ANDOR I. MESZAROS, Senior Editor, Harvard International Review
On January 1, 1993, the state of Czechoslovakia ceased to exist and the Czech Republic and Slovakia were born in its place. The "Velvet Divorce," as the breakup was known, brought an end to more than 70 years of sometimes uneasy coexistence born out of the ashes of World War I. Communist rule from 1948 until 1989 kept any internal tensions securely under wraps, but the democratic government that succeeded it found itself facing the issue of separatism almost immediately. Elections in June 1992 saw economic reformer Vaclav Klaus capture the Czech premiership while Slovak nationalist Vladimir Meciar came to power in Slovakia. Klaus and Meciar were elected by a deeply divided electorate, and agreement could not be reached on a candidate to serve as federal president. Without the powerful symbol of federal unity that the institution of the presidency represented, it became clear that the nation would divide. In November 1992 the National Assembly voted to dissolve the federation, despite the lack of any real public enthusiasm for the split.
Since then, the two new nations have taken very different paths. The Czech Republic enthusiastically embraced Western capitalism, becoming the darling of foreign investors and boasting one of the strongest economies in Eastern Europe before finally hitting a setback in 1997. With former dissident and playwright Vaclav Havel as president, the Czech Republic showed a commitment to democracy and stable government that won it an invitation to join NATO and put it on the fast track for European Union (EU) membership. Slovakia, by contrast, found itself isolated and struggling to attract sorely needed investors, largely because of the policies of Vladimir Meciar, who, as premier, ruled Slovakia with an iron fist from 1993 until his party was defeated in parliamentary elections last September. Notorious for its disregard of personal freedoms and minority rights, the Meciar government relegated Slovakia to near-pariah status abroad.
The Czech Miracle
The Czech Republic's approach to reform can only be characterized as bold. Vaclav Klaus, Prime Minister from the time of the breakup until late 1997, was a Thatcherite conservative who believed strongly in free market principles. Foremost among his economic policies was the voucher privatization program, which facilitated the transfer of 80 percent of state holdings to private hands by the end of 1994. For a nominal fee--approximately a week's pay--any Czech citizen could purchase a book of vouchers and place bids on the stock of companies being privatized. Citizens could also entrust their vouchers to an investment fund to act on their behalf, an alternative many took. While it is difficult to conceive how state enterprises could have been privatized so quickly and efficiently in any other way without encountering rampant corruption, some problems did arise. The voucher system left many companies controlled by a large number of small shareholders with insignificant influence and a few large, powerful investment funds. Unfortunately, most of these investment funds were owned by the same banks that were the principal creditors of the companies they controlled. With the banks more interested in collecting on their loans than embarking on risky but badly needed restructuring of their holdings, many companies faced stagnation.
Foreign investment has also played an important role in the Czech Republic's post-communist economic success. Since 1990, the Czech Republic has attracted over US$8 billion in foreign direct investment. Germany has been by far the largest source of capital, followed by the Netherlands and the United States. Success stories, such as Volkswagen's 1991 acquisition of auto maker Skoda for US$6.4 billion, only helped fuel interest in the Czech economy. Skoda, once a poster child for communist industrial malaise and the laughingstock of Eastern Europe, was transformed into an efficient, modern enterprise with the help of German expertise. …