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Czech Republic: Difficult Economic Choices Loom

  • Breffni O'Rourke

Prague, 7 October 1997 (RFE/RL) -- "The summer's gone, and we are left in shadow" run the words of an old folk song. That's a refrain which fits the outlook for the Czech Republic rather well this autumn. Faded are the heady days when Czech Prime Minister Vaclav Klaus could boast that his country was ahead of the other Central and East European states in a smooth transition from central planning to the new free market era.

Now, the fundamental problems which the Klaus government failed to tackle correctly in the past years are becoming ever more pressing -- at a time when the government is tired and possibly too weakened to take the vigorous action needed to return the country to economic health.

Not all, of course, is gloom and doom. For five consecutive months now the growth of exports has exceeded the growth in imports, thus narrowing the trade deficit. Similarly the current account deficit, which last year was an intolerable eight percent of gross domestic product, is down to seven percent this year and expected to fall further next year.

Another positive sign is that the restructured segment of industry is getting into its stride with a stronger export performance. This is true in particular of the broader automotive industry, including Skoda, but also other companies which supply components to big western companies like Opel and Ford.

So much for the good news, what of the bad? There's low growth -- only 1.3 percent in the first half of this year. And there's ominously accelerating inflation. In August it reached an annualised rate of 9.9 percent. Jiri Krovak, macro-economist at Woods Commerz in Prague says that the latest inflation figures -- due out tomorrow -- are most likely to show inflation again reaching double digits for the first time in more than two years. Krovak says that if the expected rise is confirmed, it will be a heavy psychological blow to confidence in the Czech economy.

Krovak points to another bad indicator, namely the increase in the country's foreign indebtedness, which is now nudging 50 percent of GDP. This problem has escalated rapidly. In 1994 gross foreign debt was less than $11 billion or 26 percent of GDP. Now, it is $21 billion, or 46 percent of GDP. There's also the question of this year's state budget deficit, cruelly exacerbated by the summer's flooding. Latest estimates say the deficit is likely to be over $450 millon.

What should the government do to counter these manifold threats? Krovak's remedy in the short term is for very restrictive budgetary policies which run surpluses, or at least produce balances. In fact, next year's budget, which will reach parliament soon, is projected as balanced.

The danger of screwing down the lid too hard however lies in the political and social costs it imposes. Heavy spending cuts and wage freezes in the public sector, combined with sharp inflation, are set to raise the barometer of social discontent. The Czech chamber of Trade Unions is planning demonstrations next month against the government's economic and social policies, and some union leaders say a general strike is inevitable.

The Czech population did not undergo a period of deprivation in the early post-communist years as a result of economic shock therapy. The Poles and Hungarians underwent such hardship and are now over the worst, but the Czechs appear less than willing to take the same unpalatable medicine. Krovak warns however, that the social price can only rise in future if the proper action is not taken now.

And Krovak is pessimistic that the government has a sufficient perspective to tackle the long-term underlaying problems. One of these is the inefficient ownership structures which Czech privatisation has managed to produce. By this he means the intertwined situation under which the major Czech banks run investment funds which in turn have high stakes in big companies. This means in effect that the banks have a dual role as both creditors to industry and owners of industry. The result: the banks are tending to keep afloat companies which should really go bankrupt. He says this knot must be unravelled by the privatisation of the big state-owned banks, and by new laws to prevent banks owning large stakes in companies, and to separate the commerical and investment banking sectors.

Krovak sees the present three-party centre-right coalition has having its horizon of activity limited to at most a few months, and is thus unable to focus on the necessary time span for fundamental reform. His answer is a radical political move, namely the resignation or fall of the present government and its replacement by an administration of technocrats. Such a non-partisan government would have to have broad support in parliament. But since it would not be elected, it would be capable of carrying through drastic and unpopular reforms.

Krovak argues that installing such an administration for a set period should be seen as a move which in the end would strengthen Czech democracy, not weaken it.