Economic Aspects of
Transformation
A Changing Role of the
Government
I.Maly, Masaryk University Brno
Content
· Introduction
­ From a centrally planned command
economy to a market (mixed) one
­ Milestones
· Changes in the role of the government
­ Public Sector´s formation
­ Privatisation
­ New fiscal policy
· Discussion
Some history...
· Until 1918, Austro-Hungarian Epire, Bohemia
and Moravia were probably most industrialised
parts (Skoda Pilsen: heavy industry,
armaments), glass, textile, light industry...
· 1918-1938, ,,First Republic", democracy, one of
most developed countries in that time, however
a heavy impact of Great Depression (1928-
1934). Weapons, transportation vehicles, glass,
textile, shoemaking (Bata)...,
...continued
· 1938-1945 Occupation, World War II, a lot of
damages (certainly not that much like
Germany...)
· 1945-1948 Rebuilding, National Front
Government, Nationalisation of German
property, Coal mines, Heavy industry, Foreign
Aid (UNRA), Devastating drought (1947)
· 1948 ,,Winning February" ­ communist took all
power ­ peoplés democracy, socialism (1960).
Five-year plans, Industrialisation of Slovakia,
Nationalisation of everything. Private sector
almost disappeared.

Socialist Economy
· Centrally planned (five years plans)
· Private sector non existing
· Starting from late 60´s some attempts for reforms,
economic incentives, ,,chozrasèot"
· The growth of the economy was based on an output
from heavy industry, coal mines, metallurgy,
engineering, large constructions (dams), cement,
energetic...
· A member of Council for Mutual Economic Co-operation
(USSR, Eastern European countries, Viet-Nam, ...
· A clear lag behind Western democracies in terms of
standard of living.
· Environmental impacts (mainly northern parts of the
country)
deregulated
deregulation
with several
exceptions
(housing,
energies..)
regulated
Prices
dttomixture like
anywhere else
Convertible
(floating)
,,Market"Market
Germany, EU
(old markets were
lost, surprisingly
fast recovery in
some industries ­
car producers.
foreign
investment,
privatisation
(details see
below)
Convertible
(fixed on DM
and $) ­ early
nineties...
Semistate banks
(bank socialism..)
until 2001 when
last major banks
became fully
private
Transformati
on Period
(1990-20...)
USSR,
COMECOP...
National ­
state...
Not­
convertible
Centrally planned
by the
government
Socialist
Main trade
partners
OwnershipCurrencyResource
allocation
Current Czech Economy
over
48%
overall
deficit
reached
10%
below
2%
close to
3%
increased
from 41% in
1998 ­ left
wing
government
struggling
with ,,burned
country..."
trade balance in a
heavy deficit
(although getting
better)
balance of capital
flows ­ surplus
(quite attractive
for foreign
investment)
this JanuaryCore inflation
even lower -
price increase
because of
deregulations
Has started
actually rise
in 1999.
Serious
depression in
1996-1997
Total
public
expen
d.
balance of
payments
unemploy
ment
inflation:growth:
Changed role of the Government
· from state monopoly to plurality in many
branches of social services ­ building up a
real Public Sector
· from directive commands and plan to
organising, standard legal environment, and
economic incentives
· from preferred state ownership to an equal
treatment for all kinds of ownership
· from the tough centralism to some
decentralisation within government levels
(stronger local govern.´s position)
· lower level of redistribution

Building up a New Public Sector
(Principles of the Public Sector Transformation - PST)
· diminishing of and changes in the general economic role
of the government ­ the PS was created by reduction (a
key question was ,,What should stay in government
hands...")
· privatisation, plurality ­ cream skimming, fears from
losing a control....
· new fiscal and budget policy ­ (ambitious goals)
· new social policy - social, health care, education reforms
· public administration reform
Privatisation
· The specific nature of privatisation - it was a tool of
eliminating a major systemic feature of the communist
system - primarily ideological objectives!
· Government's top priority was to privatise the public
sector quickly and she did ­ naturally with some
unpleasant consequences ­ tunneling, unclear structure
of owners, a large share of semigovernmental agencies
and banks....
Privatization - methods
· restitution
· ,,small-scale" privatization (services)
· "large-scale" privatisation (in order to
privatise large industrial enterprises)
­ They have either been sold directly to pre-
approved buyers or transformed into joint-
stock companies whose shares were sold
either
· directly to investors
· or through voucher privatisation.
Privatization ­ a magnitude
· the share of the
private sector was not
higher than 4.2% of
GDP before 1990
· less than 2% of
registered property
was private
· 63% of GDP from
private sector in 1995
­ 85% services
­ 90% agriculture
­ 40% industrial output
· much higher now

Non-state sphere share in
GDP
0
10
20
30
40
50
60
70
1992 1993 1994 1995
%of GDP
Privatization 2
· ,,small" privatization in 1990 (services)
· two waves of a coupon privatization
· 8.5 mil. stock-holders after 1995
· major owners - banks and investment
funds
· massive foreign investment
,,,,Capitalism without a capital...Capitalism without a capital...""
Fiscal policy strategy `93
· graduate decline in the general budget`s
share on GDP
· balanced public budgets
· stabilized public debt at current nominal
level
· a new tax system based on a neutrality,
equity, and simplicity
Public expenditures as a share of GDP (%)
household
transfers
subsidies goods and services

Public Debt Tax quota
34
34,5
35
35,5
36
36,5
37
37,5
38
38,5
1993 1994 1995 1996 1997 1998 1999 2000 2001
Social policy strategy
· reform of the social benefit system
­ means tested allowances
· reform of the health care system
­ public insurance
­ market incentives