Czech Republic

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Czech Republic
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Background

• Czechoslovakia established by Treaty of
  Versailles
• put together lands of two peoples
• Czechs
• Slovaks
• speak different languages and not always friendly
• Split into separate countries Jan. 1, 1993
• Czech Republic and Slovakia
• an amicable divorce

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• Included much of industrial base of former
  Austro-Hungarian Empire
• Prior to WWII had become a democratic and
  capitalistic state
• A well-off European nation
• on a par with Austria
• considerably better off than Italy, Spain,
  Portugal
• Prague was the Paris of Central Europe
• http//www.countryreports.org/czechrepublic.htm

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Socialist Period

• Occupied by Soviet Union after WWII
• Economy organized along the lines of the Soviet
  system
• Became one of the most ideologically rigid of the
  Soviet bloc countries
• 98 of the non-labor factors of production owned
  by state
• prices and wages set by state and rigidly
  controlled

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• Typical socialist economy
• priority economy
• emphasis on heavy industry and construction
• services and consumer goods low priority
• not producing according to comparative advantage
  but to ideology
• to a large extent, producing according to the
  needs of the Soviet Union

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• agriculture collectivized
• almost all trade with CMEA countries
• inefficient energy use due to heavy subsidization
  of energy
• massive environmental problems
• lacking marketing and managerial skills needed
  for transition to market economy

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Privatization

• Took several forms including
• restitution
• auctions
• direct sales
• vouchers

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Restitution

• Return of property who owned it when it was
  nationalized
• 70,000 residential properties
• 30,000 administrative and industrial buildings,
  forest and agricultural properties
• About 5 billion worth

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Auctions

• Most privatization of small-scale enterprises was
  by auction
• shops
• services
• barber shops
• repair shops
• restaurants

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• Few persons could afford to bid
• Those who acquired property by auction were
  generally of three types
• former nomenklatura
• who had taken advantage of their position to get
  rich under former system
• black market operators
• including money changers
• those whose work allowed them to get bribes
• e.g., butchers, gas station operators
• those with foreign backing

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Vouchers

• In 1992 government decided to sell off 1,200 of
  its largest SOEs by vouchers
• Every citizen over 18 could buy a voucher book
  for equivalent of a weeks average salary
• Books worth 1,000 points that could be bid for
  shares or given to funds in exchange for shares
  in fund

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• Between 1990 and 1996 the government generated
  604 billion koruny from privatization
• 33 from auctions of small enterprises (5)
• 571 from large-scale privatization (95)
• Vouchers by far the most important privatization
  mechanism
• voucher revenue from 1990 to 1996 was 343 billion
  koruny (57)

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• Privatization fairly rapid
• by 1992, 28 GDP from private sector
• by 1996, 64 GDP from private sector
• by 1992, 40 employment in private sector
• by 1996, 78 employment in private sector

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Banking

• Czechoslovakia in better financial condition than
  Hungary and Poland at start of transition
• budget deficit less than 1 of GDP
• foreign debt low
• Major problem was what to do with the bad debts
  of SOEs

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• Consolidated Bank, a special bank established to
  manage the debt by providing credit to indebted
  SOEs
• Major banking reforms include breaking up the
  former monopoly bank into a central bank and
  several state-owned commercial banks
• Privatization of state-owned banks very slow

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• Subsidiaries of foreign banks make up about 20
  of bank assets
• putting pressure on Czech banks to be more
  efficient
• Small private Czech banks make up 10
• undercapitalized
• outstanding loans of poor quality

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Performance

• Initial collapse followed by two years of
  stagnation and then recovery
• Recovery looked strong initially but, after 1996,
  falters
• three-year recession began in 1997
• recovery in 2000

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• Wage increases far outstripping gains in
  productivity
• result is increased unit labor costs
• inflationary
• exports have become less competitive
• Foreign investment has declined

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What Happened?

• Large state-owned banks never privatized
• Main role to direct credits to large enterprises
  to prevent bankruptcy and loss of employment
• state owned and private
• reason unemployment has been so low
• Result is continuation of soft budget constraints
  and lack of enterprise restructuring

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