Experts recall 'the Czech miracle'

Two decades ago, the newly independent Czechoslovak Republic set out on the gargantuan task of privatizing an entire country's economy, a project that spurred wild successes and flagrant abuses but nevertheless was dubbed the "Czech miracle." In 1989, now President Václav Klaus, an economist, became finance minister of the Czech and Slovak Federal Republic and was one of the forces guiding the countries into free market economies. Critics point out, however, that Klaus' privatization policies also entrenched corruption in the Czech business environment. Despite the hurdles along the way, the Czech economy has emerged as a stable and significant one in the Central and Eastern Europe region, even surviving the recent recession relatively unscathed compared with its neighbors. Economists and policymakers talked to The Prague Post about the biggest economic transformations of the past two decades.

Privatization

The transition to private economy was swift and successful in the short term, but Czechs also managed to create their very own brand of financial fraud, coined as "tunneling" in the mid-90s, a practice that sapped the Czech economy of billions of crowns. The major shareholders or management of one company would order a sale of its assets, selling at bargain prices to a second company that the first company's managment owned outright, thereby profiting from the sale. Industry and Trade Deputy Minister Martin Tlapa said there was simply not enough demand at the time to sell off assets at their full market value.

"The two main approaches to the transformation of an economy are shock therapy and the gradual approach. In the Czech Republic, the former, developed by a team around then Finance Minister Václav Klaus, was used," Tlapa said. "Yes, we could have gone the gradual path of privatization, selling production factories and production facilities for real-money equivalent. The problem was there was not enough real money to meet the offer at that time at home."

Industry

One consequence of the revolution and the ensuing split between the Czech and Slovak republics was the redirected focus of the Czech economy, which lost a significant part of its petrol chemical and weapons industries when Slovakia seceded. Since then, the Czech economy has become dependent on the auto industry, Tlapa said.

"The automotive industry and other branches of the machinery sector have made a great leap forward, and as a result, the Czech Republic concentrates more on the automotive industry and its related branches than any other country in the world," he said. "But this specific focus on one industry has proved dangerous in the time of economic crisis. We have a great task before us to develop to a much larger extent the high-tech industry that should be based on the so-called knowledge economy."

Immigrant workers

The number of foreign workers in the Czech Republic has skyrocketed since the borders were opened in 1989. One of the largest, and certainly the most visible, communities of foreigners in the Czech Republic is the Vietnamese, which numbered 421 in 1991 according to a census, and has grown to an estimated 60,000. Marcel Winter, chairman of the Czech-Vietnamese Society, said the biggest difficulty facing workers remains applying for and receiving a visa, especially since the country temporarily stopped issuing work visas to Vietnamese this summer.

"Everyone, including me, had to do blue-collar work under communism. Today, Vietnamese have counseling, travel agencies, shops [and] studios," he said. "It's a pity [the government] stopped issuing new visas. A number of unskilled workers flood into the Czech Republic while there is a high demand for trained Vietnamese IT workers."

Banking sector

Foreign investment capital has largely taken control of the banking sector, with the majority of institutions now foreign-owned. The structure was created by default rather than design, said Anne-Francois Blüher and Miroslav Adamkovič of the economic and strategy research department of Komerční banka (KB).

Several attempts to privatize the banking sector were unsuccessful because of weak management in state-owned banks, poor cash flow in local private banks and, in some cases, even crooked banking institutions, Blüher said.

"The banks needed know-how, capital and independence from both politics and industrial holdings. By selling the banks to foreign banks, these goals were reached all at once," she said.

Economists called the rapid and successful privatization of the Czech economy the "Czech miracle," but it was a transition funded by private banks, Blüher said. Ninety-seven percent of productive assets in the Czech Republic were state-owned in 1990, requiring a swift and aggressive transition to privatized economy. Thanks to foreign capital provided by banks, the pressure for companies to restructure was dramatically reduced, she said.

"The recession in 1997 revealed that the transformation of the Czech economy was not a miracle in the end," Blüher said. "However, we've seen neither a bankruptcy nor a run in the sector since Union Bank's fall in 2003, and Czech banks have withstood the turbulence of the financial crisis much better than elsewhere."

Prague Stock Exchange

The Prague Stock Exchange saw dramatic growth from its founding in 1993, topping off at nearly 1,700 listed companies in the mid-90s. Today, that number has fallen to 16, following massive delisting of companies from 1996 ownward, when the buzz of privatization had worn off and many investors left the region. Petr Sklenář, an analyst at Atlantik FT, called the creation of the Prague Stock Exchange "the least successful part of the transformation," adding, "The lack of an institution and sufficient law system caused the capital market to not start working as it was planned."

"The capital market was not one of the priorities of transformation," he said. "The Polish government tried to sell its stake in state companies through the stock exchange, while the Czech government preferred a direct sale to one investor. Only at the beginning of the voucher transformation were some companies like KB and ČEZ listed on the stock exchange."

The government's choice to use direct sale as a means to privatize companies put the Prague Stock Exchange at a disadvantage to other exchanges in Warsaw and Budapest. The current Prague Stock Exchange is an ineffective shadow of its former self, said Sklenář.

"The Prague Stock Exchange is not a source of capital for Czech companies," he said.

Economy

As economists will point out, it is still too soon to deliver a definitive critique of the economy's transition from communism. Oldřich Dědek, national coordinator for euro adoption at the Finance Ministry, told The Prague Post he is not in favor of a major review of the country's economic past, but said there were many things that could have been done differently during the transition.

"For too long, the political elite prevented the entry of foreign capital into the banking sector, and only numerous and expensive bankruptcies of domestic banks evoked change. And the investment incentives for foreign investors were introduced quite late," he said.

Dědek considers "the initial lack of respect for the legal framework" during the country's economic transition "a stain on Czech transformation." In the early 1990s, he said, the importance of financial regulation was underestimated, which led to economic crisis in 1997.

"I think with greater attention paid to the institutional background of a modern market economy, a lot of spectacular abuse of privatization for personal gain could have been prevented," he said.

Looking back over the past 20 years, Dědek is satisfied with the progress the Czech economy has made, despite the mistakes along the way.

"The Czech economy has kept its position as one of the most advanced among the former planned economies," he said. "An important milestone was the accession to the European Union, which contributed to the cultivation of the market in our country. Early entry in the eurozone would be a logical continuation."

Stephan Delbos can be reached at
sdelbos@praguepost.com