Economic development of Czechoslovakia Mgr Vladimr Mller Ph

Economic development of Czechoslovakia Mgr. Vladimír Müller, Ph. D. 24. 10. 2019

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Economy of Czechoslovakia after the collapse of the Austrian-Hungarian Empire • Czech territories were together with Lower Austria centres of the agrarian and industrial production of the empire • One of the most innovative economies – electric engines, diesel engines, cars. . . • Economic situation facilitated the creation of ideas about sovereign Czech state (later with Slovak territory and Carpathian Ruthenia)

Czechoslovak Republic • Economically beneficial reforms – • • Land reform Development of shoemaking trade Development of machinery and weapon industry Creation of significant number of banks (Agrární, Živnostenská. . . ) • Economy based on export of goods and import of strategic raw materials • The Grand Depression – (tariffs, decrease of export, unemployment) • Czechoslovakia was still one of the most developed economies in the world

2 nd World War • Economy was vassal of German interests • Industrial and agricultural production of the Protectorate and of the Slovak state was under direct control of the Nazis • Previous favourable position of Czech economy was irreparably damaged (no commercial decisions, war battles)

Imrich Karvaš

After 2 nd World War • Czechoslovakia did not participate in Marshall plan • Košice Government Program – restoring the economy, social policy, nationalization of the properties of traitors • Monetary reform – 1945 – too many currencies used, establishment of the single currency • In 1948 the Communist party took power

Socialist economy • Centralized, state planned economy, businesses were forbidden • Communist party of Czechoslovakia created Directives for economic and social development • The Central Planning Commission followed these directives and created Five Year Plans • In these plans the CPC decided on • • • Where the product will be produced What product will be produced How much of the product wil be produced The price of the product How many employees will work in the production The salaries of the employees

Socialist economy • Experienced managers were replaced by communist friendly individuals • No considerations about the environment • Low productivity of workers • One of the main aims was to balance the industrial production within the country (succesful – Slovakia finally reached the 1/3 share on the production)

COMECON (CMEA) • The Council for Mutual Economic Assistance • Soviet opposition to OEEC (Marshall Plan) • 1949 – 1991 • Barter trade • Oil and natural gas were sold under market prices

Five Year Plans • 1. pětiletka 1949– 1953: industrialization, collectivization, creation of cooperative farms, building up heavy industry , 1953 – monetary reform • 1954– 1955 – investments to the development of agriculture (changed because of Comecon) • 2. pětiletka 1956– 1960: consolidation of socialist economy • 3. pětiletka 1961– 1965: declaration about reaching the real socialism • 4. pětiletka 1966– 1970 • 5. pětiletka 1971– 1975 • 6. pětiletka 1976– 1980 • 7. pětiletka 1981– 1985 • 8. pětiletka 1986– 1990

During the 1950 s • 1953 – monetary reform – exchange of cash and deposits (rate 5: 1 to 50: 1), cancelling of the rationing system, unified retail prices • Rise of the living costs – mass demonstrations • Korean War – need for arms and machinery within Comecon, Czechoslovakia became an important supplier • Trade with socialist states raised from 40% to 70%

During the 1960 s • Weak agriculture production • Recession in 1962 • Sino-Soviet dispute • Ideas about reforms – in 1964 the party published new reforming program, later called New Economic Model – (weakening of the planning authorities and expanding the autonomy of enterprises) • Implementation of the program began in 1967 and later accelerated the political changes in 1968

1970 s • Federalization of the republic • The intervention of the Warsaw Pact troops stopped all reform processes in political and economic area • Normalization returned many aspects of the economic system to the state of early 60 s • Economic growth was lower than the plans (both agriculture and industry production did not meet the goals) • Significant shortage of basic goods – meat, milk, vegetables, toilet paper

1980 s • The industrial facilities became old and out of date • Goulash socialism – regime tried to please the basic needs (food and other consumer goods) • Growth of shadow economy • The 8 th Five Year Plan called for innovation and modernization of the economy

Residues of socialism • Nostalgy about socialism (people were nicer, prices lower. . . ) • Political apathy and disinterest of the public • Mistrust to big businesses • Russia is big brother

TRANSFORMATION

Political and Economic Transformation • This transformation consisted in the transition from the totalitarian regime and centrally planned economy to democracy and market economy • New political elites did not possess any transformation model or plan • Negative side effects of radical transformation (primarily underrated role of education and research) were consequences of the misunderstanding of broader context of causes and relations

Political and Economic Transformation • The beginning of economic and social problems can be found within the era when the advanced industrial states started to transform into information societies • All reform efforts in Czechoslovakia/Slovakia (1956 -1960, 1966 -1969, 1990 -1997) were unsuccessful because they were made within the framework of the industrial economy and did not focus on new modern perspective technologies

Political and Economic Transformation • One of the most important economic experiences in Europe in 20 th century • The influence of political processes on economic transformation processes was underrated. Postcommunist governements should have voluntarily withdraw from economic life of the country • The costs of reforms were underestimated (banks, privatization, tax reform, reform of the pension system • The historic opportunity to privatize the huge state sector was not properly used

Neoliberal views to the transformation • The political elites of Czechoslovakia decided to implement the shock therapy • Reforms were implemented very quickly, to avoid the situation when the planned economy rules would be gradually less and less functional and the market economy rules would not be operational yet • The priorities were set to stop the rise of inflation and stop the rising deficit in the state budget

Results • Success – the inflation shock was stopped – open rise of prices • Unsuccess – GDP decline from 1989 to 1993 was 25% - unemployment (1990 -1, 6%, 1992 – 10, 4%, 1993 – 14, 4%) • More social problems – criticism of the reform which damaged Slovakia • The discontent of the population was manifested during the parlamentary election in 1992 – in Czechia – right wing parties, in Slovakia – centrist and left wing national parties

The dissolution of the common state • Disputes about competences • No referendum • Immovable assets – divided by territorial principle • Movable assets – divided by population principle 2: 1 • One of the few peaceful state dissolutions in the history

Privatization • Small privatization – based on public auction sales, 9 500 companies and businesses were sold for 14 billion crowns • Big privatization – 678 businesses sold for 170 billion SKK • Coupon privatization – citizens could buy shares of state businesses by buying coupons • Second wave of big privatization – 610 businesses sold for 137 billion SKK • Strategic businesses were excluded from privatization

Transformation in independent Slovakia • Strategy – building the socially oriented market economy • Restructuralization and revitalization of sectors which could be effective in the long term • Main points of the Strategy of economic renewal from 1992: • Restructuralization of the industry with the financial aid from the state • Active trade policy, supporting the export to European Countries and CIS • Macroeconomic expansion should be achieved by freer fiscal policy

Slovak economy • 1. oriented on export • 2. dependent on the import of raw materials • 3. low energy efficiency (the consumption of energy on one unit of GDP was 2, 5 -3 times bigger than the EU average). The competitivness of the metallurgic and chemical industry was preserved only by low price of energy at that time • 4. low added value

1994 -1998 • Since 1995 all GDP components were growing • Neutral monetary policy and restrictive fiscal policy • Export was growing – good situation in western Europe and in CEFTA countries • Independent Slovak state found its position within the world economy

1994 - 1998 • Domestic demand was growing – rise of the import • Weakening of liberal ideas – political elites emphasized the key role of the state • High economic growth was stimulated by high spending of public expenditures and infrastructural investments • The transformation of the economy was still not completed

Prime minister Vladimír Mečiar • Aggressive style of policy • Misuse of state apparatus • Authoritative managing of the party

Integration to the EU • November 1993 – Signing of the association treaty • 1995 – Slovak application for the full membership • 1997 – Luxembourg summit – Council of the EU opened the negotiation process with 6 countries – Czech Republic, Estonia, Hungary, Poland, Slovenia, Cyprus – Slovakia was not included • Slovakia did not fulfill the political criteria – rule of law, democracy, rights of minorities. . .

Election in 1998 – change of transformation process • Effort to eliminate non-sustainable macroeconomic imbalance even with the decrease of the economic growth • Pillars of the subsequent economic growth: • • New institutional framework Restructuralization Improving the competitivness of the businesses Reforms (taxes, health care. . . )

Stabilization of the economy • In 1999 the level of GDP achieved the level from 1989 • 85% of GDP is produced by private companies (only 30% in 1993) • Share of the services on GDP incresed (in 1989 agriculture had 9, 4 % share on GDP, in 1998 it was 4, 4%)(in 1989 the services had 32, 2 % share on GDP, in 1998 it was 60 %). • The efficiency of the production was still not high

1998 - 2002 • High corruption, isolation, not enough investments, 25% interest on state loans, the three largest banks have almost collapsed • Many restrictive and unpopular policy steps were made • The rescue package for the banks was 12% of GDP • Privatization of strategic companies was allowed

Slovak economy at the beginning of the 21 st century • Highly industrialized society with significant impact of industrial and financial sector within political decision processes • Most common sectors are second wave sectors: metallurgy, nuclear energy, machinery, chemical industry • High tech industries are not present in Slovakia

Integration to the EU • Immediately after the change of government, Slovakia started to cooperate deeply with the European Commission • PM articulated the entry to the EU as the first priority of the new government • Implementation of the recommended actions • 1999 decision to open the negotiation process with Slovakia

2002 - 2006 • Reforming government (public finance, taxes, fiscal decentralization, labour market, pension system) – serious reforms • Good economic results: • Unemployment from 19, 3% (2001) to 9, 6% (2008) • Deficit of public finances from 12, 3% (2000) to 1, 8% (2007) of the GDP • Public debt from 50, 3% (2000) to 27, 8% (2007) of the GDP • In 2005 a famous summit Bush-Putin took place in Bratislava

Mikuláš Dzurinda

Integration to the EU • Slovakia managed to catch up the other countries within the negotiation and all of them (except for Romania and Bulgaria) joined the EU on 1 st of May 2004 • Slovakia became part of the • • EU customs union functioning since 1968 EU single market EU common policies Commitment to join the monetary union • In 2006 Slovakia joined the Schengen area

2006 - 2010 • New government was initially hesitant about joining the monetary union but finally it was set as a priority • Symbolic corrections of the previous policy reforms • Economic crisis – scrap dotation • 2009 joining the monetary union

Robert Fico

2010 -2012 • Right oriented parties • Big expectations – very little achievement • Correction of public finances

Iveta Radičová

2012 - 2016 • One party government • Tax reform • Pension system reform • Missed opportunity - stagnation

2016 - 2020 • Coalition government • 2016 – Bratislava process – Slovak presidency in the Council of the EU • 2018 murder of an investigative journalist Ján Kuciak • Reshuffle of the government

2016 - 2020 • Stable economic growth – not reflected in budgetary savings • Country is not prepared for economic slowdown • Populist reforms – stopped raising retirement age • Decreasing unemployment – significant amount of workers coming from abroad

Automotive • Biggest car producer in the world per capita • 192 cars per 1000 inhabitants • Employs 250 000 people and 44% of total industrial production • Audi Q 8, Porsche Cayenne, VW Touareg, Kia Ceed, Land Rover Discovery (Defender) • VW (e)UP, Audi Q 7, Kia Sportage, – Europe

• Business Service Centres • Electronics & Electrical Components Industry (screens, cables, machines) • Challenges: • Connect automotive with electronics and establish significant productions of electromobiles • Regional differences • Automatization and robotization – 40% of jobs in danger