8.

Case: Hungarys Reform Process

Question (a)
The question intends to analyze the failures of central planning, drawing on the
Hungarian experience.
The answer explains that central planning requires the state to have direct control over the
assets and human resources necessary to achieve the desired goal of the community. It
also assumes that central planner will have the perfect knowledge of all resource
availabilities, technical capabilities of all production units and society's social welfare
function and also that all the instructions of government will be carried out. It also
explains that there are several reasons for the failure of central planning methods such as
limited information, elaborate decision making process and inefficient utilization of
resources etc.
However, the answer fails to relate the reasons behind the failure of central planning in
Hungary such as diversified growth of production and consumption, low prices and
rationing, problems of information and coordination etc.
Question (b)
The question intends to analyze Hungarys regulatory environment through the years and
explain the advantages of Hungarys EU membership, in terms of regulatory
environment, for companies wanting to enter Hungary.
The answer explains the regulatory environment of Hungary. Hungary has a welldeveloped legal frameworks, institutions and administrative procedures, Hungarys job is
mostly to strengthen and rebuild, rather than to create institutions from scratch. The
government has initiated the economic infrastructure of a market system through
mutually-rewarding policies, mainly privatization, deregulation, re-regulation, institution
building, fair competition and trade oriented economic policies.
The answer discussed the advantages of Hungarys EU membership such as more FDI
inflows, highly skilled and relatively inexpensive labor, low costs of doing business, tax
incentives, decent transport and telecommunications infrastructure etc.
However, the answer could have discussed the advantages of Hungarys EU membership
such as fair competition, protection of human rights, well laid out administrative
structure, availability of modern legal systems, strong domestic currency, GDP growth,
less corruption, effective customs and trade regulations, easy licensing and permits,
shorter time required for property registration, starting business and enforcing a contract
etc.