If we were to answer the question as to what extent and which aspect of "new economy" is present in Hungary, we may find the presence of some (initial) elements, but the main growth factors are primarily still related to the transition. Economic restructuring, which followed the distraction of old structures, has generated economic growth in Hungary in the last five years. Presently, the Hungarian economy is characterised by relatively high growth, and with decreasing inflation in the long term. Similarly to some OECD countries, growing productivity, and (slowly) rising real wages have been coupled with a higher rate of employment. Labour productivity growth rates may be put down to technological progress, the high-tech branches of production, and services related to foreign direct investment alike.

In addition to the growing computer and software industry, and other ICTs, the fledgling attempts of E-commerce and banking services, the acceleration of information flow, the modernisation of the infrastructure, and the widening phone services may put down the basis of what is called “new economy” in the sense of ICT development. But as far as Hungary is concerned, the country is still lacking certain factors like the widespread use of Internet, significant inflow of venture capital, massive diffusion of e-business, substantial changes with respect to the notion of work, the prevalence of telework, significant investments in R&D, etc.

The "new economy" apparently encompasses all positive changes in

• communication,
• finance,
• trade,
• businesses management methods,
• network management methods and the organisational structure.

The elements of “new economy” may be identified as

• sustained high growth with minimal inflation,
• very low unemployment rate and effective utilisation of labour force and productivity,
• rising real wages,
• stock options to information and communication technology (ICT) and biotechnology, etc.
• venture capital to the Internet, etc. (Visco, Ignacio (2000))

The OECD’s answer of "Yes - in some respect" to the question "Is there a "new economy?" is valid with respect to the Hungarian economy, too. Nevertheless, it must be emphasised that during the first years of transition to market economy, the old production structure - together with full employment - was abolished. The economy was shaken and characterised by the scarcity of capital. The OECD normally associates characteristics like strong non-inflationary growth coupled with the increasing influence of information and communication technology (ICT). This has been partly observed also in Hungary but only since the mid-1990s. We must stress that it was only one of the factors influencing growth in the country.

Hungarian strategy makers (government policy) anticipate that the development of information society will stimulate economic growth and productivity, create new economic activities, and jobs.

When identifying some of the characteristics of "new economy", the following aspects cannot be ignored:

• easy and cheap access to, and the widespread use of the Internet
• e-commerce – challenging consumers and producers and governments
• changing the notion of work and workplace (telework)
• acceleration of information flow.

When attempting to find the answer as to what extent or which aspect of the "new economy" is present in Hungary, we may uncover that presence of “new economy” is very partial, or that the presence of some elements is not responsible so much for the specific character but for the consequences of "new economy". These elements include sustained growth with relatively low (and decreasing) inflation and unemployment rate, (slowly) rising real wages, the launching of e-commerce and e-banking services, the acceleration of information flow, widening phone services, and a growing computer and software industry, etc. All these factors may lay down the foundation of the future of the so-called new economy with respect to ICT development. However, certain elements of paramount importance are still badly missing in the new economy of Hungary. These include the widespread use of Internet, massive diffusion of e-business, substantial changes with respect to the notion of work, expansion of telework, significant investments in R&D, and significant amounts of venture capital in Internet, etc.

The key factors of present economic growth in Hungary may be identified as follows:

• liberalisation of trade and capital;
• market-oriented regulation of economy and society;
• privatisation - transition to market economy;
• foreign direct investment (FDI) by multinational companies in high tech, electronics, ICT area;
• stimulation of entrepreneurship, etc.

The factors of future sustainable and just as much "knowledge-based" growth in Hungary are the development of

• the basic conditions of market economy;
• infrastructure;
• small and medium-size enterprises;
• certain relevant branches like tourism ;

and the

• conscious channelling of foreign direct investments into environmental sectors and knowledge demanding sectors that generate great added value. These include biotechnology, telecommunications and information technology, which ought to be supported by investment incentives.
• Stimulation of knowledge based economy, raising the competitiveness of the economy by supporting the transfer of knowledge and co-operation between higher education and companies. The so called Co-operation Research Centers would bring tertiary education institutions, non-profit research institutes and the business sector together in order to develop up-to date technologies within the borders of the country.
• Establishing of an Institutional Network for the Development of Regional Innovation. The primary agents to accelerate knowledge transfer include technology transfer centres, innovation headquarters and industrial parks - along with their respective networks -, which should rely on the intellectual basis provided in higher education.
• Support of the application of generic technologies, especially the up-to-date information technological and communication technologies, as well as biotechnology.
• Increasing corporate innovation capacities, establishing innovation and information centres as well as institutions for the purpose of disbursing innovation.
• Improving the institutional infrastructure of research and development. According to the Széchenyi Plan, effective innovative activity and participation in international co-operation may only be based on a state-of-the-art research and development infrastructure. This makes it indispensable for Hungary to constantly develop the laboratories, the equipment and the information technological systems of research institutes.

What particular elements could stimulate the "new economy" with respect to ICT development in Hungary?

• Free access to Internet
• Adequate security systems for payment in e-commerce
• Electronic signing
• Legal regulations for consumer protection in e-commerce
• Regulations promoting telework in different areas of economy
• Growing proportion of budget spending for R&D
• Promoting private and increasing State investments in R&D and innovation
• Regulations (taxation) promoting innovation
• Development of regional knowledge bases (access to higher education in rural areas, too, use of tele-teaching, regional centres of higher education in the less developed regions of Hungary, too, etc).

Growth in Hungary was uneven during the 1990s. Hungary went through a growth slowdown and even an economic decline during the first years of the 1990s. The use of labour resources decreased and severe unemployment ensued. As a consequence of the substantial structural reforms and new policies, privatisation, the macroeconomic stabilisation and the heavy inflow of foreign direct investment, the economy was transformed, and since 1994/1995 the country has experienced growth in the GDP. The rate of growth since 1997 has been between 4 and 5 %. Employment has increased by 1,4 % and 3,1 % in 1998 and 1999, respectively.

According to the calculations of the Economic Growth Institute (Budapest), production in the computer industry in 1998 was more than sixtyfold of that in 1995, whereas production only doubled in all OECD countries in the same period. Production in the communication industry in 1998 was 4 times higher than in 1995, in contrast to all OECD countries where production was only 1,3 times greater. The other driving force behind Hungarian growth has been the car industry.

Production, 1998

1995=100

Source: Indicators of Industrial activity, OECD, No 1, 2000

The present phase, i.e. a period preceding EU accession, is characterised by simultaneous legal and institutional harmonisation processes, economic re-structuring, and steady growth combined with relatively low inflation. In the medium term – extending up to the anticipated date of effective accession – the economic policy considers the current dynamic rate of economic growth sustainable both in an economic (equilibrium, price stabilising and competitiveness related) and in a social (regional and cohesion related) sense. This rate of growth should suffice to enable Hungary to gradually bridge the gap with the EU.

Industrial productivity per worker has been growing by about 10 % per annum since the mid-90s. Notwithstanding the strong productivity growth, the level of production value per employee has been getting close to the average unit production value of developed countries only in the computing industry.

Production value/employee, Hungary 1997

Source: Economic Growth Institute (Budapest), 2000

The inflow of FDI to Hungary has played a determinant role in enhancing economic efficiency and promoting industrial restructuring. It contributed to the high rates of productivity gains in industry, reaching a yearly average of 10 percent between 1992-1999. (OECD (2000), p. 20).

Because of their access to capital and technology, firms with foreign involvement tend to be more productive, have a higher share in exports and are more profitable than domestic ones.

On a per capita basis, the cumulative amount invested in Hungary in the period 1989-1999 exceeded USD 900, by far the highest in the region. Meanwhile, during the first period, a substantial amount of FDI was centred around strategic privatisation projects, in the late 1990s greenfield and capacity expansion projects assumed a more important role with increased availability of incentives for investors, including the creation of industrial free trade zones. The stock of FDI for 1999 rose to around USD 19 billion (OECD (2000), p. 15).

Today inflow of FDI – although slowing something down - remain high, they seem to be established around 5 per cent of GDP per annum. Although the vast majority of the stock of accumulated FDI has found its way to western Hungary and primarily to the Budapest agglomeration, recently foreign investors have been increasingly attracted by the less developed parts of the country. This is mainly due to the emerging labour shortage in traditional destinations for FDI as well as the extension of a modern motorway into southern Hungary.

Initially, multinational companies based their activities on the cheap and relatively highly skilled Hungarian labour force. Now the motivation seems to change, and significant FDI is coming into the tech. Foreign companies in Hungary are shifting more and more to high-tech and high value-added products, and in some cases they establish research and development facilities in Hungary (e.g. Nokia, General Electric, Audi, Ericcson, Knorr-Bremse, Sanofi). They are motivated to use up the research bases and they outplace some of their R&D activity into Hungary. The objective is to put it close the education, basic and applied research.

Driven by the higher import demand from the EU, Hungary, as well as the other Central and Eastern European countries, are enjoying an export boom which fuels their GDP growth. Industry has been the main contributor to the economic recovery of the region whereas agriculture suffers from a severe drought. The cost advantages of successful CEE producers are rapidly improving. In 1998 high-tech products represented more than 16 per cent of exports. In the same year, high technology industries represented more than 23 per cent in the Hungarian exports. The role of free trade zones in Hungarian exports has significantly increased: in 1999 they accounted for approximately 43 per cent of Hungarian exports, compared to 36 per cent in 1998. Most of large, export-oriented automotive manufacturers, their suppliers and some newly established electronic plants are attracted to industrial free trade zones. (OECD (2000), p. 22). Despite the positive export performance, there is a need for the involvement of SMEs into the export business in a greater volume than currently.

The same Széchenyi Plan relies upon the economic philosophy of "network economy". In the era of globalisation, this philosophy places primary importance on linking to local and global networks as a means to increase the competitiveness of companies, regions, and national economies. The economic philosophy of network economy respects the priority of free competition, yet it emphasises the role of the state in widening the competitive economic environment and networks which may exercise a multiplying- and pull-effect on the whole of economy.

The main objective of the sub-contracting program of the Széchenyi Plan aims to demolish the currently prevailing dual structure of Hungarian economy and to strengthen production, and innovation and information ties of domestic small and medium size enterprises with multinational corporations with operations in Hungary. In order to achieve the general objective, the sub-contracting program sets the following additional objectives:

• reinforcement of market transparency for Hungarian small and medium size enterprises, i.e. improvement of information with respect to sub-contracting activities, and
• provision of a government level co-ordination and funding framework for Hungarian small and medium size enterprises to promote the establishment of sub-contractors’ relations with corporate enterprises and multinational companies operating in Hungary. (Source: Széchenyi Plan (2000)).

While the developed regions are believed to have reached a self-sustaining growth path, the lagging and relatively backward areas cannot pursue a similar course of development without government assistance. This idea lays behind the medium-term national development plan, called Széchenyi Plan, starting in 2001.

The development of interactive applications is fundamentally based on three factors: convergence, globalisation and universal network access. One may agree with the idea that the Information Economy and the Information Society which accompany it, rely upon the review and, where necessary, the revision of policies and policy frameworks today and the implications will be significant not only for the stimulation of economic growth and job opportunities, but also for a potential to provide social benefits and public services.

The transformation of the telecommunication sector in Hungary has been remarkably rapid. The privatisation of the state-owned monopoly (MATAV) to a consortium, composed of Deutsche Telecom, was completed in 1999 when the state sold all its remaining holdings except for one "golden" share. The system has been widely modernised.

The penetration rate for fixed network telephone service in 1998 was 32 lines per 100 inhabitants (as opposed to 11 lines in 1991). In 1998 there were 771 000 subscribers of mobile telephones in a country with a population of 10,1 million. In the same year, 60 per cent of the fixed network and 90 per cent of the mobile networks was digitised. The national optic cable network was about 3 400 km. The former, state-owned national Telephone Company, MATÁV, has been privatised, more than 90 % of its capital is held by the private sector, mostly by foreign companies. Its shares are quoted at the New York and Budapest stock exchanges. Three competing companies provide mobile services. About 50 per cent of the households are connected to cable television networks. (Source: Negotiation Position on Chapter 19 (1998)) In 2000 the number of personal computers in households amounted to around 600 000 (Estimation of Institute of Economic Growth).

The Hungarian National programme for adopting the Acquis (2000) underlines that the services and technologies of Information Society are critical to the economic development of countries and regions as they play a fundamental role in shaping the entire economy and society and the quality of life. It is Hungary's fundamental interest to rely on her capabilities (such as advanced state of telecommunications, availability of qualified experts, high-standard education) and build up Information Society as soon as possible and close up to the most advanced nations in order to be able to survive in global economic competition and guarantee a high quality of life for her citizens.

The liberalisation of the Hungarian telecommunication service is the most fundamental prerequisite for further development and the embedding some of the segments of "new economy".

The European Commission in its Opinion on Hungary’s Application for Membership concluded that “Hungary should have little difficulty in adopting the EC model of telecommunications liberalisation in the medium term because it has already implemented most of the acquis communautaire.”

The theses of the new Uniform Communications Act (EHT) have been prepared on the principles of full competition, universal services and Open Network Provision (ONP) to regulate the communications market in an EU-conform manner. They were adopted by the Government in their Decision 2350/1999 (XII.21.) Korm. (National Programme (p.207))

Exclusivity will expire on 31 October 2002 even in the case of a few local concessions; the last small monopolistic segment of switched telephone services. Competition will result in lower prices and, indirectly, lead to the creation of conditions for more effective enforcement of consumer interests. A Communications Act should be the primary source of law for harmonisation with the acquis communautaire. Certain provisions of the act will take effect only at the end of 2001 and in 2002 with the implementation of liberalisation. Under the authorisation of the act, the secondary sources of law (government decrees, ministerial decrees) prescribing regulations on particular areas in more detail will be issued in 2001 and 2002.

As a consequence of the liberalisation of the telecommunication market, the tariffs and prices are likely to decrease depending on the speed of the process. It may mean a turning point in Internet use and E-commerce as well as their related services. The other important task of regulating electronic commerce will fall within the responsibility of the Prime Minister’s Office, the Ministry of Economic Affairs, the Ministry of Finance and the Ministry of Justice.

The spreading of new types of work (e.g. telework) which require low industrial costs with respect to the creation of work-places would offer good opportunities for start-up entrepreneurship. Presently, psychical obstacles hinder the widespread application of telework.

Considering the growth factors of "new economy" from a theoretical angle, we may support the idea of the growth theory which concentrates on endogenesis of technical progress, on the important role of knowledge accumulation which requires extra-resources to be devoted to research and development activities where ‘ideas’ can be generated. An important characteristic of models of endogenous knowledge accumulation is that it is of public benefit, generating spatial externalities. In other words, knowledge is assumed freely 'spilling over' to all firms (and sometimes across countries, too) rather than being created and preserved within company walls. This knowledge is therefore naturally associated with research undertaken in the higher education sector. The unique characteristic of new knowledge of being of public benefit may allow some countries/regions to imitate new technologies at low cost, rather than compete in the production of new technologies.

Also, total factor productivity (TFP) growth will be faster in regions with greater concentration of applicable skills evidenced either because the region can innovate more readily or can imitate faster. So, reaping the external gains of technology transfers may require critical threshold levels of certain variables such as labour quality. It may be concluded therefore that education has an important role to play in raising labour skill levels above such thresholds allowing the economy to keep up a high growth rate. Of course, the migration of relevant labour skills (from high to low skill regions) will encourage technology transfer (and the convergence of regional income levels).

Klenow and Rodriguez-Clare (1997) calculated that 91% of cross-country differences in growth rates were due to differences in TFP growth, not in capital growth. They also re-examined results by Young (1994, 1996). They took into account that part of capital accumulation is simply a response to TFP growth.

In Hungary in the 1990's research, development and innovation suffered a steep decline. It was characteristic of the situation that between 1990 and 1998 the rate of expenditures on research and development relative to the GDP dropped from 1.6% to 0.7%, which remained far behind the 1.5-2.0% standard of the EU member states.

Simultaneously with the decrease of expenditures, the number of people employed in research and development fell dramatically. In an international comparison, in Hungary only ten researchers were employed per ten thousand inhabitants, while in France for example, this index figured 33, in Slovenia it was 25, and in Ireland it stood at 23.

Nevertheless, "in Hungary medical science, pharmaceutical research, molecular biology, agriculture, material sciences and gene technology have an established tradition and internationally recognised staffs of experts. The major multinational companies of health industry run most of the Hungarian pharmaceutical factories. Several small ventures have also been founded for the purposes of developing a small number of promising products, these hold out good hopes of great profit for the investors of risk capital. There are several applied research with prospective successful products". In information technological research and development "as a result of the traditionally high standard of training in mathematics as well as the oeuvres of our scientific notabilities Hungary has a considerable research potential. In certain specific fields of applied research outstanding results have been achieved in international co-operation. The development of special software tools built into other diverse products has earned us significant posts, which is due – besides expertise – to competitive wage costs." (Széchenyi plan (2000))

So, the note of the European Commission in its Opinion on Hungary’s application for membership is justified: “Despite the fall in investment and technical services in recent years, Hungary remains one of the strong performers among CEECs. The Hungarian scientific output ranks the country among the top 20 countries world-wide.”

The general decrease in research and development was accompanied by a major structural transformation. On the one hand, earlier domestic R&D activity was directly associated with but a few R&D intensive business lines - primarily with the chemical industry, pharmaceutical industry and machine engineering. By now information technology has taken over the lead in research and development. The imported innovation and technology acquired through the import of materials, parts and investment goods have become much more significant, too: the rate of import within the total amount of technology used in Hungary had risen to 73% already in 1997.

Up until now, the most relevant factors to give an impetus to innovation processes and encourage research and development activity have included foreign direct investments and the demand they had generated. By the end of the 1990's, it became clear that the individual elements of the currently operating national system of innovation – i.e. universities, research institutes, companies and mediating units – were insufficient to guarantee the success of these processes. The most significant objective set for the innovation program is to secure an exchange of information, strengthen the transfer of knowledge and co-operation between the scientific realm and the corporate sector. (Source: Széchenyi Plan (2000)).

According to Government Decree No. 114/1999, the National Committee for Technological Development (OMFB) was entitled to co-ordinate tasks in Hungary regarding the Fifth Framework Programme. On 1^st January 2000 the Ministry of Education (Ministry of Education - Research and Development Division) became the legal successor of the OMFB.

The OMFB took measures in November 1999 in order to execute the payment of the Hungarian national contribution to FP5 (Fifth Framework Programme of the European Community for Research, Technological Development and Demonstration Activities). The OMFB (the National Committee for Technological Development) began giving support to the Hungarian FEMIRC (Fellow Member of the Innovation Relay Centres) in 1998, and has been an official member of the FEMIRC consortium since January 1999.

The consortium which established the Hungarian EU RTD Liaison Office in Brussels was formed in 1998, with the participation of the Ministry of Education, the Ministry of Health, the Ministry of Agriculture and Regional Development, the Hungarian Academy of Sciences, the National Science Research Funds and the OMFB. The head of the office was selected in an open tender. The office was officially opened on 27^th September 1999.

In order to facilitate the building of international research consortia in FP5 projects, the OMFB launched a call for proposals to enhance competitive potential. (Source: National Programme (2000))

The Program for the Development of Research, Development and Innovation within the framework of the Széchenyi Plan aims to “achieve the critical mass that allows the economic application of scientific results, penetration to a tighter world market segment and the formation of regional scientific centres”. The same program raises the research support by 25-25 per cent in 2001 and 2002. The amount to be spent by the State on R&D tenders will be doubled in 2001. Market firms may reduce their income basis for corporate tax by 200 per cent of their R&D expenditures.

In its Opinion on Hungary’s application for membership the European Commission noted: “Hungary has a long tradition of excellent education facilities. The Hungarian educational system already met very high standards before the transformation.” According to the Commission’s assessment: “Hungary enjoys a solid background in education and training.” The Commission concluded: “In the perspective of accession, no major problems should be expected in these fields.”

The Hungarian Government's educational policy attaches paramount importance to education with regards to its role in the modernisation of the country.

In addition to preparing solutions for questions directly connected with EU accession, the Hungarian educational system has to play an active role in preparing the population – especially the younger generations and the target groups who play a special role in the process of integration – for accession and in improving the international competitiveness of the Hungarian labour force. According to the National Programme of Acquis Communitarire, the attainment of the above objectives requires that the following tasks be fulfilled:

• raising the standards of foreign language teaching. Taking into consideration the relevant Community objective, it is necessary to ensure the teaching of two ‘Community languages’ in all schools at all levels of education;
• strengthening the relationship between education and the world of labour, among other things, by creating the frameworks and conditions of life-long education;
• improving the situation with respect to equal opportunities in education (as for instance, through post-secondary vocational training, distance learning and adult education);
• conforming research in higher education to EU standards;
• ensuring the free flow of information, and conducting training; both are crucially important for widespread co-operation between institutions to evolve;
• defining development plans, monitoring structures, and the system of financing of the educational system in harmony with the EU's regional and human resource development concept and practice; involving participants in higher education in the elaboration and realisation of the regional development plans.

Based on Decision No. 1/97 of 4 August 1997 of the Association Council, Hungary has been participating in Community programmes in the fields of education (Socrates), training (Leonardo da Vinci) and youth (Youth for Europe).

The Hungarian Government is aware that the low level of salary paid to teachers, professors and educational personnel could have a negative impact on the quality of education. Therefore, the government is determined to increase the real wages of employees in education in the next four years by 7-10 per cent. (Source: Negotiating Position of the Government of the Republic of Hungary, On Chapter 18 EDUCATION AND TRAINING)

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