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Czech Republic: First Cracks Appear In Economy

Prague, 21 January 1997 (RFE/RL) - Hailed for the past four years as a success story of the former communist bloc for its speedy transition to a market economy, the Czech Republic is still looking fairly good. But cracks are beginning to show.

In Prague city center the fresh face of capitalism is visible on every street corner. Newly-renovated shopping malls of marble and glass are springing up everywhere as foreign retailers move in to claim a share of the market.

From a wider perspective and judging by the statistics, the Czech economy as a whole appears to be in pretty good shape. It features the lowest unemployment rate in Europe, a balanced budget and an inflation figure which, if not low, is at least less than that of Greece, which is a member of the European Union.

The man credited with much of the country's success is rightist Prime Minister Vaclav Klaus. A dry and business-like man who models himself after former British premier Margaret Thatcher, Klaus was able to push his reform program through practically unchallenged during his first term in office.

Things, however, became more complicated last year when his government lost its majority in the parliament. While Klaus' new minority government struggles to position itself in the parliament, there are fears that the Opposition Social Democrats could hinder the pace of economic change.

In any event, the first signs of a slowdown in the economy since the beginning of the reforms began to show last year. Estimates of GDP growth rate had to be adjusted downward twice and the full-year level is now expected to be just above 4 percent. Inflation was also edging upwards towards 9 percent, but is being carefully watched by the interventionist-minded central bank, the Czech National Bank.

As for privatization, one of the hallmarks of the country's transformation, the process nearly stalled in 1996 and the prospects for 1997 do not look any better.

By June 1996, the government had managed to sell off 873,000 million crowns worth of enterprises through various privatization schemes. Now it is left with shares to the value of 210,000 million crowns and has been forced to come up with new methods of privatization, such as management buy outs, to dispose of the remaining property.

Conducted with lightning speed, privatization saw formerly state-owned companies transferred into the hands of private individuals and banks without restructuring.

Those same companies are now finding it increasingly difficult to swim in market conditions. Although there has not been a single major bankruptcy since 1989, some embarrassing episodes have shown that serious blunders were made during the transfer of ownership.

The most notable case involved the partial sell-off of the Poldi steelworks at Kladno, one of the country's largest plants. Although a final court verdict has still to be reached it's been alleged that the new owner siphoned off money from the company, which crashed with the loss of 6,000 jobs.

A series of banking collapses last year only added to the rising wave of concern over the state of the economy. When managerial incompetence and fraud were revealed to be behind the collapse of eight banks a darker side of Czech financial dealings began to emerge.

Inside dealing and opaqueness of the financial markets have caused some western investors to close up shop and leave the stock exchange altogether.

There are now plans to set up an independent securities commission to oversee the work of the Prague stock exchange. This, however, will have to go a long way to repair the image of the market that investors have graded as below Warsaw, Moscow and Budapest.

Foreign direct investment in 1996 reached $1 billion, less than half of the level of the preceding year and by far not enough to propel the cash-starved economy forward and make it more competitive.

Despite the hiccups industrial production is on the rise. The Skoda car manufacturer, in which Germany's Volkswagen has a majority stake, launched a new medium class family car Octavia in November and the company has increased its output some 20 percent compared to the 1995 figures.

This together with expansionist plans of another Czech company, engineering giant Skoda Plzen, should help offset the burgeoning trade deficit. Claiming to be the first company from a former communist country to buy into a western European firm, Skoda Plzen is spreading out beyond neighboring Germany into Argentina and China.

While there is little doubt about the instant success of the first years of transition, analysts say a lot of fine tuning of the economy are still needed.