Judit Kiss: Hungary


• The main principles and objectives of the Hungarian development cooperation strategy
• The main priorities of development cooperation policy
• The present state of development cooperation in Hungary
• The main strategic issues of development cooperation
• The financing of development cooperation
• The tasks of institution building
• Trade with developing countries
• The impact of EU accession on Hungary’s relations with developing countries

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Judit Kiss: Hungary

The main principles and objectives of the Hungarian development cooperation strategy

Though Hungary’s economic potential and development lag behind those of the present EU members, as an OECD member-country and as a candidate for the DAC (Development Assistance Committee) and EU membership, Hungary is trying to formulate its own development cooperation policy. Whilst previously the EU did not urge the establishment of an independent development cooperation system for the candidate countries, in 2000 the EU stated the related institution-building tasks incumbent upon potential members. At the same time, there is increasing pressure from both donor and recipient countries to become more actively involved in the development cooperation process. However, it takes time to change from being a recipient into an effective donor.

Hungarian development cooperation policy is an integral part of the country’s foreign, economic, and financial policies; however, it should reflect the interests not only of the donor country, but also those of the recipient countries and also the EU. It should at the same time be integrated into the EU’s development cooperation policy.

The main objectives of Hungary’s development cooperation strategy are as follows:

• to preserve international peace and security, and to create regional stability
• to promote sustainable economic and social development in developing countries, with due regard for the least developed countries
• to defend human rights and the principle of equality; strengthen the institutions of democracy and civil society and improve the situation of national minorities
• to increase the well-being of ethnic Hungarians living in neighbouring countries and support the realisation of their ethnic identity
• to promote social and economic development with special regard to basic needs, health and education
• to promote good governance
• to protect the environment
• to play an active role in the international development institutions;
• to obtain DAC membership.

The realisation of these goals – which we present in no particular order – requires a complex approach: a balance should be attained between international commitments, expectations, and national possibilities, as well as between global and national interests.

The main priorities of development cooperation policy

Hungarian development cooperation policy is based on both foreign-policy and economic considerations. Among the foreign-policy priorities are Euro-Atlantic integration, regional stability, and ethnic Hungarian minorities living in neighbouring countries. Consequently, the main targets of Hungarian development cooperation policy and humanitarian aid are countries of Central and Eastern Europe, although Hungary also provides assistance in the "classical sense" – that is, to developing countries, the main target groups in this instance being situated relatively close to Hungary, namely in the Near East and Central Asia, with the addition of countries assisted by the OECD and the EU. Hungary’s position is that the geographical di-

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stribution of development aid should be handled flexibly, that is, it should be adapted to the changing international situation and revised from time to time. Long-term, project-type assistance should be bestowed on democratic countries with stable political and economic systems.

In addition to foreign-policy considerations, economic interests should be taken into account in development cooperation decisions. In the case of the neighbouring countries it is in Hungary’s economic and foreign-trade interest to contribute to the stability and development of the region. Within the framework of the Southern European Stability Pact Hungary made available a non-repayable grant to the countries of the region, for which purpose the Hungarian Eximbank opened a concessionary credit window of €100 million. The proper form of development cooperation for these countries is technical assistance (education, training, expertise), which can directly promote Hungarian investments.

Assistance given to developing countries should be based on foreign-policy, economic, and humanitarian considerations. Although Hungary’s presence in the developing world has decreased significantly at both government and enterprise level since the start of the transition, some Hungarian interests could justify the revitalisation of relations. The framework for development cooperation should be existing personal contacts and long-term traditions. Provision of credits should be considered on economic grounds as Hungary has accumulated "frozen" debts in a number of developing countries (Angola, Ethiopia, Nicaragua, Sudan, Yemen). Debt relief or write-offs are options only in the case of the most severely indebted countries.

Hungarian development cooperation should focus on those sectors and areas where Hungary has a ‘comparative advantage’. These are the following:

• sharing Hungarian experience concerning political and economic transformation with special regard to the establishment of democratic institutions, building a market economy, privatisation, supporting small and medium-size enterprises, good governance, and so on
• intellectual capital and knowledge-based assistance (for example, know-how, software)
• education at graduate and post-graduate level, training
• health (planning and equipping hospitals, birth and epidemic control)
• agriculture and the food industry (seed improvement, animal breeding, plant protection, reforestation, biotechnology, agrometeorology, extension services, farm and food industry planning, training of agricultural technicians and experts)
• water management (planning of reservoirs and dams, water cleaning, drainage, land reclamation)
• development of infrastructure
• environmental protection.

The present state of development cooperation in Hungary

At the moment, Hungarian development cooperation policy does not have an established institutional basis. Prior to the transition Hungarian development assistance – mainly technical assistance – was conducted by TESCO, a government institution specialising in technical and scientific cooperation with developing countries. During this period Hungary signed technical and scientific cooperation agreements with 57 developing countries, mainly on ideological and political grounds. The chief aim of the agreements was to pave the way for the export of

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services; however, this goal was achieved only in some cases (Syria, Iraq, China, Vietnam, Mongolia).

During the 1990s Hungary conducted its development cooperation on an ad hoc basis and in a decentralised manner:

• Hungary provided Official Development Assistance (ODA) via multilateral channels, through different international organisations (IMF, World Bank, UN institutions) in the form of financial contributions, compulsory membership fees, and voluntary donations. In 1999 Hungary provided multilateral assistance in the amount of USD 4.6 million; USD 3 million of this was Hungary’s financial contribution to the budget of the World Bank’s International Development Association (IDA).
• The amount spent on official bilateral assistance (foreign students studying in Hungary, sending and receiving experts, consulting work) was no more than USD 370,000 at the end of the 1990s.
• As far as humanitarian aid is concerned, it is difficult to measure its precise magnitude, as central budget sources (USD 430,000) are supplemented by donations from NGOs, churches, and individuals.
• In 1999 Hungary provided USD 7 million as Official Aid (OA) to ethnic Hungarian minorities living outside Hungary via the Office for Hungarians Living Outside Hungary.

It is clear that the resources which Hungary expends on development cooperation have been very modest, and Official Development Assistance, provided on a bilateral basis, is at a very low level.

The main strategic issues of development cooperation

One of the main dilemmas is whether to provide assistance to a large number of countries or to concentrate limited resources on selected areas and projects for the sake of developing bilateral relations. The experience of small countries is generally that, in order to realise its comparative advantages, the optimum path is specialisation in bilateral development cooperation. However, by participating in the ‘international division of labour’ as regards development cooperation – for example, in international projects – Hungary can take in more countries and increase the effectiveness of its aid activities.

As far as the form of development cooperation is concerned, efforts should be made to progress from simple, easily manageable forms of cooperation to more complex ones. First, priority should be given to low-cost forms of technical assistance (education, training, sharing transition experiences) where Hungary can make use of its intellectual potential. In this way, support for Hungarian commodity and services exports can be increased, while respecting international commitments and regulations. In the medium term – in the coming five to ten years – Hungarian development cooperation should be broadened to encompass project-type assistance, which requires more resources and developed infrastructure for development cooperation.

Financial resources for development cooperation can be transferred through bilateral and/or multilateral channels. In the experience of other donors, the share of bilateral channels is increasing at the expense of multilateral ones, as bilateral assistance serves the political and economic interests of the donor country better and more directly, and creates direct links with the recipient; in the case of multilateral aid the donor becomes "impersonal" and has little say

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in how the aid is utilised. However, multilateral aid can be beneficial for the donor countries, as their financial resources add up and so bigger projects can be financed. Although Hungary does not wish to renounce multilateral assistance (in any case, its international commitments make this impossible), preference will be given to bilateral assistance. Hungary would like to increase its bilateral assistance at a faster rate than its contributions to international institutions and eventually approach a two-to-one ratio in favour of bilateral aid.

The financing of development cooperation

In Hungary, development cooperation is financed mostly from the central budget; however, the aim is to involve NGOs and large enterprises with economic interests in the target countries in development cooperation to a greater extent.

The magnitude of financial resources assigned to development cooperation is determined as follows:

• it should reflect the international reputation and conduct
• it should take due account of economic means, but it should also be sufficient to realise development cooperation objectives
• Hungary should approach the level of the OECD and the EU countries as far as the proportion of GDP spent on development assistance is concerned
• the value of development assistance should be significantly higher than in previous years when it was granted on an ad hoc and decentralised basis
• resources slated for bilateral development cooperation should grow at a higher rate than resources expended on multilateral assistance.

The scale of development assistance will be determined annually by the Ministry of Finance in cooperation with the Ministry of Foreign Affairs and the Ministry of the Economy, with due regard to the development assistance/GDP ratio of the OECD and EU countries. Based on Hungary’s development cooperation budget, the needs of recipient countries will be examined and concrete bilateral development cooperation programmes elaborated.

In 1999 Hungary spent USD 12.4 million – that is, 0.025 per cent of GDP – on development cooperation. In 2000 the development cooperation budget was increased by 70 per cent, mainly in the form of more resources for the higher education of ethnic Hungarians ‘beyond the borders’. In 1999 Hungary’s Official Development Assistance (ODA) equalled USD 5.4 million, of which 85 per cent or USD 4.6 million was spent on meeting multilateral commitments, while 15 per cent (USD 800,000) went on bilateral assistance and humanitarian aid. USD 7 million was spent on Official Aid (OA) to assist Hungarians living outside Hungary.

In order to achieve the present OECD aid/GDP ratio of 0.25 per cent, Hungary must increase its development cooperation budget to USD 121 million; in order to reach the EU average, Hungary would have to spend USD 151 million a year on development cooperation. Assuming a 15-year catch-up period, Hungary would have to increase its development cooperation budget by USD 10 million a year.

The 2003 budget plan envisages spending around USD 3.5 million as a contribution to IDA and the IMF. The share of multilateral aid will increase by way of Hungary’s contribution to the EU’s European Development Fund. The Hungarian contribution is estimated to be around USD 13–15 million.

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At the same time, Hungary following the example of the other donor countries would like to increase the share and value of bilateral development assistance. According to preliminary estimates, in 2003 Hungary will spend USD 6.32 million – around 0.01 per cent of GDP – on bilateral development cooperation. This amount will be supplemented by humanitarian aid financed by the Ministry of Foreign Affairs and the grant element of concessionary credits.

In order to harmonise Hungary’s development cooperation strategy and activity, it is necessary to concentrate development resource allocation. This task is assigned to the Ministry of Foreign Affairs, with the exception of multilateral development cooperation: Hungary’s present financial contributions to the IMF and the World Bank are handled by the Ministry of Finance; the same would be advisable in the case of Hungary’s future financial contribution to the European Development Fund. The assistance granted to Hungarian minorities living outside Hungary is financed from the budget of the Ministry of Foreign Affairs through the Office for Hungarians Living Outside Hungary.

The tasks of institution building

In order to implement Hungary’s development cooperation strategy and to participate in EU development cooperation activity, appropriate institutions are needed. According to EU recommendations a special ministry or a separate department with professional, experienced officials should be established for this purpose. Correspondence between Hungarian and EU development cooperation should be ensured.

In the leading donor countries and in the EU, development cooperation policy is implemented by ministries of foreign affairs. As development cooperation policy is an integral part of foreign policy, it is obvious that it should be formulated and partly implemented by the Ministry of Foreign Affairs in Hungary, too. Under the supervision of the executive (administrative) state secretary a special department (in the long run an Office) will be established, with the following tasks:

• activity related to development cooperation policy implementation (planning, tasks at home and abroad, controlling, evaluation);
• coordination of development cooperation between ministries;
• handling financial resources for development cooperation and humanitarian aid;
• activities related to multilateral development cooperation (UN);
• preparation of medium-term strategic plans and annual action plans;
• making proposals for geographical and structural priorities;
• evaluation of development cooperation in the case of Hungary and partner countries;
• elaboration and realisation of a communications strategy directed towards Hungarian public opinion;
• making proposals for staff appointments (officials, independent experts, volunteers);
• implementing the principle of transparency and accountability in all areas of development cooperation;
• preparing an annual report for the government.

The cost of institution building will be covered from the budget of the Ministry of Foreign Affairs.

The development cooperation strategy guidelines will be outlined by a Ministerial Committee headed by the Minister of Foreign Affairs. All the relevant ministries will be represented on this committee. Its main task will be to apportion financial resources for development co-

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operation and to indicate geographical and sectoral priorities. In tandem with the Ministerial Committee an Expert Working Group will also be established.

Later on, the work of the Ministerial Committee will be supported by a Development Cooperation Advisory Board. It will consist of the representatives of the administration, civil society, and research institutions. The establishment of a specialised professional institution is also under consideration.

The above-outlined organisational structure will be established for ODA-type development cooperation with special regard to expanding bilateral activities. In order to establish an effective and transparent organisational structure, a registration system is needed which covers all forms of official and unofficial development cooperation. The conditions for international statistical data provision should also be secured.

Special attention should be paid to the training of experts specialising in development cooperation; for example, after EU accession Hungary will have to delegate development cooperation experts to the EU’s Development Committee. At first, the demand for development cooperation experts will be moderate, however, and can be met by domestic postgraduate education. Hungarian representative offices abroad should also play an active role in implementing development cooperation policy.

In order to prepare itself for the role of donor, Hungary can make use of international support given to transition economies. Under the aegis of the UNDP a special project is envisaged for the establishment of an institutional and personnel database, the training of development cooperation experts at home and abroad, and the preparation of a communications strategy.

Trade with developing countries

As a consequence of the re-orientation of Hungary’s foreign trade towards the developed countries, and especially the EU, [While in 1990, 36.4 per cent of Hungary’s exports were directed to the EU, in 2000 the same figure was 75 per cent (83.5 per cent for developed countries as a whole).] the share of the developing countries has fallen significantly, despite an increase in foreign-trade turnover. The decrease was especially sharp on the export side: between 1990 and 1996 Hungary’s exports to developing countries fell from USD 772.7 million to USD 475.7 million; the share of developing countries in Hungarian exports decreased from 7.9 per cent to 3.6 per cent. Hungarian exports to developing countries increased from USD 503.5 million in 1996 to USD 898.8 million in 2000, but the export share of developing countries stagnated at 3.2 per cent (see Table 1).

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Table 1: Hungary’s exports to developing countries

Note: * In 1996 a new statistical system was introduced. Since then the activities of customs-free zones have also been included in the foreign-trade statistics.

Source: Own calculations based on data from the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

As far as Hungary’s imports from the developing world are concerned the decline was less significant. Although Hungarian imports from the developing countries decreased a little in the early 1990s, since the middle of the decade imports from developing countries have grown threefold. Consequently, the share of developing countries in Hungarian imports returned to pre-transition levels by 2000 (see Table 2).

Table 2: Hungary’s imports from developing countries

Note: * In 1996 a new statistical system was introduced. Since then the activities of customs-free zones have also been included in the foreign-trade statistics.

Source: Own calculations based on data of the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

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As Hungarian imports from the developing countries grew dynamically, while exports fluctuated (see Chart 1), Hungary’s foreign-trade balance with the developing countries showed a significantly increasing deficit (see Table 3): currently Hungary’s trade with developing countries accounts for more than 55 per cent of its foreign-trade deficit. It is therefore in Hungary’s economic interest to revitalise trade with the developing countries, to regain markets in the developing world, and to balance its foreign-trade turnover.

Chart 1 Hungary’s foreign trade with the developing countries (USD million)

Note: In 1996 a new statistical system was introduced. Since then the activities of customs-free zones have also been included in the foreign-trade statistics.

Source: Own calculations based on data of the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

Table 3 Hungary’s foreign-trade balance with the developing countries

Source: Own calculations based on data of the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

The commodity structure of Hungary’s foreign trade with the developing countries is characterised by a large share of manufactured goods and machinery and transport equipment on the export side. Currently, these two product groups account for almost 90 per cent of Hun-

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gary’s exports (see Table 4). Almost half of machinery and transport equipment exports are made up of office machinery and automatic data processing machines, whilst 26 per cent is electrical machinery, apparatus, and appliances.

Table 4 The commodity structure of Hungary’s exports to the developing countries (2000)

Source: Own calculations based on data of the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

Table 5 The commodity structure of Hungary’s imports from the developing countries (2000)

Source: Own calculations based on data of the Statistical Yearbook of External Trade, 2000 (Budapest: Hungarian Central Statistical Office, 2001).

The commodity structure of Hungary’s imports from the developing countries is characterised by a large share of manufactured products: almost three-quarters consist of machinery and

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transport equipment, with manufactured goods making up 14 per cent. Within the machinery product group the most important product category is "electrical machinery, apparatus and appliances" which accounts for 32.6 per cent of total Hungarian imports from the developing world (see Table 5).

As far as the relational structure of Hungarian foreign trade with the developing countries is concerned, the ten leading export markets are (in descending order): Singapore (with 25.1 per cent of Hungary’s total exports to developing countries), Taiwan (9.5 per cent), Brazil (6.6 per cent), Mexico (5.9 per cent), South Korea (4.3 per cent), Iran (3.6 per cent), Malaysia (3.2 per cent), Egypt (2.9 per cent), Saudi Arabia (2.7 per cent), and Hong Kong (2.3 per cent). In 2000 the ten leading markets absorbed around 64 per cent of Hungarian exports to developing countries. The ten most important import markets are: South Korea (10.8 per cent of Hungary’s total imports from developing countries), Taiwan (7.2 per cent), Singapore (5.6 per cent), Hong Kong (4.8 per cent), Mexico (3.8 per cent), Malaysia (3.6 per cent), Brazil (2.2 per cent), Thailand (1.4 per cent), Indonesia (0.6 per cent), and Uganda (0.5 per cent). In 2000, 40 per cent of total Hungarian imports from developing countries derived from the ten leading partners. The figures show that the concentration of Hungarian trade with developing countries is quite low, especially on the import side.

The impact of EU accession on Hungary’s relations with developing countries

In December 2000 Hungary closed Chapter 26 – on external economic relations – of the accession negotiations. In this chapter Hungary assumes an obligation to take over the acquis in the field of external economic relations without any transitional period, that is, from the moment of accession. Hungary is aware that, after accession, all EU international commitments must be taken over and all international agreements which contradict the acquis must be terminated: for example, the free trade agreements which Hungary signed with the CEFTA countries in 1992, the EFTA countries in 1993, Turkey and Israel in 1997, and Estonia and Lithuania in 1998. As far as relations with the developing countries are concerned, Hungary also applies the General System of Preferences, so there will be no problem in taking over the EU’s system of preferences and the commitments of the Lomé Conventions. Hungary hopes that after accession as a consequence of the application of the EU’s system of preferences, taking over the obligations of the Lomé Conventions, participating in EU development cooperation, and implementing its own development cooperation policy relations with developing countries will be revitalised and a more balanced foreign trade with these countries can be realised.