Academic journal article Review of Business

Small Business Development in the Czech Republic

Academic journal article Review of Business

Small Business Development in the Czech Republic

Article excerpt

Western observers have collectively heralded the economic "miracle" within the Czech Republic, which currently boasts a balanced national budget, the lowest inflation and unemployment rates in post-communist Central and Eastern Europe, and a Standard and Poor's credit rating higher than that of Greece and much higher than any other post-communist economy (Economist, 22 October, 1994). A large majority of World Bank representatives surveyed in early 1994 identified the Czech Republic as the most promising post-communist country for foreign investment, and the European Bank for Reconstruction and Development (EBRD) rated the Czech Republic in 1993 and 1994 as satisfying more economic criteria for membership in the European Economic community than several of its current members (Economist, 22 October, 1994).

Indeed, the Czech lands during the late 19th century produced 70% of the Austro-Hungarian empire's industrial output and, as recently as 1937, Czechoslovakia achieved a per capita income on par with France and higher than Italy or Austria. The Czechoslovak economy of the 1930s included more than 330,000 small firms employing between one and five people. However, no European country suffered a more thorough loss of small business enterprise than the Czech lands during the postwar years. What few vestiges of private enterprise still survived after the communist electoral victories in 1948 were eradicated after the Warsaw Pact's 1968 overthrow of the Dubcek government's "socialism with a human face." By the early 1970s the post Dubcek communist government had eliminated all forms of private enterprise and consolidated small firms into approximately 1500 state-owned enterprises and 750 state-owned commercial enterprises, the latter with an average firm size exceeding 2500 employees (Rondinelli, 1993). One measure of the economic cost of Communist rule was the relative decline in Czechoslovak income per capita, which by 1990 had fallen to only one-fifth that of Austria (Dyba and Svejnar, 1994).

The Czech Republic's economic transformation since 1990 has been nothing short of remarkable and the following sections discuss the macro and micro economic government policies and market forces fueling this economic transformation, the impact of these factors on the resurgence of the Czech small business sector, and some of the post-communist challenges facing small business development, as revealed in interviews with thirty Czech small business entrepreneurs in August 1993, supplemented by November 1994 interviews with two Czech consulting clients and business and economics faculty of the Czech Management Center. The Czech Republic is comprised of Bohemia in the western and Moravia in the eastern halves of the country. Prior to January 1993, the Czech Republic was federated with Slovakia and the totality is referred to as Czechoslovakia.

Macroeconomic and Microeconomic Government Policies

After the Velvet Revolution of November 1989, the Czechoslovak government of Prime Minister Vaclav Havel enacted a macro economic strategy engineered by Finance Minister (and next Prime Minister) Vaclav Klaus that included the following policies and objectives:

* An austere fiscal policy to substantially reduce state subsidies to state-owned enterprises and to maintain a balanced federal budget.

* A tight monetary policy to restrain inflationary pressures.

* A currency policy to stabilize the Czechoslovak koruna (crown) by pegging its value to a basket of five western currencies (primarily the German mark and the dollar) and making the crown internally convertible so that business operators could exchange limited mounts of crowns for hard currencies.

These macroeconomic policies were accompanied by government microeconomic policies that focused on price liberalization and privatization of government-owned enterprises. In 1991 the government liberalized 85 percent of producer and consumer prices while simultaneously imposing wage controls. …

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