Transitional Success USSR to EU — страница 4

be abandoned. Finally, the Czech tax system had to be completely overhauled. Additionally, the banking system needed massive reform. Large spreads in interest rates were common and overall the banks were simply reluctant to lend on any long term basis, a major impediment to domestic investment and growth. All of these massive changes occurred within just a few years. Throughout these developments, monetary policy remained extremely tight. At the onset of the reform period, it was at its tightest, with a minor break late in 1991, once the political economic dust had settled. Otherwise, the next monetary reprieve didn’t occur until the second half of 1993. By 1994, broad money grew at 30 percent compared with growth of 15 percent a year earlier. More important than doubling

growth figures is that the economy was able to withstand this growth by 1994! Interest rates were high throughout the period, and continue to remain high by most western standards (over 9 percent). Interest rates were not directly controlled but were subject to central bank reserve requirements and discount rate announcements. Liquidity was further controlled through regular auctions of treasury bills. Bank reform focused primarily on establishing the legal framework for transactions between the central bank and newly established commercial banks. Weaknesses still remain in reporting and accounting and the reluctancy for banks to lend. Several commercial banks have had to come back under government control to prevent major economic problems. Macro Economic Stability 1992 -

present By 1992, the CSFR began to show significant signs of success. Though they were in fact more disadvantaged than many other countries in the CEE, they fared well. Their export market consisted almost entirely of former members of the Council for Mutual Economic Assistance (CMEA) who were in the same transitional position as the CSFR, impeding efficient trade. Fortunately, inflation on the whole in the CSFR remained remarkably low when compared to the rest of the CMEA, as did external debt. Inflation did jump just before the CSFR breakup into the Czech and Slovak Republics. Experts suggest this occurred in part due to the fear of instability during the breakup and in part due to an anticipated VAT. As expected, in 1993 (in the Czech Republic), inflation rose again after

introduction of the VAT. In 1993, free from its less advantaged Slovak counterpart, the Czech Republic better targeted its economic recovery plan. The plan encompassed three main elements: 1) A balanced state budget that encompassed sweeping tax reform; 2) A tight monetary policy to reduce the inflation caused by VAT and other lesser effects (which also improved its external position for trade and investment); and 3) Moderate wage increases (adjusted to inflation) and a stable exchange rate. This reform policy was backed by an IMF “stand by” arrangement as a precautionary measure. The IMF would assist if the Czech Republic needed financial assistance. This happened once early in 1993 and Czech officials repaid the loan before it came due (much to the delight of the IMF).

Unemployment remained remarkably low in the Czech Republic at 3 percent in 1993, while Poland’s figures (another major success story in CEE) still remain in double digits. Low, virtually non-existent unemployment certainly contributes to greater political and popular acceptance of the above fiscal and monetary policies. Many attribute a major setback in the Polish “Shock Therapy” reform efforts to the political demands of the labor unions. The Polish President, Lech Walesa, understood the need to keep wages low to implement the reform. But he feared for his political power and caved in to labor pressures by granting wage increases. By doing so he nearly destroyed the entire economic reform process. He claimed that had he not, the entire political reform process would have

crumbled. Czech officials didn’t face this obstacle as unemployment throughout the transition remained low. The political reform process was slightly segregated from the economic reform process. The small Czech population (roughly 10 million) was easier to organize than Poland’s 40 million. Regional differences were less and political factions less pronounced. Regardless, by 1993, the Czech Republic had a very cohesive popular political support base which facilitated the economic reforms. By 1994, foreign trade increased substantially, with much of the growth occurring between EU member nations. Tourism in Prague, now a “must see” on any European vacation, contributed to increased trade to maintain a strong balance of payments and a surplus in the current account. Though