The Czech Economic Crisis: Policy Revenge?

By Rusek, Antonin [*] | International Advances in Economic Research, May 1999 | Go to article overview

The Czech Economic Crisis: Policy Revenge?


Rusek, Antonin [*], International Advances in Economic Research


The current Czech economic crisis is defined and its causes are analyzed. The role of policies followed after the collapse of communism--especially the privatization strategy, macroeconomic stabilization (based on a balanced budget and a stable exchange rate regime), and the microsphere liberalization in the absence of a functioning legal environment-will be assessed in view of current economic difficulties. These policies are identified as the primary cause of these difficulties. The need for policy changes and the nature of such changes are elucidated. (JEL 050)

Introduction

In terms of economic performance in eastern Europe, 1997 can be best described as the year for the return to realism, or, perhaps, the return to fundamentals. After three years (1994-96) of improving economic performance and increasing (albeit, rather slowly) economic growth, in 1997, most of the countries in the region confronted realities of a modern market economy.

Indeed, individual countries differed significantly--as they always did. Poland and Slovakia still performed very well, but their balance of payments deteriorated significantly. Hungary, the Baltic states, and Slovenia experienced restrictions imposed by a balance of payment constraint. All three countries experienced relatively slow growth. Bulgaria, Rumania, and, to a lesser degree, Ukraine experienced near economic collapse after a radical political change and the introduction of new economic policies. Croatia and Bosnia-Herzegovina are still coping with the aftermath of four years of Serbian aggression. Hence, their economic performance is difficult to evaluate. The Czech Republic--the darling of international financial institutions--is often presented as an example to other post-communist countries. Most analysts had called the Czech Republic the "East European Tiger" and predicted a bright future for its economy. Confounding everybody (and themselves most of all), 1997 revealed the Czechs and their eco nomy to the world, not as a tiger, but, rather, as a dead cat. Economic growth collapsed, the current account deficit became unsustainable, and the country posed itself for a crisis on the Mexican or Thai scale. What happened?

The discussion that follows will answer this question in several steps. The next section reviews basic information about the performance of the Czech economy from the inception of independence in 1993. Emphasis is placed on the growth performance in the context of the investments-savings nexus balance of payment constraints and the exchange rate regime. The third section relates the Czech economic performance to policies followed in 1993-97 by the Czech government and the Czech National Bank (CNB). The fourth section discusses the perspectives of the Czech economy in light of the analysis in the second and third sections. Finally, conclusions are drawn in the fifth section.

The Czech Economy: 1993-97

Basic data [1] about the performance of the Czech economy from the country's creation in 1993 are in Tables 1 and 2. Annual data show that economic growth was restored in 1994 and lasted until 1996.

The results for 1997 signal the onset of an economic stagnation. In a more detailed approach (not reported here), it appears that economic growth started in the third quarter of 1994 and lasted until the third quarter of 1996. Between 1993 and 1996, unemployment was rather low, hovering around 3 percent annually. However, during 1997, the rate of unemployment accelerated, reaching an unprecedented number in Czech history--5.2 percent in December 1997. Inflation remained very low by East European standards from 1994 and on, hovering around 9 to 10 percent for consumer prices and around 5 to 7 percent for producer prices.

The nominal exchange rate of the Czech currency (Kc) remained rather steady between 1993 and 1996, depreciating slightly with respect to the DM and appreciating slightly with respect to the US$. …

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