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The Way From The Centrally Planned Economy To The Free Market Economy
Ondrej Castek
castek@econ.muni.cz

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What can you expect
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nThe starting position of the Czech Republic
nObjectives of the transformation
nPrivatization
nRestructuring
nFree price mechanism
nConvertibility of the currency
nForeign trade liberalisation
nConclusion – Achievements, Failures

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czech_republic_map.jpg


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http://upload.wikimedia.org/wikipedia/commons/5/50/Dissolution_of_Austria-Hungary.png

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File:Austro-Hungarian Monarchy (1914).svg
Austro-Hungarian Empire in 1914
Succeeded by:
Austria
Hungary
Yugoslavia
Czechoslovakia
Ukraine
Romania
Poland
Italy

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Fall 2009, MWCC
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Motto
In god we trust
Truth prevails
Area
3,794,066  sq mi (9)
30,450 sq mi (122)
Population
307,212,123 (4)
10,211,904 (81)
Population density
80/sq mi (180)
341/sq mi (77)
Religion unaffiliated
16.1 %
34.2 %
Education expenditures (% of GDP)
5.4
4.5
GDP in 2012 US dollars
$15,94 trillion (2)
$291.7 billion (45)
GDP per capita
50,700 (14)
27,600 (56)
Currency
US Dollar, USD
Czech Crown, CZK
HDI
0.937 (3)
0.873 (28)
Infant mortality rate (deaths per 1000 live births)
6.26 (180)
3.79 (211)
HIV/AIDS - adult prevalence rate
0.6% (68)
less than 0.1% (161)
Drinking age
21
18
Driving age
16
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Suffrage
18
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us-flag-small cz-flag-small

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Income groups
800px-World_Bank_income_groups_svg.png
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Advancement of Economies
800px-Imf-advanced-un-least-developed-2008_svg.png
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GDP composition (%, 2012)
USA
Czech Republic
Agriculture
1.1
2.3
Industry
19.2
38
Services
79.7
59.7
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The starting point
nOne party political system (The Communist Party)
nNow multiparty
nState owned means of production (98 %)
n1989: 98%, 1990: 80%, 1999: 12%
nInefficient and inappropriate industry composition
nAbsence of free price system
n1989: 100% of GDP. 1991: January 15%, June 10%, December 5-6%
nAbsence of suitable legal system
nForeign trade fully under state supervision, currency not convertible

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Privatization
nOwnership structure in 1989: 87% state, 10% collective farms, 2% private owners
nVital issue: fast or slow?
n3 forms:
1. restitutions
2. „great privatization“
3. „small privatization“
n„Great“ = „voucher“ privatization
nCzechoslovakia specific
n2 rounds: 1992 and 1994
n„Small“ = auctions
nUnfinished

Largest share of state in central european CPE
If slow privatisation: asset confiscation (Hungary, Poland)
State corporations held all productive resources, if industry restructuring, than immediately
State firms: financial state support at the expense of private firms
For slow:
No one to sell to, no capital, foreign companies not interested. Symbolical price: the state does
not get anything. On credit: buyer will have no money for restructuring. Legal system was missing.
Too late or unfinished privatization of banks and some other firms considered to be strategic:
utilities, airlines, trains, city public transport

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Privatization – assets confiscation risk
nAsset confiscation – managerial „tunneling“
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nTunneling is a specific kind of financial fraud. A group of major shareholders or the management
of a company orders that company to sell off its assets to a second company at unreasonably low
prices. The shareholders or management typically own the second company outright, and thus profit
from the otherwise disastrous sale. Tunnelling differs from outright theft because people who
engage in tunnelling generally comply with all of the relevant legal procedures; it is thus a
subtler scheme than simply writing checks from a company to a private bank account. While people
widely agree that tunnelling is unethical, penalties for tunnelling vary widely; some states impose
criminal sanctions, whereas other states provide either for civil suits only, or for no sanctions
at all.
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Privatization – conditions to meet
1.On a micro-scale, the enterprise has to be sold off and management control and ownership have to
be firmly rooted in the private sector.
2.Privatization works best if it is carried out in a competitive environment so that the SOE (state
owned enterprise) has to cope with liberalized markets -in which barriers to entry are minimized-
for its products.
3.State subsidies and policy loans should be eliminated.
4.The SOE monopoly prices have to be regulated with a pricing formula that keeps pressure on
management to improve efficiency.
5.The markets that surround the SOEs on the output and input sides must be liberalized at the same
time.
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Privatization – three steps
nCorporatisation creates a new separate legal entity for the firm by converting a SOE into a
joint-stock company (JSC) all of whose shares are (initially) held by the State Treasury.
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nCommercialisation implies that the new JSC, unlike the former SOE, will be run as a profit-seeking
business.
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nPrivatisation entails divestiture of (some of) the JSC's shares by one or a combination of various
methods, such as initial public offerings, public tenders, management and employee buy-outs, and
auctions of shares for vouchers distributed free under a mass privatisation scheme.

Corporatisation – but there was no trade law
Commercialisation – but an enterprise is a social system on its own. 1. how to make people to think
completely different way from day to day, 2. how to motivate managers.
Privatisatisation – but which way.

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Privatization – coupon (voucher) privatization
nEvery adult citizen ages 18 and older was given the opportunity to buy investment vouchers - 1,000
points of investment money with limited maturity - for a registration fee of Kčs 1,000 (U.S. $34),
representing approximately 25% of the average monthly wage. These vouchers, in turn, entitled Czech
citizens to bid for ownership shares of any company privatized by the voucher method or to allocate
their shares to an investment fund that would make investment decisions for them.
nFirst round (wave), 1992: 93 % of offered shares were sold
nIn 1995, after the end of 2nd round: 80 % of the economy privatized.
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nMiddle class has been created.

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Free price mechanism
n1989: The prices were set by the government for 100% of GDP. 1991: January 15%, June 10%, December
5-6%
nBarrier: monopolies
nSlow in some areas: telecommunications, energies, public transportation, education, health care
system, social care system

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GDP y/y, %
Unemployment, %

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CPI 1969 - 2008

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Convertibility of Czech Crown, foreign trade
nFree trade since 1990, still high import duty
n„Internal“ convertibility until 1995
nFull convertibility since 1995
nToo passive balance of trade since 1995
nCause of macroeconomic problems

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Exchange rate CZK/USD and CZK/EUR(XEU)

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Export and import y/y rates (%), balance of trade (bil. CZK)

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Achievements
nMacroeconomics: inflation and GDP
nSocial state
nOpen economy with an active balance of trade
nMemberships: OECD, WTO, CEFTA, IMF, WB, EU
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V dalších tranzitních ekonomikách až hyperinflace
Protiinflační kotva: pevný kurz koruny. V Argentině navázání měny na dolar problém, když dolar v
90. letech prudce posiloval – Argentinský vývoz v potížích. Proto u nás navázání na koš měn.
Po uvolnění cen nenásledovala valorizace státních mezd a důchodů – snížení životní úrovně. Snížení
ale nižší, než v ekonomikách postižených hyperinflací.
Sociální stát – velký stát
Exportujeme na náročné trhy: Německo

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Achievements – CIA World Factbook Comment
nThe Czech Republic is one of the most stable and prosperous of the post-Communist states of
Central and Eastern Europe. Maintaining an open investment climate has been a key element of the
Czech Republic's transition from a communist, centrally planned economy to a functioning market
economy. As a member of the European Union, with an advantageous location in the center of Europe,
a relatively low cost structure, and a well-qualified labor force, the Czech Republic is an
attractive destination for foreign investment.
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V dalších tranzitních ekonomikách až hyperinflace
Protiinflační kotva: pevný kurz koruny. V Argentině navázání měny na dolar problém, když dolar v
90. letech prudce posiloval – Argentinský vývoz v potížích. Proto u nás navázání na koš měn.
Po uvolnění cen nenásledovala valorizace státních mezd a důchodů – snížení životní úrovně. Snížení
ale nižší, než v ekonomikách postižených hyperinflací.
Sociální stát – velký stát
Exportujeme na náročné trhy: Německo

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Comparison – GDP y/y
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Comparison – Unemployment, CPI (y/y)
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Failures
nAsset confiscation
nToo many bad loans – many bankruptcies
nLate privatization of banking sector
nSlow implementation of legal system
nUnenforceable law in 90ies
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Tunelování majoritním nebo i minoritním dominantním akcionářem podniků zprivatizovaných kuponovou
privatizací
Banky: dnes zdravé, žádné krachy v této krizi. V druhé pol. 90. let ale jejich privatizace
zpolitizovaným tématem
Špatné úvěry – nebyli zkušení pracovníci, nebyly credit histories
Selhal dohled ČNB
Sekundární platební neschopnost – secondary insolvency

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Sources
nGeographic Facts
nCIA World Factbook
nhttps://www.cia.gov/library/publications/the-world-factbook/
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