Czech Up

Dec. 21, 2004
What is the real state of the vaunted Czech economy?

Since the 1989 overthrow of Czechoslovakia's Communist regime and the subsequent independence of Slovakia in 1993, the Czech Republic has been widely considered one of the stars of the newly free Eastern Bloc states. The country has a long history of industrialization and technical expertise. In the years before World War II, Czechoslovakia was consistently ranked among the eight largest industrial economies in the world, and Czech scientists and inventors were on the cutting edge of innovation in the automotive, aeronautics, and electronics industries. Thus, the country was deemed the most likely of its Central European neighbors to quickly realize its long pent-up potential as a free-market powerhouse. The country is still considered a "fast-track" applicant for membership in the European Union (EU), but all is not well within the Czech Republic. As Poland and Slovenia speed forward rapidly and Hungary makes up for lost time, the Czechs seem to have slowed to walking pace. Gross domestic product, for example, has been shrinking steadily since 1995, dropping more than 8.5% by 1998. The Finance Ministry's own prediction for 1999 is for a further 1% decline. The growth of exports and foreign trade has slowed concurrently, and unemployment in some regions is at nearly 12%. One bright note: Inflation -- an early problem -- has been reasonably subdued of late at approximately 2.2%. Countries applying for membership in the EU must first bring their laws into line with the rest of the union by implementing 31 chapters of legislation -- some 100,000 pages of EU requirements. As of August the Czech Republic had completed talks on just six chapters. The European Commission, which each October reviews the progress of EU candidate states, last year criticized the Czechs' pace of change. If anything, the pace has slackened in 1999. The Czech government promises that it will achieve EU membership in 2003, exactly 10 years after becoming an independent state. But the government's budget is still running a serious deficit -- estimated to be $1.86 billion in 1999, twice the amount forecast by the Finance Ministry at the beginning of the year. Ongoing spending to raise the level of the armed forces to meet the requirements of NATO membership (achieved this year) threatens to add further to the sea of red ink. And there have been disturbing instances of bribery, corruption, and official incompetence in both the public and private sectors. There is also a widespread belief that the Czech Republic has not prepared sufficiently to deal with the potential problems of Y2K. If that is the case, the havoc that ensues after Jan. 1, 2000, will further depress the national economy. (In this, however, the Czech Republic is far from alone. Many observers believe that most of the countries of Central and Eastern Europe -- as well as some in Western Europe -- will not be prepared for Y2K when it arrives.) Perhaps most worrisome of all is the resurgence of the Communist Party, which in the 1998 national elections garnered 11% of the vote, making it the third-most-popular party in the country. Public-opinion polls in this past summer show the Communists potentially garnering 20% of the vote in the next election, second after the opposition Civic Democratic Party and ahead of the governing Social Democrats. Few observers believe the Communists will be able to convert their current popularity into real election results, and even fewer see the Czech Republic abandoning democratic free-market capitalism and returning to some form of socialist economy. The consensus is that this "new" country needs time to work out its problems and make the most of its many assets. Today, however, time may well be a commodity that is in short supply.

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