Policy Brief

FEBRUARY 2010

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Economic Survey of Hungary,

2010
How has the global Summary
crisis affected
Hungary? Hungary is facing one of the most severe recessions among OECD countries
Despite financial assistance from international organisations, macro policies
What challenges
had to remain tight. Stabilisation is underway, but the depth of the recession
arise for economic
will leave deep marks. Looking forward, restoring sustainable growth
policies?
requires decisive structural reforms. The shift in the tax burden from labour
to consumption in 2009 was a positive step toward reducing economic
How to ensure fiscal
distortions. The pension reform, which will increase labour supply, should be
sustainability?
sustained. To increase productivity, innovation policies should be promoted.
A well-balanced policy mix is also critical to restoring growth. Fiscal
How to improve
consolidation should continue, while avoiding excessive pro-cyclicality, if
financial regulation
in

the economy deteriorates beyond anticipation. As the economy recovers, the

and supervision?
o.
nf

central bank should continue to carefully communicate to financial markets

ci
ee

so as to avoid financial stability concerns in case of sudden changes in

How to raise
.s
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market sentiment.
education outcomes?
w
w

For further The momentum of fiscal reform should be sustained

information Recently, significant progress in improving fiscal sustainability has been
made. The creation of fiscal rules and a Fiscal Council is welcome ahead of
For further reading the 2010 elections given the historical political cycle of fiscal deficits. Hence,
it is of utmost importance that the Fiscal Council benefits from broad political
Where to contact us? acceptance. It is also advisable to allow some experience to accumulate
before considering any substantial changes in the Fiscal Responsibility Law.
Improving general public administration should bring large welfare gains and
reducing the size of government should eventually allow for tax cuts. The
government should continue targeted streamlining of public employment
and strengthen public procurement. To spur public administration reforms, a
monitoring unit should be established. The government should also enhance
the efficiency of the health system by seeking consensus for introducing
patient co-payment for physician care.

This Policy Brief presents the assessment and recommendations of the 2010 OECD Economic
Survey of Hungary. The Economic and Development Review Committee, which is made up of the
30 member countries and the European Commission, reviewed this Survey. The starting point for
the Survey is a draft prepared by the Economics Department which is then modified following the
Committee’s discussions, and issued under the responsibility of the Committee.

© OECD 2010
Policy Brief
ECONOMIC SURVEY OF HUNGARY, 2010

The financial regulatory framework should be reshaped

The crisis exposed several weaknesses in the supervisory framework,
such as inadequate monitoring and risk assessment. Excessive risk taking
by borrowers needs to be limited by capping the share of income that
can be used for debt servicing while the accuracy of income should be
documented. To ensure that the ceilings on debt-service ratios are observed,
a comprehensive credit registry is needed. On the lender side, banks should
be subject to higher costs for risky lending in the form of higher capital
requirements. The scope for unilateral changes in contract should be limited,
consumer protection enhanced and all conditions of financial products
disclosed in a transparent way. Appropriately, the supervisory authority
has been made independent from the Ministry of Finance and directly
accountable to Parliament. To prevent systemic risks, close co‑operation
between the central bank and the supervisory authority is also needed.

Education efficiency needs to be improved

The school system possesses features associated with good outcomes,
notably a high degree of autonomy. Nevertheless, vocationally trained school
leavers are not adequately prepared for the labour market. Policy to favour
vocational practical training in regional integrated vocational training
centres and in workplaces should continue. In terms of school efficiency, the
in
o.

ratio of actual teaching relative to the total statutory working time should
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ci
ee

be raised and there remains scope for further mergers/associations among

.s

municipalities. The proportion of adults with tertiary qualifications is still

w
w
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low. The authorities should improve incentives to provide tertiary studies that
match labour market needs and tighten the conditions under which students
continue to receive free tuition, while extending ways of defraying the living
expenses of students from poor families. n

2 ■ © OECD 2010
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ECONOMIC SURVEY OF HUNGARY, 2010

How has the global Hungary has been in one of the most severe recessions among OECD
crisis affected countries, with the projected fall in real gross domestic product (GDP) in 2009
Hungary? being double the OECD average. Hungary’s economy suffered from a trade
collapse just like other transition economies in the region, but the global
crisis has been compounded by a collapse in investor confidence in forint-
denominated assets. This triggered a steep depreciation of the exchange rate
in October 2008 and led the authorities to request financial assistance from
international organisations. A combined credit package of EUR 20 billion was
granted in November 2008 by the International Monetary Fund (IMF), the
European Union (EU) and the World Bank.

High foreign currency indebtedness and weak fiscal sustainability were

at the root of the loss in confidence of foreign investors. Foreign exchange
lending became a common practice due to the interaction of several factors,
reinforcing each other. On the credit demand side, lenders were encouraged
to borrow by the persistently wide spread between interest rates in Hungary
and western European countries, a relatively stable currency, and the
expectation of convergence. On the credit supply side, banks favoured
foreign currency lending owing to the lack of domestic forint savings and
also over-optimistic assumption on convergence. As a result, households and
enterprises have become increasingly indebted in foreign currency, especially
in Swiss francs. Total external debt reached about 120% of GDP at the end of
in

2008, compared to less than 50% in Poland and 40% in the Czech Republic. At
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the climax of the financial crisis (October 2008), gross international reserves
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fell short of covering short-term foreign currency debt at remaining maturity.

.s
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At the same time, the capacity of the government to bail out private investors
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appeared limited owing to the high public debt and the still significant fiscal
deficit. n

What challenges Unlike in most other OECD countries, macroeconomic policies could not
arise for economic afford to support the economy and had to remain tight to avoid further
policies? depreciation of the exchange rate. For the central bank, defending the forint
had at times to take precedence over inflation targeting. On the fiscal side,
spending was cut significantly to reinforce confidence, including nominal
cuts in public wages and pensions. The pro-cyclical stance was similar to
policies followed by other emerging countries with foreign currency debt
overhangs. In those countries, the positive impact of reversing capital flows
proved to outweigh the negative impact of tight macroeconomic policies:
the restoration of market confidence eventually led to currency appreciation
and interest rate declines, which lightened the private sector debt burden,
stimulating activity. In the meantime, transitory high domestic interest
rates had limited pass-through to the economy since most indebtedness is
in foreign currency. In Hungary also, tight macroeconomic policies, together
with international support, have been successful in stabilising the currency,
allowing the central bank to resume interest rate cuts in mid-2009 and the
government to let automatic stabilisers work in part.

The need to restore foreign investor confidence also acted as a trigger to

implement long-overdue structural reforms. Improving fiscal sustainability

© OECD 2010 ■ 3
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ECONOMIC SURVEY OF HUNGARY, 2010

required going beyond short-term expenditure cuts. Hungary has made

significant progress in reducing the cyclically-adjusted fiscal deficit over the
past years. In particular, the government has improved the targeting of social
transfers and has reduced inefficient subsidies. In May 2009, the government
adopted a new pension reform that should significantly mitigate the rise in
ageing costs. This reform, which increases the retirement age, will also favour
labour supply, thereby supporting potential growth. Moreover, on 1 July 2009,
the government implemented a far-reaching tax reform that switches the tax
burden from labour to consumption: an increase in the value added tax rate
by 5 percentage points (together with a rise in excise taxes and the creation
of a wealth tax) allowed significant cuts in employer social contributions and
the personal income tax. This reform should support potential growth and
employment by reducing economic distortions.

Before the crisis, Hungary’s productivity gap vis-à-vis the OECD average
was already large. Real income convergence came close to a halt in 2007-08
and is likely to have been reversed in 2009. The depth of this recession is
bound to leave deep marks in productive capacity. Consequently, boosting
potential growth calls for continued structural reforms encompassing labour
market, education, entrepreneurship and innovation. In particular, active
labour market policies should be better targeted at the unskilled. For the
recent reduction in maternity leave to lead to a significant increase in female
in

participation, it is essential that public support for childcare (e.g. part-time

o.
nf

work, working from home, nursery services) is expanded. The still generous
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maternity leave provisions should be reduced further, while public support for
.s
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childcare should be expanded in parallel. Regarding product market policies,

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barriers to firm creation should continue to be reduced. The share of research

and development in GDP should increase and collaborative links between
research institutions, universities and the business community should be
strengthened.

A well-balanced policy mix is the key to maintaining a sustainable growth

path in Hungary. Fiscal consolidation is a pre-requisite since market
confidence is needed to allow the central bank to base its policy stance solely
on inflation targeting. Hence, fiscal consolidation, through structural reforms,
should continue, while avoiding excessive pro-cyclicality if the economy
deteriorates beyond anticipation. As the economy recovers and monetary
policy shifts emphasis from financial stability to inflation targeting, the
central bank should continue to carefully communicate to financial markets
so as to avoid financial stability concerns in case of sudden changes in
market confidence, as has happened in the past. Continued in-depth
analysis of the impact of the recession on potential output should help guide
monetary policy within the inflation targeting framework, given the difficulty
of interpreting inflation shifts in Hungary. n

How to ensure fiscal A major step toward fiscal sustainability has been taken with the adoption
sustainability? of the Fiscal Responsibility Law that introduced strict fiscal rules and
established a non-partisan fiscal council to oversee implementation. The
new fiscal council holds the potential to raise public awareness about the

4 ■ © OECD 2010
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ECONOMIC SURVEY OF HUNGARY, 2010

need for fiscal consolidation and to ensure “checks and balances” for fiscal
policy implementation. Hence, it is of utmost importance that the fiscal
council benefits from broad political acceptance. The new fiscal rules aim
at lowering the debt-to-GDP ratio over time and introduce annual spending
targets for each of the next three years. By focusing on the debt ratio and
moving towards a medium-term expenditure setting, the framework deals
appropriately with Hungary’s sustainability challenge given politicians’
proclivity to overspending during election years. The Fiscal Responsibility
Law has just begun to be implemented and, with two major elections taking
place in 2010, it would be best to allow some experience to accumulate before
considering substantial changes. However, the operational framework of the
rules appears to be somewhat complex. To increase public ownership of the
rules, the fiscal council should prepare, as soon as possible, an operational
manual describing the step-by-step process for implementing the rules,
including key budgetary variables, dates and responsible governmental and
parliamentary units.

As mentioned above, the recent changes in the tax system, by switching

from labour to consumption taxes, are steps in the right direction. However,
at a constant level of taxation, economic distortions could be reduced by
considering further cuts in labour taxes, financed through higher property
taxes (accompanied by improved property registry) and/or emissions
in

taxation. Further tax cuts would also increase welfare gains since marginal
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nf

tax rates are high, with negative impacts on growth and employment.
ci
ee

However, this would require first to reduce the size of the government
.s
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– which is very large in Hungary, especially in comparison to countries

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with similar living standards – so as not to deteriorate fiscal sustainability.

A striking feature in Hungary is the large share of public service expenditure,
suggesting inefficient public administration. Another feature is the
comparatively high level of outlays on social protection, reflecting generous
social transfers and attractive incentives for early retirement, despite recent
measures taken by the government. Finally, health-care spending, while not
dramatically different from most OECD members, does not deliver adequate
outcomes by international standards. While some improvement has been
made, further efforts are needed to increase efficiency.

Hungary’s public administration is one of the least efficient among OECD and
accession countries, pointing to potentially large efficiency gains (Figure 1).
One potential source of savings appears to lie in reduced staffing; central and
sub‑national workers account for almost 20% of total domestic employment,
which is high in comparison with other OECD countries, although it reflects
low total activity ratio as well. Hence, the government should continue to
streamline public sector employment. Another source of saving could be
outsourcing, given that the degree of outsourcing is rather low in Hungary
at the central government level compared to other countries. Greater use of
outsourcing for public services could raise efficiency of service provision,
but care would have to be taken to ensure transparent and competitive
contracting, to reduce the risk of corruption. This would require the
government to strengthen public procurement monitoring capacity and the

© OECD 2010 ■ 5
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ECONOMIC SURVEY OF HUNGARY, 2010

State Audit Office, and enhance the political will in support of the Office’s
enforcement. The recent legislation enhancing the control mechanism of
the Public Procurement Office is a step in the right direction. More generally,
to help maintain the momentum of public administration reform, the
government should establish a unit with a mandate to both promote and
assess reform progress. It should also revisit and pursue recommendations
of the 2006 State Reform Council’s comprehensive stocktaking of overlapping
tasks in government agencies.

A major challenge for public expenditure reduction is the anticipated rise in

public expenditure related to ageing. Past and recent reforms of the pension
system – in 1998, 2007 and May 2009 – should lead to a slower increase in
pension costs. In the future, the government should increase the statutory
retirement age in line with increases in life expectancy.

The health status of the Hungarian population is among the poorest in the
OECD; in particular, male life expectancy at birth is the lowest, while that
of women is the second lowest. Despite multi-causal factors, one of the
most important determinants is the health-care delivery system. Although
Hungary’s public expenditure on health care is below OECD and EU15
averages, the share of private spending on health (including the traditional
under-the-table payments) is estimated to be the highest in the EU, at around
30% of total spending on health. There is thus an obvious need to raise “value
in
o.

for money” in the health sector, all the more so in light of impending ageing-
nf
ci

related growth in demand for health services.

ee
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Figure 1. Performance indicator, 2008 1

1.3
ESTIMATED PUBLIC
DNK
SERVICE EFFICIENCY 1.2 NOR ISL
FIN NLD SWE
FRONTIER IN OECD CAN NZL
1.1 DEU LUX AUT
COUNTRIES
USA IRL
1.0 JPN GBR FRA BEL
KOR
ESP EST PRT
0.9 SVN
GRC HUN
0.8 SVK CZE ITA

0.7 POL

0.6

0.5

0.4
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0
Public service spending 20072 (% of GDP)

1. A composite indicator for public administration outcome based on international surveys on the
quality of justice and the level of corruption, both taken from the Global Competitiveness Report, and
the levels of bureaucracy in the economy measured by OECD’s Product Market Regulation indicator.
2. Spending in 2006 for Canada and Slovenia, 2005 for New Zealand. Spending on general public
services (excluding interest payments) and public order and safety.
Source: OECD calculations based on OECD (2009), OECD National Accounts Statistics (database), October;
WEO (2008), The Global Competitiveness Report 2008‑2009, World Economic Forum; OECD (2009),
International Regulation (database), July.

6 ■ © OECD 2010
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ECONOMIC SURVEY OF HUNGARY, 2010

Recently, the government has achieved some successful reforms, principally

in reforming the pharmaceutical market, but the reform agenda spelled out
in previous OECD Surveys remains mostly valid. Efforts to tackle the thorny
issues of formal patient co-payments and devolution of the payer function
from the Social Security Fund to a mix of private/public insurance schemes
have encountered strong political resistance. The authorities should seek
consensus toward the goal of introducing patient co-payment to instil
some cost-consciousness and help eliminate under-the-table payments.
The authorities should also continue to strengthen the gate-keeping role
of general practitioners. Reform is also crucial for the government to be in
a position to manage the financial impact of ageing-related increases in
health-care spending. Based solely on ageing, Hungary’s public spending on
health care is projected to increase relatively modestly, but the government
should plan for possible long-term budgetary impacts of rising demand,
and especially the likely greater use of more costly improved medical
technologies. n

How to improve A major lesson learnt from the crisis in Hungary is that the approach towards
financial regulation household lending needs to change: stronger protection for borrowers needs
and supervision? to be combined with tighter regulation of lenders. The right balance needs to
be struck in both directions, as neither the over-protection of households nor
the over-regulation of banks would be desirable. The former can lead to moral
in
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hazard and boost the pool of “subprime” borrowers, while the latter can
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hurt the efficient functioning of the financial system and hence of the whole
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economy.
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Household debt as a percentage of GDP, at less than 40% in 2009 is much

lower than that in more developed countries, but most debt is floating-rate
and a large share of the debt is in foreign currency (Figure 2). This exposes
borrowers to interest rate and exchange rate risks that increase their solvency
risks. In view of the risks that high household debt-service ratios pose for
financial stability, in accordance with the already effective Code of Conduct,
the share of income that can be used for debt servicing should be capped. To
ensure that the ceilings on debt-service ratios are observed, a comprehensive
credit registry is needed, which goes beyond the existing negative list.
Borrowers’ incomes should be better documented to ensure ability to repay.
This measure would also help “whiten” the economy.

To mitigate solvency risks for households, the supply of mortgage insurance-

type financial products, (for instance, in the case of unemployment or
sickness of the borrower) should be reinforced, and the practise by banks to
use these products as a loan security should be fostered. Financial education
at the stage of formal studies is widespread and covers major issues. But
financial education in general should be bolstered at all life stages and
targeted programmes for vulnerable groups such as the elderly and the less
educated should be introduced.

Major sources of risk for financial stability have been borrowing in foreign
currency and inadequate liquidity management with a mismatch of

© OECD 2010 ■ 7
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ECONOMIC SURVEY OF HUNGARY, 2010

maturities between assets and liabilities. Exposure of banks in foreign

currency, in particular Swiss francs, is large, while the scope for the
authorities to provide emergency liquidity in this currency is limited. Hence,
liquidity regulation and oversight of the largest institutions needs to be given
high priority to avoid a future currency crisis. Although capital requirements
have so far been adequate, better preparation for a rise in non-performing
loans is needed. Liquidity conditions in foreign currency should be more
closely followed. Banks should be subject to higher costs for risky lending
in the form of higher capital requirements, although this would be more
effective if enacted at the regional (even global) level. Dynamic provisioning
should be introduced once the economy recovers to provide a buffer for banks
during economic downturns.

A source of risk for borrowers has been the arbitrary cost increases passed on
by banks without much restriction until very recently. Inadequate disclosure
of the conditions of loan products, in particular unilateral change of contract
by banks, resulted in soaring instalments, payment difficulties, defaults
and sometimes evictions. Unfair conditions, unilateral changes of contract
and other abusive practices in the recent past call for vigilant consumer
protection. All conditions of financial products should be disclosed in a
transparent way before signing the contract. More recently, the instances
where banks can transfer increased costs to households have been limited
in

with the signature of banks, the regulator and the government of a “Code of
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nf

Conduct” effective from December 2009. However, related clauses in lending

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contracts should be generally condemned and declared non-binding. As a

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second-best option for existing contracts, lenders should be encouraged to

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engage in restructuring of loans if borrowers’ defaults result from a unilateral

contract change.

There are serious obstacles to effective competition. One relates to the lack
of information on borrowers, which implies higher credit risk for banks

Figure 2. 4 000

HOUSING LOANS 3 500

IN FOREIGN CURRENCY
HAVE BECOME 3 000
MORE ATTRACTIVE
FOR HOUSEHOLDS1 2 500

Billion HUF 2 000 Foreign currency

Other

1 500

1 000
Subsidised
500

0
2002 2003 2004 2005 2006 2007 2008

1. Stock of housing credits.

Source: HCSO (2009), “Dwellings, Public Utilities”, Stadat Tables, Hungarian Central Statistical Office,
December.

8 ■ © OECD 2010
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ECONOMIC SURVEY OF HUNGARY, 2010

and hence less likelihood for reducing margins. Another very important
obstacle is high switching costs, amounting to 1-2% for housing loans and
3-5% for loans for other purposes. Increased competition should help reduce
switching costs but capping of pre-payment costs by a recent legislation is a
welcome step, even though the cap may be somewhat high. Also, portability
for housing loan subsidies across properties and across financial institutions
should be introduced, as recommended by the competition authority.
Independent agents should be required to offer several options to customers
for a fixed fee, which should only be paid if one of the options is chosen
by the customer, and these agents should be prohibited from accepting
commissions from financial institutions. Agents working for or on behalf
of banks should disclose their remuneration scheme and amount to the
borrower.

The crisis exposed weaknesses in the supervisory framework, such as

inadequate monitoring and risk assessment of the financial system, and
insufficient co‑operation among institutions in charge of financial stability.
The financial supervisory authority had not been entrusted with stopping
unfair commercial practices and protecting consumer interests until very
recently. The supervisory authority has been made independent from the
Ministry of Finance and responsible directly to Parliament. To better identify
and assess systemic risks, co‑operation between the central bank and
in

other institutions in charge of financial stability should be strengthened

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nf

further. A more formal Financial Stability Council should play a prominent

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ee

role in detecting risks and making recommendations to mitigate them.

.s
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The financial market supervisor should be granted wider scope to issue

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regulation, although care should be taken to avoid overlap with the central
bank. The supervisory authority should not be held liable for the damages its
regulations may cause to regulated institutions, otherwise the new powers to
charge higher fines cannot be effective. n

How to raise Hungarian educational policies and institutions are capable of combining
education outcomes? good educational outcomes and a relatively efficient use of resources.
Costs relative to GDP are at about the OECD average, while younger school
pupils perform above average in internationally comparable assessments.
But 15 year-olds register only average performance in the Programme for
International Student Assessments (PISA), and the proportion of adults with
tertiary qualifications, though rising, is still low. More worryingly, the school
system does not adequately prepare vocational school leavers for the labour
market. Hence, the government should be ready to reform the system to
further improve educational outcomes and cost efficiency.

The Hungarian school system possesses features usually associated with

good outcomes, notably a high degree of local autonomy. However, many
municipalities are too small to provide good educational facilities for all
students in their district, and the government actively encourages small
municipalities to form associations with each other so as to share facilities
and/or combine kindergartens, primary and secondary schools. Scope
remains for further mergers/associations among municipalities to improve

© OECD 2010 ■ 9
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ECONOMIC SURVEY OF HUNGARY, 2010

education efficiency. The “National Assessment of Basic Competencies”

provides a benchmark for individual school performance, but the supervision
of the tests and their dissemination leave something to be desired. To
improve their reliability, the proportion of national assessments invigilated by
independent inspectors should increase and, to improve their utility, a higher
proportion of individual school results, preferably adjusted for the socio-
economic background of the students, should be coded and disseminated in a
timely fashion.

Teacher quality is an important factor influencing educational achievement.

In Hungary, the quality of incoming teachers appears to be lower than those
in other professions. Recent reforms require new entrants to spend up to
three years acquiring knowledge in their specific topic area, followed by
up to two years studying teaching-related issues and as trainee teachers.
Entry criteria and courses taught in teacher training institutions should be
independently assessed. Hungarian teachers are paid less than teachers in
most other countries, even allowing for lower per capita GDP, but they also
have a lower teaching burden. In the longer term, the ratio of actual teaching
relative to the total statutory working time should be raised. The resulting
gains in efficiency could be used either to reduce the number of teachers or
increase the relatively low salaries of teachers, or a combination of both.

The employment rate for youth (age 15-19) was the lowest in the OECD area
in
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in 2008, which is in part explained by the longer compulsory schooling period

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(gradually increased to the age of 18). Some 60% of vocationally trained

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workers are either not in employment, or in fields that do not correspond to

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their professional qualifications. To improve the usefulness of the courses

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taught, school leavers should be traced in their first years after school to gain
feedback on the relevance of their vocational training.

A high proportion of Hungarian students are enrolled in two types of

vocational schools after the end of the 8th grade. The OECD recently
published an in-depth analysis of the vocational education and training
system in Hungary. The government should implement the policy
recommendations of the OECD report. As practical training provided on
school premises is of uncertain quality as well as limited in quantity, the
policy to favour practical vocational training in regional integrated vocational
training centres and in workplaces (apprenticeship system), rather than in
the vocational schools should be continued. In addition, given the poor record
of the vocational training schools in preparing students for the labour market,
the government should strengthen them, for example by offering a similar
education standard as in vocational secondary schools in order to offer all
vocational students the same teaching resources, and adequately prepare all
interested students to sit for the matura examination.

Tracking (i.e. selecting students into different types of school on the basis of
their assessed performance and expressed preferences) is widely believed
to lead to greater efficiency in teaching, despite lack of evidence. Several
OECD countries have moved away from early tracking in recent decades,
and no country has moved in the opposite direction. The movement towards

10 ■ © OECD 2010
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ECONOMIC SURVEY OF HUNGARY, 2010

de-tracking was influenced by the finding that early tracking tended to

perpetuate existing socio-economic differentials. In Hungary, tracking can
occur at age 14. As in most OECD countries, tracking should start at the
earliest at age 15.

Many Roma adults have low educational attainment – some did not
even complete primary education – and on average, systematically lower
achievement than the rest of the population. Policies have moved away from
concentrating Roma students in “gypsy schools” towards encouraging Roma
integration with the rest of society from the earliest possible age. Research
shows that integrating young children from different ethnic backgrounds in
pre‑school raises the probability that they will remain longer in education
after the minimum age limit, and reduces social prejudices in both directions.
It is therefore desirable to encourage Roma parents, for example through
financial incentives, to send their children to pre-school for longer than the
compulsory period. The special pre-schooling support for disadvantaged
parents introduced by the government in January 2009 is a positive step in
this direction.

In 2005, tertiary education switched to the Bologna System. The 2010 in-depth
review may reveal some quality issues since major reforms combined
with the rise in enrolments have put the tertiary system under strain. The
government should ensure that subsidising failing institutions and faculties
in
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is conditional on rapid improvement. The authorities should improve

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ci

financial incentives to provide tertiary studies that match forecast labour

ee
.s

market needs and tighten the conditions under which students continue to
w
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receive free tuition, while extending ways of defraying the living expenses
w

of students from poor families. Although numbers of tertiary graduates are

rising, the proportion opting to study the kinds of science subjects important
for innovation has diminished. Hungary has by far the lowest proportion of
science graduates among OECD countries. The authorities should continue to
prioritise the allocation of finance to subject areas conducive to innovation
and thus economic growth. n

For further For further information regarding this Policy Brief, please contact:
information Margit Molnár, e-mail: margit.molnar@oecd.org, tel.: +33 1 45 24 89 49; or
Colin Forthun, e-mail: colin.forthun@oecd.org, tel.: +33 1 45 24 92 20; or
Pierre Beynet, e-mail: pierre.beynet@oecd.org, tel.: +33 1 45 24 96 35.

© OECD 2010 ■ 11
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