Slovakia Beats Hungary in Growth Race, Lithuania Catching Up Fast

Slovakia Beats Hungary in Growth Race, Lithuania Catching Up Fast

In the early 2000s, Hungary was one of the most developed countries in Central and Eastern Europe, but since then it has been surpassed in this respect by several of its regional peers. Now the turn is on Lithuania to push Hungary back to the lower half of the development list, reports.

According to the latest forecasts by Eurostat, the statistics agency of the European Union, per capita gross domestic product in Hungary, calculated at purchasing parity, will reach 63% of the EU average this year. This is down two percentage points from the level two years ago, which clearly indicates a disturbance in Hungary's convergence process.

Meanwhile, economic growth in other countries in the region did rev up. Surfing on the rising business cycle of the European Union they showed growth of over 6%, which implied a swift catching up with the more developed countries. Hungary's backlog in convergence becomes even more evident when we look at per capita GDP growth data in two four-year periods in the 2000s.

The result of this was not only that Hungary got further behind the most developed countries of the region (Slovenia, Czech Republic), but also that Estonia and Slovakia left Hungary behind. The Baltic state took Hungary over in 2006 and the tail lights of Slovakia appeared in front of Hungary last year. And the latest figures of the Eurostat indicate that the process is by far not over, and yet another country may catch up with Hungary in one or two years.

The Eurostat has pulled the 2007-2008 (still estimated) data for Hungary even lower due to the country's worse-than-expected economic performance. Although the macroeconomic prospects of the Baltic States, which are fighting problems of overheating, also grew uncertain, their advantage in growth cannot be denied.

Consequently, the Eurostat puts the difference between the per capita GDP of Hungary and Lithuania to a mere one percentage point in 2008. Considering that GDP growth in Lithuania will most probably be bigger in 2009 than in Hungary, the most southern Baltic state is likely to catch up with Hungary next year. Interestingly enough, Lithuania's level of development was only two thirds of Hungary's in 1995, based on per capita GDP data.

Over the past years, Latvia has also got close to Hungary's level of development, but economists see much graver balance problems there therefore they are less upbeat on that country's growth outlook.

Despite all these, Hungary stands more than a good chance that it will slip to the lower five-member group, where both Latvia and Poland will be breathing down its neck in the race for the sixth place. The fresh Eurostat figures paint a picture of Hungary climbing down the regional ladder not up. However, there may be several factors that could help stop this descent.

The Hungarian economy could gradually get nearer to the path of potential growth as it slowly recovers from the shocks induced by the government's fiscal adjustment measures. On the other hand, this path has recently been estimated to lie rather low, at 3.0-3.5%. A faster growth may not be achieved without revamping the labour market, the tax system, implementing other institutional measures and boosting credibility - steps that currently stand no chance to be taken.

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