Czechoslovakia in Transition

by  Nellie Pattavina

The “Velvet Revolution” of 1989 marked the collapse of the communist system in Czechoslovakia. This event was welcomed with a feeling of utter jubilation.  However, once the euphoria subsided, the reality of the situation swept across the country and its citizens quickly became disillusioned.  This can best be explained by recalling that fact that prior to 1989, the state had been involved in every aspect of life in Czechoslovakia.  Now, with collapse of the communist government, the certainties of everyday life were ripped from people’s lives and freedom filled the void.  Czechoslovak citizens demanded a higher standard of living and assumed that the “magical” invisible hand of capitalism would fulfill their desire.  Having realized this, the new government, headed by Vaclav Havel, adopted radical solutions to remedy the country’s problems.  Czechoslovakia embarked on a path of rapid economic transformation and the transition to a market economy began.

Economic reform in Czechoslovakia was carried out in four stages.  The first stage dealt with restitutions.  The new government sought out the original owners of businesses that had been seized by the communists in 1948 and gave them back their property.  This was the first step in the process of denationalization.  The second stage involved enterprises that did not exist, or whose owners could not be found.  In this case, the enterprises were auctioned off at Dutch auctions, where citizens could go and bid on the small businesses that were available.  The third stage dealt mainly with the sale of large enterprises.  However, the government was weary of selling these large companies publicly.  It feared that foreign cartels would buy the company and intentionally drive it under.  To avoid this situation, a special ministry was established to oversee the sale of large enterprises.   They drafted treaties, which included clauses that would prevent new owners from changing the name of the company or declaring bankruptcy, for example. 

The fourth stage came in the form of coupon privatization, a topic that deserves a bit more elaboration than the preceding stages.  Under the leadership of Vaclav Klaus, Finance Minister and later Prime Minister, a voucher plan was employed throughout Czechoslovakia.  Czechoslovak citizens over the age of 18 bought their vouchers for about 1,035 crowns (approximately 33 US dollars), at which point that could either keep them for personal investment or entrust them to an investment firm (Stokes 197).  The privatization of many large firms in Czechoslovakia took place through a contrived auction.  First, each enterprise submitted a plan to the government showing how much of its assets it wished to offer the public.  Then, bidders selected their companies and sent their choices to one of the local offices that had been set up for this purpose.  Next, bidding began and “in cases where the demand exceeded or fell substantially short of the number of shares offered, a pricing committee of three persons reset the price upward or downward and a second round was held” (Stokes 198). 

A man by the name of Viktor Kozeny single-handedly revolutionized this process by forming a company called Harvard Capital and Consulting.  He began advertising that his company would guarantee to return 10,350 crowns (ten times the original investment) to any investor within a year if the investor was disappointed in how his or her vouchers were doing with the company.  This process sparked enormous interest from the public and suddenly, Czechs everywhere started to believe in the system.  8 out of 10 million people decided to invest, and before long, the entire economy became privatized!

Of course, in paving the way toward a market economy, Czechoslovakia also undertook measures to reform economic policy.  The purpose of such measures was to ensure stabilization and liberalization.  On January 1, 1991, Czechoslovakia introduced a package of far-reaching transformation provisions which could be characterized as a slightly moderate form of shock therapy (Adam 37).  These provisions laid down the preconditions for a market economy, and as a result, Czechoslovakia achieved positive results.  For example, a more rational price system came into being; the exchange rate was more or less stable; shortages, which existed previously, were gradually eliminated; consumers got a greater choice of products; the private sector was expanding (Adam 41). 

The performance of the economy during the first years of transformation (1991-1993) was achieved at very high social costs and can therefore be described as a stage of substantial economic decline. The country plunged into a deep recession and experienced a considerable decline in the standard of living (Adam 14).  The inflation rate in 1990 was 9.7%, but by 1991, it has increased to 56.6%.  In addition, the unemployment rate increased from 0.8% in 1990 to 2.6% in 1991 (Adam 15).  All of this suggests that things were going to get worse before they got any better.

The Czech and Slovak Prime Ministers, Vaclav Klaus and Vladimir Meciar, agreed to dissolve the country by the end of 1992.  The two independent states of Slovakia and the Czech Republic were formed.  Therefore, data regarding economic performance after 1992 is pertinent only to the Czech Republic.

The period from 1994-1996, one of economic recovery, saw a reversal in economic growth; GDP, industrial production, as well as productivity, all started to increase.  In 1994 and 1995, GDP and industrial production achieved robust rates—102.7% and 106.4%, respectively (Adam 16).  The growth of GDP in 1995 was driven by fast-growing manufacturing and a favorable change in the growth of agriculture.  Rapid growth of investment played an important role as well.

The situation in the Czech Republic remained promising throughout the late 1990’s, interrupted only in 1997 by the ensuing economic crisis.  In May 1997, speculators brought down the value of the quite stable Czech crown by 10% against the US dollar (Adam 48).  This event soon provoked a political crisis in which, many called for the resignation of Prime Minister Klaus.  Klaus finally capitulated and a provisional government, headed by the Governor of the National Bank, was installed. 

 Today, the Czech Republic is still recovering from the ill effects of the 1997 economic crisis, but the outlook for the future is fairly bright.  In fact, according to the Ministry of Finance of the Czech National Bank (Ceska Narodni Banka), GDP is rising steadily.  In 1998 GDP reached 97.7, with an increase this year to 99.5 and is expected to reach 101.4 for the year 2000 [see the graph below].  In addition, inflation is coming down dramatically.  The enormous rates of 8.5% (1997) and 10.7% (1998), have been brought down to 2.2% for 1999.  The only impediment to the Czech economy seems to be the increasing rate of unemployment which is currently 8.7%, and which is forecasted at 11.1% for the year 2000. (http://patriot.net/~bernkopf).

 

Bibliography

 Adam, Jan.  Social Costs of Transformation to a Market Economy in Post-Socialist Countries.  New York: St. Martin’s Press, 1999.

 Lukes, Igor.  Class Lecture regarding Czechoslovak economic reform. 

 Stokes, Gale.  The Walls Came Tumbling Down: The Collapse of Communism in Eastern Europe.  New York: Oxford University Press, 1993.

http://patriot.net/~bernkopf.  Czech National Bank-Ministry of Finance-Macroeconomic Forecast.  December 12, 1999. 


 

 

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