Transition   Privatization   

Privatization in Czechoslovakia

by Deniz Arikan

by James K. Yang

by Jeffrey Lin

 

updownThe Privatization Process in Czechoslovakia

by Deniz Arikan

Before the "velvet revolution" of 1989, more than 96 percent of Czechoslovakia's assets were state-owned. Along with East Germany, the country had one of the most state-dominated economies in the world. Virtually all prices were state controlled, and small- and medium-sized firms were few and far between. Private initiative was nonexistent and limited to black-market activities. The fundamental policy question was how to transform this stodgy, centralized economy into a vibrant market economy.

My researches and studies have proved that, everybody agrees Czech Republic is the Eastern European nation which has had the most successful transition process and thus has seen one of the best results on its economy among the other Eastern European countries. For example, the CIA fact book states that western observers view the Czech Republic as one of the most politically and economically stable post-Communist states. In 1994, the growth rate was around 2.4% and reached about 5% in 1995 and 1996. Also the country had the lowest unemployment rate in 1996, which was 3.3% and had a low inflation rate of 8.7% which was also among the lowest in the region.

There were several reasons behind this success. The region was heavily industrialized for generations before the Communist takeover after the war. The country was a Western European country in every sense such as politically, culturally, and economically, and the most important, reforms were led by the non-Marxist economist Vaclav Klaus, planned carefully for a year and started in January 1991, including decontrolling prices and making the currency convertible.

The Czech Republic’s mass privatization program, including its innovative distribution of ownership shares to Czech citizens by "coupon vouchers," has made the most rapid progress in Eastern Europe. The voucher privatization event involved the vast majority of adults and gave all citizens equal access to the vouchers (the parallel currency used for privatization) at a nominal fee. The scheme was therefore equitable and popularly based. In addition, it had a number of positive economic effects. The most important aspect was that by obtaining shares, individuals gained assets they could use as collateral for acquiring financial capital. And in a society where the communist regime prevented most individuals from accumulating wealth, the principal policy question was how to endow individuals with capital that would enable them to start small and medium-size enterprises. Voucher privatization proved a quick and efficient way to aid that process, and the growth of small and medium-sized private firms has been an important engine of growth and generator of jobs in the economy. The process made people feel comfortable getting used to the market economy, and helped setting prices.

It is also important to remember that using the vouchers was just one of the several methods of the privatization process in the Czech Republic. The others were restitution and free transfer of property, auctions, tenders, and direct sales. These methods were used when privatizing small firms such as department stores and restaurants. The voucher scheme was not the only means of privatization, but it was the key.

During the privatization progress, industrial production fell by 35%, as inefficient state enterprises were liquidated. However, Vaclav Klaus prepared the public in advance by repeatedly explaining the necessity and benefits of the reform. Mass privatization of 2,500 state enterprises through vouchers has moved the economy from 2% private ownership in 1990 to 80% today.

Unfortunately, the government has failed to finish the economic revolution. Voucher privatization was an excellent start of a complex transformation of the centrally planned economic system. However, the transformation requires a number of other steps, including changing the legal system and regulation of the emerging financial markets. These steps must be completed if the economic revolution is to be finished.

Sources:

  1. The CIA fact book

  2. EC397 homepage, Lecture notes "transition"

  3. Czechoslovakia – A Country Study (http://lcweb2.loc.gov/frd/cs/cstoc.html)

  4. Different Strategies of Transition to a Market Economy: How Do They Work

  5. World Bank (www.worldbank.org/html/dec/Publications/...9-abstract.html)

updownThe Privatization of Czechoslovakia

by
James K. Yang

In the past two decades of our history as a world, there have been many substantial changes that many never thought would happen.  Large government powers that held strong grips on small nations have lost all of their power.  New nations have emerged creating new economic markets that never existed before.

            One such nation that has gone through many steps to restructure their government and economic system is Czechoslovakia.  Before the Velvet Revolution of 1989, Czechoslovakia existed under Communism.  However, along with their release from the grips of Communism came the opportunity for the people of Czechoslovakia to create a society more beneficial for all of itís people.  The first crucial aspect of this change is the ability of the Czechoslovakia to compete once again with the open market.  With this new ability to compete with other nations comes the possibility for Czechoslovakia to move towards privatization of its enterprises both large and small.  This privatization of enterprises allows for the citizens of Czechoslovakia to take a new active role in the future of Czechoslovakia and its economy.  This privatization of small and large enterprises has been approached by many different methods.

Small enterprises are done by a program, which entails the sales of small businesses through auctions.  All citizens of Czechoslovakia can participate in the auctioning of these small businesses.  Along with these auctions, bank financing is also provided for the participants.  These auctions of small businesses were held as often as four times a week throughout the entire country.  In the entirety of the auctions over 20,000 small enterprises, mostly being retail outlets, were auctioned off to the people of Czechoslovakia.  The citizens of Czechoslovakia who purchased some of these small businesses had also benefited from the ability to buy the business without their debts.  These debts were paid for by the proceeds of these auctions.  Along with these auctions of small enterprises other small enterprises which were expropriated after 1948 were returned to their previous owners.

However, the privatization of larger enterprises was approached by a different method.  Instead of straight auctioning off of large enterprises, which would be very hard to accomplish unless there was a large number of wealthy investors.  The relocation of large enterprises was done through a voucher program.  The voucher program allowed for any Czechoslovakian citizen over the age of 18 to be entitled to acquire a voucher book which gave them 1,000 voucher investment points.  With these points an individual could choose to do a multitude of things.  They could choose to use their 1,000 points to bid for shares in these large enterprises or they can use them to invest in shares of a mutual fund.  These mutual funds allow for inexperienced citizens to avoid getting caught in financial analyst of enterprises.  It also allows them to have a higher chance of obtaining a more diversified portfolio.  This allows them to make very wise decision to make the most of their voucher books.

Czechoslovakia, itself has chose to deal with this privatization of large enterprises in three waves.  The first of these three waves was in 1992.  Potentially 11.2 million individuals were able to purchase a voucher book and then register their books for about $33.  With these registered voucher books individuals will have the opportunity to pledge their vouchers to one or several mutual funds.  The minimum investment would be 100 investment points per mutual funds.  This allows for each voucher book to be invested in a maximum of 10 different mutual funds.   

The second wave of privatization consists of a multiple round bidding process for shares of the enterprises.  The enterprises were offered prices proportional to their own book values.  However, these prices are the prices offered only during the first round.  If shares of these enterprises are still existent in later rounds they will be offered to the Czechoslovakian citizens for lower prices than the first round.  Another factor in these rounds is the fact that individual bids are given higher priority and preference over the mutual funds in order to make the process more simple.  After all of the individualís have finished their bidding on all of the enterprises offered the remaining stocks are then split up amongst the mutual funds.

The final wave in the privatization process is one in which the remaining stocks of large enterprises are allocated and the remaining voucher investment points are valued so that they can be paid out to their holders.  As in the small enterprises, not all of the large enterprises were privatized. Those enterprises which foreign investors had interests in were excluded from the privatization process.  This foreign investment allows for easier access to foreign markets, technology and capital.

This process of privatization is unlike any other Eastern European nationís efforts towards privatization.  The speed at which the nation of Czechoslovakia has implemented their privatization program has directly reflected the desire of their nation to return to the Capitalistic economy that they were before the emergence of Stalinís Communism which ruled over Czechoslovakia after WWII which crushed their open market economy.  After all of their attempts to return their nation back to their democracy, the Czechoslovakians have finally gained back their freedom that was robbed from them. 

Sources

 

1)  Aghevli Bijan, Borensztein Eduardo and Willigen Tessan.  Stabilization and Structural Reform in the Czech and Slovak Federal Republic.  International Monetary Fund Publication Serv.  Washington DC   1992.

 

2)  Svejnar Jan.  The Czech Republic and Economic Transition in East Europe.  Academic Press Inc.  San Diego, CA  1995.

updownThe Separation of Czechoslovakia and Privatization

by Jeffrey Lin

Czech Republic and Slovak Republic became the successors of Czechoslovakia on January 1, 1993. The break up altered the privatization plan, since the original plan was made for the economy as whole. The break up had negative effects upon both countries but especially on Slovakia, since the productivity in Slovakia was lower and it depended more on the other socialist countries undergoing transition.

Before the break up, a uniform privatization plan was applied to both countries. The privatization plan included two stages, small privatization and large privatization; with restitution being applied throughout both stages. Restitution involved return of nationalized private property to original owners. From 1990-1991, over 70,000 properties were given back (Fidrmuc, 2.4). Small privatization involved mostly small retail and service business. Czech Republic had more small firms than Slovak Republic, because Slovakia was industrialized during the socialist era as arms production area and thus had relatively more large industrial firms. As a result 21,400 small businesses were privatized in Czech Republic at the end of 1992 while Slovak Republic privatized only 9676 units (Fidrmuc, 2.4). The core of restitution and small business privatization took place before 1993 thus the break of the country had only nominal effect on it.

Large privatization was a more complex process. Unlike restitution and small privatization, part of large privatization was affected by the break up. Large privatization is the transfer of large firms (the size is determined by local privatization committees) to the ownership of people. In addition to the so called 'standard methods' a new 'voucher' or 'coupon' method was used in large privatization.. The four standard methods were auction, public tender, direct sales, and ownership transfer from state to the local authorities. For several reasons the use of standard methods was limited. First, as it was the immediate post-Communist era, most citizens did not have sufficient personal wealth to be able to purchase privatized firms with own funds. Also loans were not easy to obtain, because government was fighting inflation with tight monetary policy. Second, there were too many large firms to be privatized, thus the extent of administrative work needed would prolong the privatization process. As a result, many large firms were privatized through coupon privatization. The essential idea of coupon privatization was to give all Czechoslovakia citizens, of eighteen years or older, a chance at owning shares of the large companies. It was called coupon privatization because any person who wanted to participate in the process had to purchase a 'coupon book' containing one thousand points, and then use these points to purchase shares of privatized companies. Shares of companies that were in high demand would cost more points than those in low demand. Individuals also had the option of investing in investment privatization funds (IPFs), that were very similar to mutual funds. The coupon method resulted in the fast and efficient transfers of ownership. Since the price of the coupon book was nominal it was also socially fair. In addition, the coupon method also created instantly a new social class of investors, which is important for future economic growth.

As mentioned earlier the break up of the country occurred before the completion of large privatization. This altered the course of large privatization. The first wave of coupon privatization occurred prior to the breakup thus citizens and firms of both republics had cross share holding. Slovak Republic holds approximately 13% of Czech companies, while Czech Republic holds 8% of Slovak companies (Fidrmuc, 2.4). However, Czech Republic held a second wave of coupon privatization soon after the break up while the Slovak Republic did not announce a plan for a second wave until early part of this year. Slovak government felt that Czech government's transition was too fast, thus Slovak government adopted a more gradual approach. The different speed at which two governments proceed with the transition is the most significant alteration of the original privatization plan.

The immediate effect of the break up was a negative shock to both economies. This was expected, since the break up would include additional administration costs and a separation of state budgets. Furthermore, the end of the custom and monetary union significantly decreased trade between the two countries. Consequently the immediate economic impact of the break up was negative and the stagnating GDP of both countries in 1993 indicated this effect. Furthermore, because Slovak Republic had smaller economy, the costs of the break up had more adverse effect on it.

According to the CIA World Facts Book the Czech GDP was 76.5 billion in 1994 while the Slovak Republic's GDP was only 32.8 billion. This indicates slightly lower per capita GDP in Slovakia, because the ratio of population was almost exactly 2:1. However, it should be pointed out that the Slovak real growth rate in 1994 was by 2% higher than the Czech real growth rate (CIA World Facts Book). Nonetheless, the higher GDP growth rate does not necessarily mean that Slovak Republic has a better economic condition. Unemployment rate in Slovak Republic has consistently been more than double of Czech unemployment rate. In 1994, Slovak unemployment was 14.6% while Czech unemployment rate was only 3.2%. It should be noted that the lack of well functioning housing market prevented labor mobility; thus even before the break up, unemployment rate was higher in Slovak Republic.

Furthermore, inflation rate has also been consistently higher in Slovak Republic than in Czech Republic (1994 figure was 12% in Slovak Republic and 10.2% in Czech Republic). Foreign investments also favor Czech Republic, due to a perceived political instability in Slovak Republic. At the time of the break up, 70-80% of the foreign investment remained in Czech Republic. This disproportion of foreign investments will obviously contribute to a more favorable economic future for Czech Republic. Lastly, Czech Republic was the first post-Communist country that repaid all of its IMF loans and joined the OECD; thus demonstrating the superior economic position of Czech Republic relatively to Slovak Republic.

The two republics, nonetheless, are still very important to each other. This is true especially for Slovak Republic. Slovakia tends to exports to other former communist countries. Thus, Slovak Republic's exports suffered more as the former communist countries underwent transition. Also, 15.6% of Czech imports are from Slovak Republic, while 29.9% of Slovak imports are from Czech Republic, thus confirming the greater dependence of Slovak Republic on Czech Republic. Of Czech exports, however, 15.5% is to the Slovak Republic, while 37.7% of Slovak exports are to Czech Republic; thus the two countries are very much interdependent.

Sources:

  • 1. gopher.wu.wien.ac.at:70/11/.cerro.ind/papers (A paper by I. Fidrmuc)

  • 2. http://www.odci.gov/cvia/publications/95fact (CIA World Facts Book)

  • 3. Political and Economic Transformation in East Central Europe, published by Austrian Institute for International Affaris

 

 

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