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be considered complete.
The Czech Republic should reach growth levels of 7 percent this year. That
growth needs to be achieved for the next ten years to simply double their
income, and even then they will remain far behind their western neighbors.
Current GDP in the Czech Republic is only about $3500, which according to
the World Bank, ranks them near Malaysia. Fortunately, unemployment is
practically non-existent at about 3.2 percent, the lowest rate in all of
Europe. And the Czech trade deficit runs about 5-7 percent of GDP. Some
experts suggest that rapid appreciation of the crown in recent times is to
blame.
Furthermore, wages are a problem. Though they remain low, they are rising
very quickly even with governmental controls. To stay competitive Czech
business must increase productivity. This tends to be very difficult
without cheaper capital. Though tax designs are in place to ‘cheapen’
capital, it is not immediate nor as effective as necessary. Finally,
average savings rates throughout the CEE are about 18 percent, which is
just half of the very successful East Asian Tigers (and two to three times
that of developed economies). Czech needs to decide how fast and how much
more they will grow in the near future. Regardless of some of these more
negative indicators, Czech has made a significant transition. The numbers
above simply indicate that their journey is not yet complete.
OECD membership is just a small step toward the Czech’s ultimate goal of EU
membership. The Czech Republic is revamping their policies in order to
comply wherever possible to EU regulations, guidelines and policies in
order to facilitate their membership bid. Some of these changes include a
decrease in the number of income tax brackets, decreases in the VAT from 22
percent to below 20, and the end to all tariffs with EU countries by 1997
(excluding “sensitive products”). These changes are helpful to the Czech
economy but slightly premature. Experts claim they are done solely to
impress the EU application reviewers.
The EU and NATO
EU membership is inextricably tied to NATO membership. It is important to
understand the similarities and differences between these two
organizations, especially as they concern the Czech Republic and the
continuation or completion of the transition. The transition is both
economic and political and therefore should be examined in terms of both EU
and NATO powers. The EU and NATO are arguably the most advance powers
economically and politically in the world. NATO includes the US, while the
EU, of course does not. It is interesting, then, that many claim EU
membership is virtually predicated on NATO membership. This creates an
interesting foreign policy situation for the Czechs. It is not
contradictory, but perhaps a bit dispersed in terms of goals and
objectives.
Originally, NATO was created as a response to the communist threat. Recent
discussions between NATO and Russia suggest this threat no longer exists.
So what is NATO’s role today? For the time being, NATO has a very powerful,
though perhaps indirect role in the continuation of EU expansion. EU
membership would bring long term economic and political stability to the
CEE (a NATO objective as well). NATO must continue to work in association
with the EU to bring stability throughout the region to insure that the
“communist threat” is indeed diffused indefinitely. It is not out of the
question that massive economic and political upheaval in the FSU could
result in some nationalist power rising up and posing a serious threat to
European interests. It is in this sense that NATO and EU have a very
common, and perhaps final goal.
Recently while in Detroit campaigning, President Clinton set a date for
NATO expansion. He did not specifically mention which countries he was
referring to, however, he did say that ‘their’ inclusion into NATO is
expected by 1999 (by ‘their’ most experts assume, Poland, Czech and
Hungary). If the Czech Republic becomes a NATO member by the year 2000, EU
membership could come as early as 2003 or 2004.
Therefore, politically, the Czech Republic needs to satisfy the goals of
both EU and NATO. Economically, they need to address the EU a bit more
thoroughly then the US as the EU will be their main trading partner, but
the US will remain a powerful ally, investor and trade partner. Although
membership in either of these prestigious world powers would be remarkable
for a country just a decade after socialist rule, the Czechs need to
proceed carefully.
In joining the EU, the Czech Republic will face a somewhat unpleasant
reality. After years of being the political and economic leader of the
transitional Warsaw Pact countries, they would be immediately subverted to
the lowest status in EU member countries, lower than Portugal. Though this
would enable them to receive EU assistance, both technical and financial,
it would also require them to adapt possibly painful domestic policies
involving increased environmental standards, increased costs and
drastically high competition in terms of quality and markets. It would also
find them having to compete with Hungary and perhaps the most important
country from the EU perspective, Poland. If Czech is forced to split
benefits and favors with Poland and its huge 40 million person markets,
they will indeed have their work cut out for them. Another major problem
are the EU legal requirements for issues like consumer protection.
The benefits to EU membership, of course are many. The Czech Republic
currently meets four of the five requirements for EU membership under the
recent Maastricht Treaty. The Czechs reached EU membership levels for
currency stability, interest rates, debt as a percentage of GDP and public
expenditures as a GDP percentage. They still fall short on the inflation
determinant. 1996 inflation is still at 9.1 percent. This would have to be
lowered to 3.8 percent to conform to EU standards, a daunting task. The
country will continue to reduce taxes wherever possible to stimulate the
economy, but this is increasingly difficult as the Czechs are now in a
relatively comfortable position where increased reductions in taxes would
seriously hurt social benefits.
The EU is currently in the process of implementing their monetary union.
Though this is a fantastic goal for the Czech Republic, they are not yet in
a position to completely abandon their own monetary policy and rely
entirely on fiscal policy. Even though they could not be permitted to join
the EMU upon their EU membership (it has much stricter requirements than
general membership), it would be strange for the Czech Republic to enter
the EU knowing that they are a far cry from EMU membership. This is not to
say it is inadvisable. The Czechs must join the EU at almost any cost. It
is simply a concern worthy of mention. As the EU expands, the core states
will be able to continue a favored status or elite power center, revolving
around EMU involvement and not simply EU membership. This could be an
important strategic leveraging issue for the core states (and a major point
of contention for the Czech Republic as a new member).
There are many concerns and areas for excitement both politically and
economically for the Czech Republic. They are in a very good position to
come out far ahead of anyone’s expectations. Perhaps even their own. EU and
NATO membership will both be achieved within the next 5-10 years, no matter
what difficulties are faced along the way.
Conclusions
In just seven years, the Czech Republic transformed itself from a
socialist, Soviet-controlled industrial-based economy to an increasingly
service oriented OECD member and number one contender for the next wave of
EU and NATO expansion in the region.
The Czech Republic’s success can be largely attributed to its small size
and population and its relative ethnic and religious homogeneity. More
important, however, is the Czech determination and persistence in meeting
the challenges of transition. The transition that began in 1989 entailed a
great many hardships. Not all of the CEE countries made it through the
transition so successfully. The Czechs succeeded because they were able to
stick to their plan when most other countries were forced to abandon for
political reasons and popular discontent.
When the reform package became difficult, the Czechs didn’t revolt, they
didn’t strike and they didn’t complain. They showed remarkable foresight in
taking early steps to revamp their tax system and banks, keep inflation and
unemployment and wage increases low, and keep their currency at stable
levels. These were not all easily accomplished. They survived the difficult
times and came out on top of the CEE as the only country to make it through
the transition virtually unscathed. This smooth transition earned their
revolt the nickname, “the Velvet Revolution.”
The Czech Republic is now poised to embark upon a greater challenge, that
of becoming one of the world’s power core with EU and NATO membership. It
will entail further difficulties, but compared with the accomplishments of
the past and their ability to overcome Soviet oppression and transition
from central planning, there is little doubt that the Czech Republic will
succeed in their final step toward complete transition from the USSR to the
EU.
References
Economist. Country Profile: Czech Republic. The Economist, London. 1996.
Economist. Saving Graces. The Economist November 9, 1996.
Freiden Jeffrey. International Political Economy 3rd Edition. St. Martins
Press, NY. 1995, Section IV.
Heady, Christopher. Tax Reform and Economic Transition in the Czech
Republic. Fiscal Studies, Feb. 1994.
Heady, Christopher. Tax and Benefit Reform in the Czech and Slovak
Republics. Center for Economics and Policy Research, Discussion Paper
Series No. 1151. March 1995.
Klaus, Vaclav. The Ten Commandments of Systemic Reform. Occasional Paper
43, Group of Thirty, Washington, DC, 1993.
Munk, Eva. Trouble Brews Over Tax Break. The Prague Post, January 18, 1995.
Munk, Eva. 25 Year Old Sports Car Picking Up Speed. The Prague Post,
January 18, 1995.
OECD Economic Surveys. Czech Republic. OECD, Paris, 1996.
State Budgets and the 1993 Fiscal Policy. CTK Business News. May 4, 1993.
Svejnar, Jan. The Czech Republic and Economic Transition in Eastern Europe.
CERGE-EI, Prague, Academic Press, NY, 1995.
Untitled. CTK National News Wire. December 11, 1992.
Web Sites: http://www.cerg.cuni.cz
http://www.aifs.org/czoo.htm
http://alta vista.digital.com - simple query cz repub,
transitional economies
http://www.lbs.lon.ac.uk/school/wpaps
http://www.ssc.upenn.edu/east/spring95/janusz
http://www.hiid.harvard.edu/pub
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