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