The Hungarian economy has achieved strong growth, averaging 4 ¼ per cent annually since 1997. This good performance has relied on a dynamic export sector largely made up of foreign-invested firms, and a rapid integration into European production networks. Since 2001, very strong domestic demand has been underpinned by a surge in minimum wages and public sector pay as well as strong public-sector investment. However world-trade growth has slowed and gains in export-market share have diminished substantially so that, overall, GDP growth has weakened. The continued rapid real convergence of the Hungarian economy with that of the European Union will first and foremost require maintaining, and indeed strengthening, the competitiveness of the Hungarian economy in a broad sense of being an attractive location for developing business activities. This is key to assuring that highly productive export-driven firms continue to expand, that the linkages between these firms and Hungarian suppliers continue to deepen, and a high rate of enterprise creation and development is maintained to respond to the domestic market opportunities generated by rising incomes. However, continued strong growth cannot rely on high productivity growth alone but will also require a more intensive utilisation of labour resources. The Hungarian economy is characterised by a very low overall employment rate and a sharp regional divide between the booming central-western part of the country, where growth has been concentrated and labour shortages are emerging, and the poorer, less dynamic north, south and east. Increasing labour force participation, enhancing labour mobility and broadening the economic boom to currently less prospering regions thus constitutes another challenge for Hungary...