The transformation of Czech Republic into a capitalist state with implications

1. By Olga Danyukova,
Maya Humbatova

2. “The complicity of the challenges facing the so-called
transition economies is often described as „systemic
transformation‟, a term that captures the restructuring of
the entire social system”. (Bradshaw, Stenning 2)

3.  According to the IMF economy transition steps
include:
◦ liberalizing economic activity, prices, and market
operations, along with reallocating resources to their most
efficient use;
◦ developing indirect, market-oriented instruments for
macroeconomic stabilization;
◦ achieving effective enterprise management and economic
efficiency, usually through privatization;
◦ imposing hard budget constraints, which provides
incentives to improve efficiency;
◦ establishing an institutional and legal framework to secure
property rights, the rule of law, and transparent market-
entry regulations.

4.  In the countries of Central Europe and the Baltics,
commitment to macroeconomic stabilization came sooner
and implementation of structural reforms was firmer. These
countries have re-joined the ranks of middle-income
countries and can claim to have transitioned.
 Why Czech Republic, Hungary, and Poland adapted quicker to
the market economy comparing to other CEE countries?
 Because of the exposure to capitalism and democracy prior to
the WWII and before the eventual breakdown from the
communists
 Joined NATO and EU which accelerated the economic
transition

5.  Replacing Central Planning to Free Market
◦ CP officially canceled in autumn 1990
◦ Creation of democratic institutions lead to
corruption and mechanism problems before the EU
standards were adopted
◦ Legislations and amendments to promote private
business in 1990 (amendment to the Economic
Code)
◦ Legal framework: Commercial Code, Competition
Law, tax laws, Law on Accounting, Bankruptcy Law,
and law governing capital markets and securities in
1991-1992

6.  Types of privatizations done in CR:
◦ Restitution
 Return of property to those who owned it before the
confiscation or nationalization by communistic power
◦ Small-scale privatization
 Shops, restaurants, services
◦ Large-scale privatization
 Nonincorporated enterprises
 Auctions, tenders, direct sale, free transfer of property,
Incorporated enterprises
 Vouchers, public offers and tenders, direct sales, unpaid
transfer to the municipalities, restitution funds

7.  Reforms were easier than in
Hungary and Poland because
low foreign debt and
government deficit <1%
 January 1990 the
Czechoslovak Monobank
transferred into: Comercni
Banka, Investicni Banka,
Vseibecna Uverova Banka
 Banking Act, State Bank Act
 Privatization of Banks
strategy failed
 Created new monetary
system that was monitored
by the State Bank of CR
Average 1980-
1989
2.5
1990 -0.4
1991 -15.9
1992* -8.5
1993 0.6
1994 2.7
1995 6.4
1996 3.9
1997 1.0
1998 -1.5
1999
(estimated)
1.0
GDP per capita of CR *before the split of Czechoslovakia Source IMF, World Economic Outlook 1998

8.  Privatization of CR suffered from lingering state
control, delayed privatization of banks
 Positive Growth happened because:
◦ Favorable development of FDI (Foreign Direct Investment)
 Good Geographic position
 Human Capital, Workers
 Long traditions of manufacturing

9.  The main actors of an economy in transition are:
◦ State sector workers. Face significant loses unlikely to realize
any gains.
◦ Potential new entrants. Face initial loses from discipline but
are likely to see gains.
◦ Insiders and oligarchs. Benefit immediately from linearization
and privatization, as discipline is imposed for further
competition, gains are lowered.

10.  The poll of 14,760 Eastern Europeans was conducted
in August and September in eight countries: Bulgaria,
the Czech Republic, Hungary, Lithuania, Poland,
Russia, Slovakia and Ukraine.
 According to the poll, one-half of Eastern Europeans
say they’re worse off today than they were under
communism. Only one-third say they’re better off.
 The Globescan poll found that a clear majority of the
world’s population favors policies traditionally
associated with socialism, including public ownership
of major industries, redistribution of wealth, and an
active role for governments in regulating businesses.

11.  Gowns, Stephen. “Polls show a spectre is haunting Europe…and much of the rest
of
the world”.Communism,Socialism.Nov.15,2009.<http://gowans.wordpress.com/20
09/11/15/polls-show-a-spectre-is-haunting-europe%E2%80%A6and-much-of-the-
rest-of-the-world/>.
 Havrylyshyn Oleh,Wolf Thomas.Determinants of Growth in Transition
Countries.IMF.
June1999.<http://www.imf.org/external/pubs/ft/fandd/1999/06/havrylys.htm>.
 Transition, The First Ten Years. The World Bank.
2002.<http://lnweb90.worldbank.org/ECA/eca.nsf/Attachments/Transition1/$File/
complete.pdf>.
 Shafiqul Islam, Michael Mandelbaum. Making markets. Council on Foreign
Relations Press. Googlebooks database. 1993.
<http://books.google.com/books?id=hv0VON3aResC&printsec=frontcover#v=one
page&q=&f=false>.
 Schnitzer, Martin. Comparative Economic Systems. 8th edition, Sout Western
College Pub. 1999. Hanousek, Kocenda, Lizal (eds.). Tale of the Czech Transition:
Understanding the Challenges Ahead. Praha 2004.