Czech Republic/Economy

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Of the emerging democracies in central and eastern Europe, the Czech Republic has one of the most developed industrialized economies. Its strong industrial tradition dates to the 19th century, when Bohemia and Moravia were the economic heartland of the Austro-Hungarian Empire. Today, this heritage is both an asset and a liability. The Czech Republic has a well-educated population and a well- developed infrastructure, but its industrial plants and much of its industrial equipment are obsolete.

According to the Stalinist development policy of planned interdependence, all the economies of the socialist countries were linked tightly with that of the Soviet Union. With the disintegration of the communist economic alliance in 1991, Czech manufacturers lost their traditional markets among former communist countries to the east, some of which still owe the former Czechoslovakia sizable debts.

The Czech Republic is reducing its dependence on highly polluting low-grade brown coal as a source of energy. Nuclear energy presently provides about 25% of total power needs, and its share is projected to increase to 40%. Norway (via pipelines through Germany) and Russia also supply the Czech Republic with liquid and natural gas.

The principal industries are heavy and general machine-building, iron and steel production, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. Its main agricultural products are sugarbeets, fodder roots, potatoes, wheat, and hops.

The "Velvet Revolution" in 1989 offered a chance for profound and sustained economic reform. Signs of economic resurgence began to appear in the wake of the shock therapy that the International Monetary Fund (IMF) labeled the "big bang" of January 1991. Since then, astute economic management has led to the liberalization of 95% of all price controls, annual inflation in the 10% range, modest budgetary deficits, low unemployment, a positive balance-of-payments position, a stable exchange rate, a shift of exports from former communist economic bloc markets to Western Europe, and relatively low foreign debt.

Particularly impressive have been the Republic's strict fiscal policies. Following a series of currency devaluations, the crown has remained stable in relation to the U.S. dollar. The Czech crown became fully convertible for most business purposes in late 1995.

In addition, the government has revamped the legal and administrative structure governing investment in order to stimulate the economy and attract foreign partners. Shifting emphasis from the East to the West has necessitated restructuring existing facilities in banking and telecommunications as well as adjusting commercial laws and practices to fit Western standards. The republic has made progress toward creating a stable investment climate.

This success has enabled the Czech Republic to become the first post-communist country to receive an investment-grade credit rating by international credit institutions. Successive Czech governments have welcomed U.S. investment, in particular, as a counter-balance to the strong economic influence of Western Europe, especially of their powerful neighbor, Germany. Although foreign direct investment (FDI) runs in uneven cycles, with a 12.9% share of total FDI between 1990 and March 1998, the U.S. was the third-largest foreign investor in the Czech economy, behind Germany and the Netherlands.

The republic boasts a flourishing consumer production sector and has privatized most state-owned heavy industries through the voucher privatization system. Under the system, every citizen was given the opportunity to buy, for a moderate price, a book of vouchers that represents potential shares in any state-owned company. The voucher holders could then invest their vouchers, infusing the chosen company with valuable capital. State ownership of businesses was estimated to be about 97% under communism. In 1998, more than 80% of enterprises are in private hands. When the voucher privatization process is complete, Czechs will own shares of each of the Czech companies, making them one of the highest per capita share owners in the world. Privatization through restitution of real estate to the former owners was largely completed in 1992.

The republic's economic transformation is far from complete. A recession in 1998 revealed that the government still faces serious challenges in completing industrial restructuring, increasing transparency in capital market transactions, fully privatizing the banking sector, transforming the housing sector, privatizing the health care system, and solving serious environmental problems.

Economy - overview: Political and financial crises in 1997 shattered the Czech Republic's image as one of the most stable and prosperous of post-Communist states. Delays in enterprise restructuring and failure to develop a well-functioning capital market played major roles in Czech economic troubles, which culminated in a currency crisis in May. The currency was forced out of its fluctuation band as investors worried that the current account deficit, which reached nearly 8% of GDP in 1996, would become unsustainable. After expending $3 billion in vain to support the currency, the central bank let it float. The growing current account imbalance reflected a surge in domestic demand and poor export performance, as wage increases outpaced productivity. The government was forced to introduce two austerity packages later in the spring which cut government spending by 2.5% of GDP. Growth dropped to 0.3% in 1997, -2.3% in 1998, and -0.5% in 1999. The basic transition problem continues to be too much direct and indirect government influence on the privatized economy. The government established a restructuring agency in 1999 and launched a revitalization program - to spur the sale of firms to foreign companies. Key priorities include accelerating legislative convergence with EU norms, restructuring enterprises, and privatizing banks and utilities. The economy, fueled by increased export growth and investment, is expected to recover in 2000.

GDP: purchasing power parity - $120.8 billion (1999 est.)

GDP - real growth rate: -0.5% (1999 est.)

GDP - per capita: purchasing power parity - $11,700 (1999 est.)

GDP - composition by sector:
agriculture: 5%
industry: 42%
services: 53% (1999 est.)

Population below poverty line: NA%

Household income or consumption by percentage share:
lowest 10%: 4.6%
highest 10%: 23.5% (1993)

Inflation rate (consumer prices): 2.5% (1999 est.)

Labor force: 5.203 million (1999 est.)

Labor force - by occupation: industry 32%, agriculture 5.6%, construction 8.7%, transport and communications 6.9%, services 46.8% (1997 est.)

Unemployment rate: 9% (1999 est.)

revenues: $16.4 billion
expenditures: $17.3 billion, including capital expenditures of $NA (1999)

Industries: fuels, ferrous metallurgy, machinery and equipment, coal, motor vehicles, glass, armaments

Industrial production growth rate: -4% (1999 est.)

Electricity - production: 61.466 billion kWh (1998)

Electricity - production by source:
fossil fuel: 75.54%
hydro: 2.55%
nuclear: 20.37%
other: 1.54% (1998)

Electricity - consumption: 54.733 billion kWh (1998)

Electricity - exports: 10.8 billion kWh (1998)

Electricity - imports: 8.37 billion kWh (1998)

Natural resources: Coal, coke, timber, lignite, uranium, magnesite.

Industry: Types--iron, steel, machinery and equipment, cement, sheet glass, motor vehicles, armaments, chemicals, ceramics, wood, paper products, and footwear.

Agriculture - products: wheat, rye, oats, corn, barley, potatoes, sugar beets, hops, fruit; pigs, cattle, poultry, horses; forest products

Exports: $26.9 billion (f.o.b., 1999)

Exports - commodities: machinery and transport equipment 41%, other manufactured goods 40%, chemicals 8%, raw materials and fuel 7% (1998)

Exports - partners: Germany 42%, Slovakia 8%, Austria 6%, Poland 6%, France 4% (1999)

Imports: $29 billion (f.o.b., 1999)

Imports - commodities: machinery and transport equipment 39%, other manufactured goods 21%, chemicals 12%, raw materials and fuels 10%, food 5% (1998)

Imports - partners: Germany 34%, Slovakia 6%, Russia 6%, Austria 6%, France 5% (1999)

Debt - external: $24.3 billion (1999 est.)

Economic aid - recipient: $351.6 million (1995)

Currency: 1 koruna (Kc) = 100 haleru

Exchange rates: koruny (Kcs) per US$1 - 35.630 (December 1999), 34.569 (1999), 32.281 (1998), 31.698 (1997), 27.145 (1996), 26.541 (1995)

Fiscal year: calendar year