 The Czech Republic: reaching maturity |
Ten years are only a brief moment in a country's history - but the last decade has seen the Czech Republic shed its communist rule, move along with political and economic reforms, be admitted into NATO and get far down the road to the European Union membership. While a lot of work remains to be done, the Czech Republic is no longer a "wild east" country.
Once the industrial center of the Austro-Hungarian empire and one of the top ten most industrialized countries economies between the world wars, the Czech Republic (or Czechoslovakia until January 1993) has seen its economy decline after 1945 and especially after the communists took the country over in 1948. When the communist party was finally ousted from power in November 1989, the country in the heart of Europe (as its neighbors are Germany, Austria, and Poland) had a crumpling centrally planned economy - and a lot of hopes.
As in most other countries liberated from the communist rule in 1989 and 1990, the 15 million people of Czechoslovakia (split in January 1993 into the Czech Republic with 10 million people and Slovakia with 5 million) were ready to sacrifice their comfort for a quick - and even painful - reform. Free elections brought to power dissidents, that mostly focused on the political changes needed to transform the Czech Republic into a free democracy, as well as pro-market technocrats that moved quickly to implement the economic reforms. However, the fear of not being re-elected caused most of the economic reformers led by Vaclav Klaus, a long-time prime minister and currently the chairman of the lower house of the Czech parliament, to slow down the reforms and not implement some of the key issues, such as privatization of the large state banks, utilities and large companies referred to with a nationalistic twitch as the "family silver". Liberalization of housing, utilities and telecommunications ground to halt too and the Czech Republic went into a recession while the neighboring Poland and Hungary still enjoyed economic growth.
While the economy experienced its troubles, foreign policy - in large part due to the pressure of the President Vaclav Havel - remained on track, bringing the Czech Republic closer to NATO and the European Union. Shortly after becoming a full-fledged NATO member (in March 1999, together with Hungary and Poland), the Czech Republic found itself in the middle of the worst problem NATO had to deal with in the last decade - the Kosovo crisis. While the social democratic government of Milos Zeman did not have enough courage to vote against the NATO air strikes, it kept criticizing it domestically, not only tarnishing the reputation the Czech army built by serving in various peacekeeping mission in former Yugoslavia but also casting doubts on the reliability of the Czech Republic as a NATO member.
On the other hand, the social democratic government has succeeded to jumpstart again at least some of the reforms the previous verbally liberal government of Vaclav Klaus avoided, including the privatization of large state-owned banks and telecoms, debates about the best road to the privatization of regional utilities, and improvements of the country's laws to bring them more in line with the EU legislation. And even though last year's evaluation of the Czech Republic's progress from the EU was rather critical, the successful closing of several major chapters in the pre-entry negotiations and the new legislation signals renewed interest of the Czech government to continue on its road towards the European Union. And even though there are more and more signals that the European Union might take longer than expected before new members are admitted, the Czech government is trying to stick to the year 2003 deadline. "By then, there should be no more technical obstacles on our side and the Czech Republic will be prepared economically, technically as well as legally," promises finance minister Mertlik. By then, the Czech Republic should be able to fulfill the so-called Copenhagen criteria for new members: have a working market economy, stable market conditions and companies that are able to compete on the European market. |
The rebounding economy should help the government continue with the reforms and the privatization. While in 1998 the Czech GDP dropped by 2,2% and further 0,2% in 1999, the economy now seems to be back on the growth trajectory, reaching growth rate in the first quarter of 2000 of 4,4% (albeit primarily due to the low GDP year ago). "The official annual GDP growth forecast for this year is 1,5% but I personally think the growth might be better and reach 2%," says Pavel Mertlik, the Czech Republic's minister of finance and deputy prime minister.
GDP is generally expected to drop during major economic restructuring and so inflation is often considered a bigger threat for the success of reforms in the transition economies. Apparently, the Czech Republic has been able to deal with the threat, especially due to the strict monetary policy of the Czech National Bank. At the end of last year, the inflation (measured by the consumer price index) was only 2.5% (compared to 6.8% in 1998 and 10% in 1997), which is not only very low for a transition economy but also close to the 2% Maastricht criteria the Czech economy must strive to meet as soon as possible. The inflation is expected to be somewhat higher at the end of this year due to the price deregulation in some areas but the Czech National Bank has a long-term strategy, according to which the inflation in the Czech Republic should drop to 2% by 2005. "This will allow us to think about joining the European Monetary Union," explains Josef Tosovsky, Governor of the Czech National Bank.
The unemployment rate, which remains at roughly 10%, with small decreases in the last few months, is probably the biggest concern, especially in heavy industry regions that has experienced shutdowns or downsizing of many industrial companies. "The recession was of course socially and economically painful process - but with positive results. We will continue to press for further restructuring, especially through export promotion, investment incentives and other growth, market-oriented measures," promises Mertlik, adding that there is no other option besides restructuring the Czech economy as quickly as possible. In general, as the Czech economy is small and very open with limited resources of energy and raw materials, it can not rely on heavy industry. "Therefore, manufacturing is probably the key to the growth and international success of the Czech economy," says Josef Tosovsky, governor of the Czech National Bank.
In the end, even though each of the macroeconomic criteria is important, overall balance of the economy matters more. "There are no major imbalances in the trade deficit, current account deficit will remain somewhere between 1-2% of GDP and the inflation remains acceptable," summarizes the National Bank's governor. Therefore, he believes that the Czech Republic will see a steady progress in its economic situation. "Even though the recovery is still fragile and the takeoff will be slow, we believe it will last long," Tosovsky adds. Moreover, the combination of fundamental changes and outside pressure - especially from the European Union - is pushing the government into action
As elsewhere, the industry most hit by a recession was construction. While before the velvet revolution in 1989 all large construction projects were state funded and evenly distributed, construction companies had to adapt quickly to a new system of competition, private clients and increased quality requirements. One of those that adapted successfully is Konstruktiva Konsit. Before 1989, the company was used to execute industrial buildings and apartment blocks. "However, as the new investment into industrial buildings was very low after 1989, we had to look for new opportunities," says Jan Vrany, chairman of the board and managing director of Konstruktiva Konsit. His company found a special niche that enabled it to survive the worst times - reconstruction of buildings of historical value. Besides that, as soon as in 1992 the company has secured several foreign clients, such as Procter & Gamble or Coca-Cola, that have entrusted Konstruktiva Konsit with the construction of their industrial buildings and given the company an excellent reference for future projects developed for foreign investors entering the Czech Republic. According to Vrany, the reason of success was rather simple: "Our people have to fulfill all requirements of our clients, be flexible and adapt to changing environment." |
