Economies Czech Republic

Mr. Tosovsky gives the Czech Republic's perspective of transition in Central

and Eastern Europe Text of eighth Gerhard de Kock Memorial Lecture given by the

Governor of the Czech National Bank, Mr. Josef Tosovsky, to an audience at the South African

Reserve Bank in Pretoria on 17/2/97.

It is a great honour and pleasure for me to be invited to give the eighth Gerhard

de Kock Memorial Lecture, especially as this is probably (if I am not mistaken) the first time

that a governor from the reforming countries of Central and Eastern Europe has been afforded

this privilege. The region of Central and Eastern Europe has undergone a profound re-shaping.

More than 100 million people of Central and Eastern Europe got involved in a far-reaching

process of political, economic and social change. Because of its unprecedented character and

size the impact of this multidimensional transformation has been in continent-wide Europe.

Indeed, the political and economic map of the whole of Europe is nowadays rather different

from what it used to be throughout the postwar period till the 1990s.

Ladies and gentlemen, allow me to share with you some experience we have

acquired. At the beginning of my lecture I cannot avoid briefly mentioning options for economic

and political reforms as opened up for the countries of Central and Eastern Europe in the 1990s

as well as the starting position of the former Czechoslovakia on the eve of the "velvet

revolution" which in November 1989 enabled us to start a process of radical economic reforms.

Initial conditions for economic reforms

The task which confronted the countries after the fall of the communist regime

was enormous. It involved radical change of the whole political, institutional, and economic

system. Along with the rejection of the communist one-party rule, the principles of the past

economic system, i.e. state ownership of the means of production and the central planning and

management of the entire field of economic activity, being entirely discredited, were rejected

too. The issue was thus substitution of the previous system and not its reform. The goal was a

transition toward a democratic society - and toward a functioning market economy, based on the

dominance of private ownership.

The respective move from the Communist centrally planned economy back

towards a capitalist market economy implies a qualitative change in the entire economic and

social regime. As such it is a unique process in modern economic development. The challenge is

not only to stabilise, deregulate and liberalise the economy, as was the case in countries with

extensive interventions such as Spain or Chile several years ago. The transition in Central and

Eastern Europe required basic institutional, systemic as well as socio-political changes at the

same time; it is inevitably a multidimensional process. It follows that, while stabilisation

programmes and reforms in the other parts of the world economy may provide useful lessons

from their experience, there are substantial differences implied both in the initial conditions and

in the substance of the process. The implications of that fact should be remembered when

assessing the course of changes in the previously centrally planned economies. The transition in

Central and Eastern Europe is inevitably a much more complex and longer-term phenomenon,

for which no generalised theory could be available to apply.

Such radical transformation requires a feasible strategy implemented with wide

political support of the population. Transformation requires some minimum speed, and must

start with some "critical mass" of change to secure sufficient impact on the behaviour of

economic agents. In individual Central European post-communist countries, the sequence, speed,

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and forms of individual steps necessarily differed; they had different starting conditions,

different degrees of political support of the new governments, and they also applied different

strategies.

The Czechoslovak case

At the start of transformation in 1990, Czechoslovakia had some economic

advantages over the other Central and East European post-communist countries. In

Czechoslovakia, during the preceding decade, state budgets were mostly balanced, foreign debt

was low, and the balance of payments showed no big deficits or surpluses. Inflation was

relatively low. Even if there was an inflationary potential (reflected not only in open inflation

but also in the forms of hidden and repressed inflation) and the monetary overhang was

increasing in the 1980s, its dimensions continued to be considerably lower than in the other

countries of Central and Eastern Europe. Czechoslovakia, especially the Czech Republic, also

had the advantage of a long industrial history, and of well-educated and skilled labour.

On the other