Spotlight On. the Czech and Slovak Federal Republic

In comparison with other former member countries of the CMEA now in transition to a market economy, the Czech and Slovak Federal Republic (CSFR) looks like a quick learner. That is what emerges from the economic survey of the CSFR carried out by the OECD Centre for Co-operation with the European Economies in Transition under its 'Partners in Transition' programme. ¹

Val Koromzay

The Czech and Slovak Federal Republic is proving to be quick on the uptake in many ways. Although the country was not beset by serious macro-economic imbalances before the ' Velvet Revolution' of November 1989, it had to manage its structural reform programme from scratch, not being able — unlike its two neighbours Hungary and Poland — to build on substantive earlier reforms. Hardly two years ago Czechoslovakia had seemed a very model of a centrally planned economy: no legal base for a market economy, virtually no private sector, economic activity concentrated in large units, prices that were completely controlled, heavy dependency on the CMEA for its foreign trade.

Today, in less than two years, a substantial amount has been accomplished. Restrictions on prices and foreign trade have been almost completely lifted; subsidies have melted away; an ambitious privatisation programme has been worked out and is now under way; and the first foundations of a legal base which will allow a market economy and a private sector to develop have been laid, although in a number of areas progress has been slowed by still unresolved issues concerning the Constitutional division of functions between the Federal government and the Czech and Slovak Republics.

Most remarkable of all, this first phase of the reforms has been carried through without undermining macro-economic stability. As matters stand today, inflation has steadied at a reasonable rate, there is a budget surplus, external debt has increased hardly at all, the exchange rate is

Val Koromzay is head of the Central and Eastern European Division in the Country Studies and Economic Prospects Branch of the OECD Economics and Statistics Department.

under control and the external deficit is within limits. Above all, despite the hardships they are suffering as purchasing power falls and unemployment rises, the Czech and Slovak peoples are behaving with a calm and patience that signal their maturity.

In 1990 the Net Material Product (NMP) of the CSFR declined by only 1.1%, and domestic demand increased despite a 5.7% fall in real wages. This is ascribable to the steep drop in private saving and to the policy of partially compensating households through the budget for the disappearance of consumer subsidies. That said, consumption was boosted artificially by householders' stockpiling at the end of 1990 in anticipation of the devaluation of the crown. The picture for the first six months of 1991 is therefore a much gloomier one, with an estimated decline of 13.8% in NMP and a 27% fall in real wages attributable in part to the serious financial difficulties that businesses are facing. Unemployment, too, has been rising rapidly since mid-1990. By August 1991 5.1% of the labour force (around 400,000 people) were out of work, and the rate may well be up to 7% by the end of that year.

Price deregulation has made spectacular progress since the beginning of 1991. The percentage of GDP under price regulation was reduced from 85% in 1990 to between 13 and 16% in January, and by October to only 5-6%. As a result prices jumped by 49.2% during the first half of 1991, but then steadied during the summer and are expected to have increased by no more than 5% from June to the end of the year. A wage-price spiral has been avoided, in part due to the operation of the tripartite agreements between the government, employers and the trade unions concerning allowable wage increases. But actual wage developments have been even weaker than called for in these agreements because enterprises were often unable to pay higher wages.

Macro-economic stability was underpinned by tight monetary and fiscal policies. Total subsidies Were reduced from 16% of GDP in 1989 to only 4.6% in 1991 and the share of government spending in GNP is down by some 12 percentage points. The budget, which recorded a small surplus in 1990, moved towards a very large surplus in the first half of 1991, leading to some policy adjustments to bring it to rough balance for the year as a whole. Monetary policy, too, was tight, ...