Transitional Success USSR to EU — страница 2

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federalist, was elected in the Czech Republic. Unfortunately, these two leaders were unable to agree on common economic and political strategies to govern the CSFR. Klaus’s reform plans, now legendary, were simply inappropriate for the fledgling Slovak regions. Slovakians felt alienated from the government reform in Prague. Within a short time it was very clear that the Czech regions could not completely support their Slovak countrymen through the transition. The two leaders agreed to divide the Czech and Slovak Federalist Republic (CSFR) into the Czech and Slovak Republics on January 1, 1993. Federal assets and liabilities were split between the two nations in a two to one ratio. The Czech Republic received the larger portions reflecting both size and population. Again, the

split was achieved peacefully, without massive debate. The two countries agreed to form a customs union. They implemented identical foreign policies with respect to third countries, and forbid tariffs or ‘bans’ between themselves. They also formed a temporary monetary union, which collapsed within months as both countries unexpectedly experienced a massive drain on foreign reserves during this time. To more fully understand the current developments in the Czech Republic, one must examine the historical economic decisions made before the break-up in 1993 as outlined below. Transition to Market Economy Overview: 1990-1991 CSFR economic reformers went to work immediately following the collapse of Soviet rule. The reform package included near complete liberalization of prices, a

complete reversal of former exchange and trade systems and an impressive preparation for massive and rapid privatization. These efforts were supported by financial policies including a “pegged” exchange rate, currency devaluations, and restrictive fiscal, monetary and wage policies. Monetary Policy Although monetary policy is discussed in a separate section, it needs to be briefly addressed here to understand the conditions in which the transition occurred. Monetary policy in the initial stages of transition ensured that inflation remained in control throughout currency devaluations and price liberalizations. The CSFR devalued its currency by 20 percent in 1991 after several smaller devaluations before hand. Taken as a whole, these devaluations reduced the value of the

currency by half within six months. Generally, monetary policy remained tight throughout the entire period. Fiscal Policy Undoubtably, the goals of the CSFR economic reformers were to drastically reduce government spending. The former centrally-planned, output-driven economic policies were no longer effective for the new capitalist democracy. Restructuring government expenditures was a key component of reform. The main changes, aside from massive privatization discussed below, forced reduced subsidies wherever possible. Every sector of society, with the exception of health, welfare and education, saw an abrupt end to government subsidies. In 1991 alone, for example, officials reduced government spending by 12 percent to reach 47 percent of GDP. This trend continued throughout the

transition. Massive government spending, a hallmark of socialism, ended virtually overnight. Areas where government spending remained high would remain so throughout the reform process. Health and welfare for poor, elderly, unemployed and children is a very difficult situation in any government, especially one in transition. Reformers focused primarily on industry and energy in the initial stages, leaving the areas of greater uncertainty to be dealt with in a more stable political environment. Price Liberalization As an almost immediate measure, subsidies to foodstuffs and energy were reduced by nearly 50 percent. Retail prices for most household items increased by nearly 25 percent literally overnight. By the end of 1991, the Czech government controlled only 6 percent of prices

in the country as compared with 85 percent in early 1990. Only basic necessities, oil, and agricultural products remained under state control. To offset some of these shocks, wages increased, though only slightly and not nearly enough to meet the increased cost of living. Politically powerful trade unions prevented the passage of even more drastic reform measures. Plans in 1991 to increase the price of electricity, heating oil and coal by nearly 400 percent and rent by 300 percent were delayed until 1992 and 1993. Foreign Trade and Investment After an initial currency devaluation of nearly 50 percent, the government adopted an adjusted exchange rate connected to a “basket” of convertible hard currencies. Internal convertibility of hard currencies was established in 1991.