Transitional Success: USSR to EU — страница 5

FDI by 1994 had decreased (after very high initial investments in 1992 and 1993), the capital account maintained high inputs due to the rise in borrowing of Czech firms (which proved even better for Czech long term economic success). GDP began to rise slightly after a period of decline from 1991-1993 of nearly 20 percent. Privatization entered its second round in 1994 for enterprises being privatized through voucher programs. The first wave of privatization is considered a remarkable success (a model to be used farther east). As this first wave ended in 1993, the Prague stock exchange began trading and the banking system went though increased and improved reforms. The Czech Republic was a leader in the CEE in trade and investment. Economic reform efforts, coupled with the above

mentioned political support, put the Czechs at the forefront of CEE success. Industry Industrial output by 1993 declined by nearly 21 percent compared with 1991 figures. This can partially be explained by increases in the service sector, as investment soared in service sectors and dropped dramatically in the industrial sector. Also, the industrial sector was the most inefficient sector in the former centrally planned economy and much of those inefficiencies were corrected with the introduction of market reform. Most industries produced less as consumption dropped. And they did so more efficiently as output based economic plans were no longer used. It is significant to note that the Czech Republic does not have an industrial policy. They feel the state does not have enough

information or resources and thus it is most efficient to allow the private sector complete control. Government could assist with exemptions and subventions, but the market should determine winners and losers. However, the Czech government continued, through 1994, to bail out state-owned enterprises, mostly due to their economic (employment) and political leverage. In essence, this hurts struggling smaller, private, firms that are unable to compete with giants, let alone subsidized giants. These large industrial subsidies are all but gone in most industries today, however they still exist for politically sensitive or economically vital industries. In some cases the government reluctantly returned to subsidies as not all of the initial privatization efforts proved successful. Some

large enterprises were not effectively dismantled and the resulting giant enterprises were simply too large and inefficient for the new market economy. It took several years, in some cases, to learn this lesson. Prices Consumer price inflation by 1993, after the initial shocks of the VAT, stabilized at 18 percent. Experts estimate the VAT added 7 percent to inflation during 1993 and an additional 2 percent can be attributed to government administered price regulations. Price regulations remained mostly in the utilities sector. Adjustments from 1994-1995 increased prices in several key areas including gas, oil, transportation, medicine and telecommunication tariffs. Wages Wage restraints through a “tax based income policy” was an important feature of the CSFR. Wage restraints

ended in 1993, but had to be brought back by the end of the year by the Czech government. The rational behind bringing the restraints back was that market forces were not yet adequate to control wage increases. Wage increases had to remain close to increases in consumer prices to avoid inflationary difficulties. Therefore, as late as 1995, up to 100 percent tax rates were applied to wage increases over allowable limits, effectively keeping wages at desired rates. Monetary Policy: 1993 By 1993, Czech monetary policy began to stabilize in conjunction with political and economic indications of success. The basic aims of monetary policy at this point were simply to maintain internal and external currency stability. Officials kept the Czech crown pegged to stable European currencies

and prevented inflation from rising above 10 percent. In a somewhat disguised blessing, foreign capital flowed into the Czech Republic at high rates in 1994 causing officials to raise reserve requirements from 9 to 12 percent to insure inflationary stability. The banking system, though still flawed, was able to withstand the pressures. The economy certainly welcomed the increased capital. By 1993 and even more so by 1994, monetary policy was less of a political tool in the reform process. Stability in many respects had been achieved. The nature of further reform and continued stability relied almost entirely upon fiscal decision-making. To fully understand and appreciate the political economics of reform from 1993 onward, both fiscal and monetary, an examination of the Czech