did not become
a significant item until the mid-1960s. By con-
trast, Romanian interest costs in the West at that
time were twice those of Hungary and have continued
to grow substantially since then. Hungary's not
hard currency trade with less developed countries
is included in the current account, because net
earnings from this source can be applied to reducing
indebtedness to the industrial West or adding to
reserves of gold or hard currency. For the same
reason, interest payments include the charges on a
$30 million Chinese hard currency loan granted in
1958.
Capital Account
26. Hungarian deficits for trade and services
and net earnings from less developed hard currency
trading partners combined to produce a cumulative
deficit on current account with the industrial
West of about $380 million during 1959-69. This
deficit was covered largely by commercial credits
and untied Eurocurrency bank loans granted in
Western Europe to finance purchases mainly of
machinery and equipment and semifinished manufac-
tures and raw materials. These may well have been
underestimated, given the significant residual
representing errors and omissions.
27. In a recent press release,* Bela Csikos-
Nagy, the chairman of the reform-initiated National
Materials and Price Control Board, stated that
"Hungary's liabilities to its Western partners,
resulting from trade between 1965 and 196' amount
to 2 billion foreign exchange forint" (rc."ghly
$170 million). It is not known whether this refers
only to a hard currency bank debt, or whether it
also includes imbalances in clearing accounts with
Western soft-currency partners -- a form of non-
monetary debt, since almost all such imbalances
are settled through goods shipments. If the ref-
erence is to bank credits alone, then probably a
significant portion of the errors and omissions
residual for 1965-69 represents additional medium
and long-term drawings over and above the estimated
levels, which would increase the indebtedness to
$325 million-$350 million. If soft-currency
clearing account balances are included in the
Magyar Hirlap, 10 February 1970.
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3E URJ!;"J.'
$170 million, than the estimates of medium and
long-term drawings an they stand are fairly ac-
cu: ate .
28. Short-term and extended short-term (90 days
to 2 years) borrowings are assumed to cover at
least 15% of imports of raw materials and semi-
finished goods, with most drawings being ,ancellad
out by repayments within 12 months. Drawings on
short-term credit in 1969 are oatimated at about
$60 million. Since the mid-1960,x, medium and long-
term drawings have averaged about $55 million to
$60 million annually, principally to cover imports
of machinery and semimanufacturos. NATO drawings
for 1966-69 were derived by lagging credit exton-
sions reported by NATO members. They were than
calculated as a share of imports of Western machin-
ery and equipment for those years, and the average
share (52%) was then moved back to 1959. NATO credits
have averaged about 80% to 85% of the total. Re-
payments on medium and long-term credit from the
industrial West have increased substantially since
1964, reaching a peak of $50 million in 1969.
29. Official figures on monetary gold and
foreign exchange reserves were last published in
1950, when Hungary held the equivalent of $41 mil-
lion. Hungary sold perhaps $15 million worth of
gold in 1957 in order to pay off roughly 10% of its
indebtednea: to the West, the remainder having been
settled by the USSR, as noted earlier. ,':n 1965,
an official of the Hungarian National Dank mentioned
a current gold reserve figure of $35 million. It is
presumed that the Hungarians could have added $9
million to their gold supply between 1960 and 1964.
Accumulation of foreign exchange reserves is assumed
to have been negligible until 1969, when hard currency
reserves probably were built up to perhaps $25 million.
Clearing account balances represent trade balances
with bilateral trading partners (France until 1964,
Austria, and Switzerland), where provision for swing
balances has been made. Hungary has used such deficit
balances on occasion as a source of short and medium-term
credit. It is assumed that deficits on clearing balances
have been liquidated under the terms of swing limits
agreements through repayments in goods or by conversion
into medium-term indebtedness.
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S C1t1~PT
The Seventies
30. No major chango in strategy in expected
in the 1970n. The llungariana are expected to
follow the eonnervativo policies that have kept
them from nerioun balance-of-payments problems
with the West. Imports will continua to be manip-
ulated in line with exports, and Hungarian officials
will remain selective in their credit dealings with
the West. An added inoontivo for caution has been
provided by the economic reform of 1968, which has
loft the leadership more open to criticism -- both
from within and from the USSR. Already highly re-
luctant to have to call on the USSR again to bail
them out of any financial difficulties with the
Want, the tlungariane may tread even more carefully,
at lust until the reform is fully phased into the
.
ocQnomy.
31. An far as trade with the industrial Want is
concerned, the reform is a logical oxtennion of tNe
strategy that has emerged since the late 1950o.
The reforms have sharpened incentives for exporting
to the Went and have refined the technique of deter-
mining the volume and structure of imports from the
West. "Indirect" controls, backed up with the power
to impose direct: controls if need be, represent a
further attempt to atoor exporters to salon oppor-
tunition in the West. Moreover, some enterprises
have bean given greater authority to conduct their
own trade instead of working exclusively through
state trading firma. This should facilitate in-
creased firm-to-firm contact and more cooperation
agreements with the Wont.
32. Some Hungarian officials have credited the
reform with playing a major role in stimulating
exports and hence achieving a favorable balance
of payments with the Wont in 1969. In reality, the
331 inereana in exports to the industrial Want in
1969 in explained by a record harvont, a quick revi-
val of meat sales to Italy, and a substantial rise
in prices on the western market, particularly in
Wont Germany. The record was not straight by
Hungary's foreign trade minister, Jossef biro:
The favorable achievements of foreign trade
in 1969 largely resulted from increased ex-
ports of basic materials and agricultural
produce. However, the ability of processed
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industrial goods to compete in capitalist
markets can still not be said to be satis-
factory.
Thus far, the only major change that can be attrib-
uted even indirectly to the reform in an increased
emphasis on imports of Western consumer goods.
Anxious to give tangible evidence to its citizens
of the success of the reforms, the government has
announced plans to increase consumer goods imports
by 70% in 1970, with an unprecedented $29 million
allocated for purchases of clothing and other con-
sumer manufactures.
33. Tangible results from the reform in pro-
moting exports probably will come slowly if at all.
Factors such an domestic crop conditions and vari-
able foreign demand for Hungarian products doubtless
will continue to dominate -- and at times disturb --
ttungary's export performance in the 1970e. And fac-
tore outside the reform itself, such as selective bor-
rowing from the West in support of export industries,
probably will account for any significant improve-
ments that may take place in the structure of ex-
ports in the 1970x. For example, plans for the
aluminum industry -- already a major hard currency
earner -- should shortly make it the most important
exporter to the West within the manufacturing sec-
tor. This industry is elated for huge investments,
largo Soviet credits. and integration with the Soviet
aluminum industry. In addition, Hungary recently
borrowed S15 milli. fro. a London=based voneoi`tiim
for purchases of advanced Western equipment and
t - gY .... 41,V .....0 ...d :.b~rj w0 r44 L G;-;P4 an
world markets. Mother rising export industry -
-pharmaceuticals -- has received a loan of $30 million
from a Western consortium, enough to cover about one-
third of the total invastnt outlays scheduled for
this industry during 1971-7S.
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Conclusions
34. Hungary's strategy in trade with the West
amen the late 1950n probably has been the most
successful in Eastern Europe. Thin strategy,
evolving from a realistic assessment by the Hun-
garians of their ability to export to the Went,
has combined import restraint and careful credit
dealings with forward-looking cooperation agree-
manta with Western firma. As a result, Hungary
today owes lane money to the West than the other
taut European countries except fiulgaria, and in in
a relatively better position to continue to expand
trade with the Went in the 1970n without incurring
serious financial problema. The Hungarians have
indeed learned a lesson from the mid-1950n, when
they were extricated from heavy hard currency debts
by the USSR.
35. Hungary still will have difficulty in
sustaining increases in exports to the West. The
mainstay of exports in the 1970a an before will be
sales of agricultural produe to -- which still will
be as erratic as Hungarian weather conditions.
Greater efforts will be made to make industrial
output more competitive, and the reforms should
help to focus enterprise attention on opportu-
nities in Wantern markets. Itowevar, Hungary will
continue to rely heavily on import controls and
on the incrained conaarvatiam of its ba.n.king and
trade ofiiciala to hold down ite balance-of-
payraenta deficits with tha ueet,
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