Transformation process Transformation process - generally nTransformation vs. reform nA transformation qChanges of the economic system as a whole nIn the Czech republic – changes from the central planned economy to the market oriented economy nA reform qA partial changes inside the existing system nReform of taxation system nReform in pension system, etc. nThe main question qWhat was the aim of Czech (Czechoslovak) transformation? nDoes not exist of exact answer. Transformation process - generally nOne of the aim: get near to developed market oriented countries. qSeveral types of market oriented economies qDepending on ngovernment interventions in the economy nThe level of social system and policy nProblem of setting future economy as a whole: qFree market economy - liberal approach qMarket oriented economy with social attributes qA compromise between free market and central planned economy q q Public Opinion in 1991 Economic system before 1989 Free market Market with social attributes Popularity in % 5 48 47 Possible forms of economy system nFree market qRepresentatives: Klaus, Dyba, Dlouhy qA limited role of government, limited interventions in the economy qPriority: the low rate of inflation nMarket economy with social attributes qRepresentatives: Zeman, Komarek qBase on Keynes’s ideas qThe policy bases on interventions, strong role of government qPriority: low level of unemployment nCompromise qIncrease the role of market in central planed economy qEstablishing of competition between companies qLimitation of state aids to ineffective companies n Main changes of system from central planned to market oriented economy nPrompt reform steps qPrice liberalization qLiberalization of foreign trade qFree establish of business qElimination of state aids for companies qSet of capital and financial market qLiberalization of proprietorship nLong-term tasks qLegal framework qChanges in justice n Approach in transformation process nThe gradualism qSlow pace of reforms qAll negative factors could be limited by the slow pace of reforms nOptimism about situation in business companies nAfraid of social pressures nThe shock theory qQuick pace of reform qBasic reforms in short time horizon qAccompanied by stabilization policy and withdrawal of government interventions qThe main ideas based on expectation that in society there will be a will for victims nThe will to reforms will be declining to reforms Political development nPolitical development was initial for the whole process of transformation. nAfter the communism coup in 1948 in Czechoslovakia was communism government till 1989. nAfter mass demonstration in Nov 1989 led demission of government and set cabinet of National Unity that governed till first free election. nAt the same time at the end of 1989 was elected Vaclav Havel as the first president of Czechoslovakia. Political development nFirst free election was in 1990 qReferendum about the previous political regime nThe winner of the election were representatives of reforms ideas qIn Czech Republic won Obcanske forum (The Civil Forum) – organized group of reformers qIn Slovakia won Verejnost proti nasili (The Public against violence) Political development nGovernment coalition split in 1991 when Civil Forum was left by future members of Obcanska demokraticka strana (ODS). nFirst two years of transformation was characteristic by disputes between representatives of Czech and Slovak Republic qDispute about a “dash” nCzech and Slovak Federative republic or nCzech-Slovak Federative Republic qSlovakia representatives rejected V. Havel as a president qDisputes about competences nWhich competence will be at the hands of federal government and which at the hands of national governments. nIn 1990 was decided about next election in 1992. qThe winning coalition got public permission for quick continuation of economic reforms qThis coalition gained 150 chairs from 200 in House of Parliament. q Political development nThe winning was a success of reformers because in a lot of former communist countries in 1992-1993 won political parties that rejected or slowed down next reforms. nIn Slovakia was situation different because there won left oriented party. nIt means that representatives of particular republics had different opinions about future transformation and reforms. nThere were divergence tendencies in both countries. The important political-economical topic nArmy industry nArmy industry was concentrated in more in Slovakia (60 %) nWeapons was produced in more than 100 companies and there was employed about 70 000 employees. nThe boom of Czechoslovak army production was in 1987 it is volume was 29 billion of CSK. nArmy production represented 3 % of the total production and 10-11 % of the total industry production. nIn the 1980’s 70% of production was exported q60 % in communism countries in Europe qThe rest in the countries of the Third World (bad debts) n Army industry nIn the 1980’s Czechoslovakia 7th largest exporter of weapons. nFederal government in 1991 decided about cutting of army production about 85-89 %. nCutting of army production in Slovakia about 90 % was negatively perceived. nSlovakia regarded with cutting of army as a unreasonably direction from Prague with all negatives that impacted in Slovakia. n The important political-economical topic nOther problem was a position of Slovakia in the federal republic. nThere were different opinions about the role of federal government and national governments. nSlovakia pressed for the higher level of independency. nNegatively relation between both countries affected the transformation process nNegative impacts of transformation were more significant in the Slovak Republic q1991 unemployment in Czech republic 4,1 % in Slovakia 12 %. qIn Slovakia increased voices that wanted slowed down reforms. nDifferences qCzech Republic aim: to finish reform process qSlovakia aim: to resolve all social impact of reforms The important political-economical topic nSlovakia representatives wanted qSlower pace of privatization process qLess restrictive economy policy qAbandon of voucher privatization nSlovakia was supported by financial transfers from the Czech Republic qTo limited social differences q q Slovakia Czech Republic Satisfied with reform 57 % 77 % Gradualist reforms 64 % 36 % Radical reforms 48 % 52 % Political development nAfter election in 1992 in both countries were set strong national governments and the role of federal government was limited. nThe situation let to splitting of countries that was executed on 1st January 1993. qBut in 1991 only 9 % of Czech and 15 % of Slovak citizens wanted splitting of Czechoslovakia. Economic context of Czechoslovakia splitting nIn the process of country splitting was also necessary splitting of the federal property. nThere were two criterias qTerritorial – primary criteria qNumber of inhabitants – if primary criteria could not be used nThe most of the property was split in rate 2:1 (primary criteria) qFrom army technologies to federal debts nAssets and liabilities of bank were divided according to the bank headquarter. nProblems were related with qAirport qSome public buildings in Prague or q7,5 tunes of Slovak gold from Slovakia Republic during WWII nMain problem qProperty of State Bank of Czechoslovakia Economic context of Czechoslovakia splitting nAfter the splitting of the balance sheet of the State Bank of Czechoslovakia and the splitting of federal money in circulation qarose debt of National Bank of Slovakia in volume 26 billion CSK in the face of the Czech Republic. nAs a guarantee for settlement the Czech Republic froze Slovakia gold. nThe debt was doubted by Slovakia for several times although international auditors confirmed it. nThe dispute was solved in 1999. There was signed record about transfer and receiving of Slovakia gold. nSlovakia debt against Czech Republic qthat has never not been admitted by Slovakia qwas paid off by symbolic 1 CZK. Political development nThe role of Czech government was strong till the end of 1996. nOpposition was weak qfirst labour unions protests against government was not till 1994. nIn next elections in 1996 was elected right oriented coalitions but new government was weak qOnly 99 chairs from 200. nThis government was not able to continue in reforms. Political development nThere was a lot of disputes inside coalition and disputes pointed after monetary tremor in 1997. nGovernment was modified by several times and a lot of pro-reforms ministers left. nWeak government ruled till autumn 1997 in that time had been very significant economic recession. nAfter government failure there was “care government“ till early election in 1998. Sum up of political progress nThe whole time period can be divided in two parts. nTill 1997 general support of transformation process. qBut the enthusiasm was declining gradually and government established in 1996 was weaker than previous governments. nThere is a question if this political development and long term of government was to the benefit for the transformation process as a whole. qLong term government led to quick privatization but did not prevent corruption and setting of some political problems. qOn the basis of Poland experience alternating of governments during the transformation process can speed up this process as a whole. nIn the second period governed left oriented government of Milos Zeman that continued in some right oriented reforms qThe privatization of banking sector qThe sale of state companies q First years of transformation of financial system in the Czech Republic nFirst step – establishing of new banking system nPrior the 1990’s – so called mono-structure banking system nAlthough there was several banks with different function the major role was played by the central bank called the State Bank of Czechoslovakia (SBCS) First years of transformation of financial system in the Czech Republic nExcept for standard central bank functions like: qMonetary policy qManaging circulation of money qTax collections nThe SBCS was also responsible for: qGranting of financial and state organizations qMaintaining of their accounts qother roles as a commercial bank nAll decisions on granting credits were the subject of the state plan. q Transformation into a two-tier system and liberal regulation nIn 1989 first step were taken to abandon the mono-bank system. nAs a reason on 1st January 1990 Komercni banka (in the Czech Republic) and Vseobecna uverova banka (in Slovakia) were established. nThese banks together with Investicni banka and Investicni a rozvojova banka taking over all commercial activities of SBCS. nThese bank were established as a state financial companies. Transformation into a two-tier system and liberal regulation nRules for establishing new banks were liberal and the law lacked basic elements of prudential banking. nThe minimum basic capital required for establishing new bank was originally only 50 mil CSK. nBanks could be (and were) established from q a loan granted by a single company and qcould grant a higher loan (then shareholder’s capital) to the same company (exposure limits were missing at that time). nThe law allowed banks to exit in the form of qState financial institutions qJoint-stock companies qCo-operatives qJoint venture Transformation into a two-tier system and liberal regulation nBasic conditions for establishing a banks with foreign capital were similar to the conditions of domestic banks. nA subsidiary of foreign banks had to be established in the form of joint stock company and had to follow the same rules as Czech banks. nForeign banks were usually very cautions in this new and non-standard environment and focused mainly on solvent or foreign clients. Transformation into a two-tier system and liberal regulation nOriginally the role of commercial banks had been only the collection and redistribution of available financial resources. nThe transformed commercial banks lacked well-trained staff of loan officers, risk assessment system, etc. nLiberal framework provided strong growth of opportunities: qRapid development of private sector through small- and large privatization -> strong demand for bank products, esp. credits qMassive growth in number of opened accounts and qIncrease in payment and clearing The economic environment nCharacteristics of environment at the early the 1990’s qImproper legal framework qIneffective law enforcement qMissing market institutions – stock exchange, security exchange commission or registry n As a reason of non-existence of a security market the demand for financial services was mostly based on loan finance. Problems with loan nAssessing of financial health of loan applicants was seriously hampered by: qNon-existence of past company data nEstablishment of new companies nChanging business of original companies qVague auditing and reporting standard q Uncertainty about business activities in new environment qNeeds of new business relations qTogether with massive development of banks and their services negative phenomena appeared on the market. Including financial crime The new role of central bank nThe main goal of the central bank – monetary stability – was incorporated into new Constitution in 1990 (1993 after split-off CR and SR again in 1993) n In addition new central bank took the leading role in qBank licensing qPartly in supervision qProvide of activities beneficial to the entire banking system nDevelopment of clearing and settlement mechanism nCapital market – particularly stock exchange nBank training and education Split of Czechoslovakia nAfter the split of Czechoslovakia in 1993 State Bank of Czechoslovakia was transformed into qCzech National Bank qSlovak National Bank nThe transformation was no problem-free qThe allocation of former federal assets and liabilities could not be fully equitable qLeaving some assets and liabilities as unresolved n(transferred into KB and CSOB) First steps of central bank nEstablishment of standard monetary tools (deposit, lombard and repo rates, open market operations, obligatory minimum reserve) nEstablishment of an interbank payment system nEstablishment market with short-term debt instrument n n Other financial market institutions nMarket for Short-term debt instruments qThe short term instruments market started its operation in 1992. qThe system has been used for: nRegistration of debt instruments issued in book-entry form with maturities up to one year nSettlement of trades with securities qSecurities trading on the market have a form of nShort term instruments issued by Ministry of Finance (T-Bills) nAnd by CNB (CNB - bills) nShort terms instruments of banks and non-banks approved by Security Commission. Other financial market institutions nThe short term instruments market system was created as a segment of the financial market both for qNeeds of Ministry of Finance – T-bills to adjust short term imbalances between state budget revenues and expenditures qNeeds of CNB, which has used bill operations as a monetary policy instrument (for withdrawing and supplying liquidity via repo operations) qNeeds of the interbank financial market – used for trading between market participants and with their clients. q Other financial market institutions nThe short term instruments market system has never been public market nParticipants qAll domestic banks qAll domestic investment companies qAll domestic pension funds qAnd corporate sector or natural persons. qFrom foreign participants there are foreign banks or investment companies Preparation of transformation nYear 1990 preparation of the “Strategy of the economic transformation” (published in September 1990). qTwo parties: nCentral planned economists from Ministry of Finance nLiberal economists from Academy of Sciences (Prognostic Office) qFinal conception of Minister of Finance – V.Klaus qAt the end of the 1990 devaluation of the Czech currency (for two times) nTo face accelerating imports that were stimulated by preannounced expected devaluation. 1991 nIn 1991 in 1th January came in effects main package of stabilization measures: qLiberalization of bulk of prices (not included so-called regulated prices like electric energy, rent, medical care, etc.) qLiberalization of the foreign trade +internal convertibility of the Czech currency (obligatory surrender of foreign exchanges) qLast devaluation of the Czech currency 1DEM approximately 18 CZK qSetting of fixes currency exchange rate to 5 currencies, etc. nThe first steps of transformation were penetrative. 1991 nIn the 1991 inflation rate rose to 56 % (the highest rate in the history) qIt meant decline in real value of savings and wages. nBreak up of RVHP led to massive decline in foreign trade and slow orientation in west European countries. nBecause of all these inside and outside factors decline in GDP about 15 %. nThese transformation decline was typical for all post soviet countries. n 1992-1993 nInitiation of small and later large privatization (voucher booklets, several rounds of large privatization waves (waves were only two!)) nTo 1th January 1993 splitting of Czechoslovakia, establishing of two central banks. nAt the end February 1993 dividing of Czechoslovak currency and stamping of currency. nTo 1st January 1993 tax reformation e.g. establishing of indirect taxes -> cutting down the inflation rate to 20 % n The year 1993 last year of large shocks in the economy and starting of economy recovery. 1994 - 1995 nThe large privatization in proceeding. nIn October 1995 entrance into OECD as the first post-communistic country. nRecovery of economic growth qInflation rate 6 % qUnemployment rate 3 % nDespite of all economic progress in the financial market were emerged trends that led to banks and currency crisis. Difference - eliminated risk of demand pressure at the beginning of the 1990’s In 1995 according to GDP growth about 7 % but it was economy overheating Overheating of economy in the half of the 1990’s nFast growing demand qFast growth of wages but slow growth of productivity qFast growth of private and public investments (building of infrastructure) qFast growth of credits qFast flow of capital nInelastic supply qInfirm markets q functionless law framework q Monetary framework nFixed currency exchange rate from 1991 qSeveral baskets nOriginally to 5 currencies nLater only to USD and DEM nLiberalization of capital account nEstablishing of Impossible Trinity –pareller existence of qFree flow of capital qFixed currency exchange rate qIndependent monetary policy nLiberalization of capital account destroyed coherence of monetary framework. Vicious cycle of monetary policy Routing to CZK attack nFluctuation belt of CZK expanded from ± 5 p.p. to ± 7.5 p.p. at the end of 1996 nGrowth of repo rate from 11.3 to 12,4 (in 2011 0,75 %) nGrowth of obligatory minimal reserves from 8,5 % to 12,5 %. (in 2001 2 %) nFirst attempt to stabilize Czech economy. Not successful. nIn May 1997 after several days of fluctuation belt protection loss about 3 billion USD. nLeaving of fixed currency exchange rate n Transformation – what was successful nStabilization of the Czech economy in the first phases nSplitting of Czechoslovakia and splitting of currency nOffers of wide range of privatization methods and transit of assets to private hands nOpenness of the economy, establishing of competitive environment nAttractive of Czech economy nAll transitive economies were more and less successful in some party of transformational process. What could be better nFast privatization of large banks (slow privatization was expensive) nProblems with Impossible Trinity – long time in fixed currency exchange rate and overheating of economy nWrong law framework nUnfinished privatization (CEZ, CD, CSA) nWorse regulation of capital market nLow elasticity of labour market nNo reform of pension, medical care, education system Thank you for attention