According to Jan Vanous, through 1996 the Czech Republic was "the darling of the Western economic and financial community." In 1995-96, the economy was growing at a satisfactory rate, the inflation rate was low, privatization seemed nearly complete, and the government kept a tight rein on spending. The national unemployment rate was no more than 3.5 percent, with the figure for Prague being just .2 percent. A joke going around the Czech Republic was that, in some respects, the Czechs should teach the West how to run a market economy.
Despite the economy's seemingly impressive condition, Vanous recounted the trouble brewing beneath the surface. By early 1997, observers began to see a rapid growth of imports and a rising current account deficit, which in 1996 reached $4.5 billion or approximately 8 percent of the Gross Domestic Product (GDP). In May, as Western investors became increasingly concerned about the ability of the Czech government to control the deficit, to head off accelerating inflation, or to implement structural reforms, they decided to act. Roughly estimated, some $5 billion of koruna-denominated assets (such as bonds and various financial instruments) are internationally traded. Investors began dumping these assets, and within two weeks the koruna lost about 10 percent of its value. After the Czech National Bank spent some $2-3 billion to defend the currency, it opted to let the market decide the value of the koruna.
The difficulties in Czech privatization and the recent successes of Hungary also contributed to the demise of the Czech Republic as the leader in economic reform in Eastern Europe. Western business publications have recently praised the Hungarian government for cutting its current account deficit and lowering the country's level of indebtedness. In addition, economic analysts maintain that privatization in Hungary is superior to the Czech version. The Hungarians simply sold off their businesses to the highest bidder, which in most cases was a Western firm. The result has been that, today, Hungarian businesses acquired by Western multinationals are in what Vanous called "excellent shape," and this has translated into "spectacular productive growth."
In contrast, the Czech privatization plan, based on vouchers given to individual investors, ran into problems. The majority of citizens, uncomfortable with making investment decisions, gave their vouchers to investment funds. Vanous noted that these funds, typically controlled by major banks, had their own agendas that had little to do with protecting the investment of small shareholders. Over time, the funds sought to concentrate ownership, acting like venture capitalists, not as classic portfolio investors. The problem, he argued, was that these funds tried to manage companies without having the resources to put into them. As the value of the companies plummeted, small shareholders lost their money. In the latest wave of privatization, the government is pressuring funds to diversify. They will have to sell large blocks of shares to do so. Vanous suggested ironically that the Czech government should have promoted this kind of sale in 1993. As it is, the Czech Republic might be by 1999 where Hungary is today.
Turning to Slovakia, Vanous stated that "the immaturity of the Slovak political scene" has isolated the country unnecessarily. This is all the more disturbing since Slovakia is not only "strategically located," but its economic figures, in certain respects, look more impressive than those of the Czech Republic. He noted that Slovak GDP recorded 6 percent growth for the first half of 1997, as compared with barely 1.5 percent for the Czechs. Yet it is difficult to pin-point the reasons for growth. In fact, he suggested, it appears that Slovak growth is simply being fueled by government spending. The result is that Slovakia is running a large deficit, with the budget deficit/GDP ratio in the 5-6 percent range. This, combined with a sizeable current account deficit, leaves Slovakia vulnerable to a reaction from the international community. Although the country is poorly integrated into global financial markets, Austrian, German and Japanese banks hold Slovak paper. Should they refuse to buy any more, Slovakia would be faced with a crisis overnight.
Where are these two countries going? Despite some optimistic numbers coming out of the Czech Republic over the past few months, Vanous argued that the political situation in both countries needed to improve before they can "move ahead on the economic front." The Czech Republic, he suggested, needs "a consensus maker" as premier. In Slovakia, the current regime of Vladimir Meciar would have to be replaced by a government that would turn the country's economy away from state or political control and better integrate it into Europe.
Jan Vanous spoke at an EES Noon Discussion on November 19, 1997.