Economic reforms fail to produce the goods

September 25, 1991

By Peter Annear

PRAGUE — Among all the countries of Eastern Europe, Czechoslovakia has been regarded as the most likely to succeed in the transition to a market economy. Its economy is stronger than others and it is not troubled by a massive debt burden.

But the country faces major economic problems as a result of both external pressures and government policies, according to statistics for the first half of 1991.

A report by the government Statistical Office says Czechoslovakia's transition to a market economy was seriously affected by the collapse of the former east European and Soviet markets. This is true, but it is far from the whole story.

The economy has seriously contracted. Compared with the same period last year, the creation of real national revenue decreased by 13.8% and gross domestic product by 9.2%. The State Bank expects the falls for the full year to be 18% and 16%.

Prices have risen sharply as a result of the transition in January to direct trade between enterprises (instead of through ministry allocations) and the removal of subsidies to enterprises.

Consumer prices rose 49.2% between December and June, and real income fell by 28.2% compared with the first half of 1990. The resulting contraction of demand, especially for food, has created huge agricultural surpluses, especially of dairy products, eggs and beef, and big losses for some farm collectives.

The agricultural crisis has generated protests from farmers and collectives. In response, the government temporarily has stepped back from its plans to reform the farm sector and established a "market regulation fund" which will subsidise exports and purchase some surpluses.

Currently, all agriculture is collectivised or state-run and is reasonably efficient. Legislation to reintroduce private land ownership has not passed through parliament, despite several attempts. By creating a rural crisis, the government's policies aid its political campaign against the collectives.

Problems have been aggravated by the government's tight monetary and fiscal policies. Together, the federal, Czech and Slovak governments have a combined budget surplus of about US$560 million, and interest rates are kept high. Currency stability, industrial efficiency and management of agricultural competition are all key to Czechoslovakia's desperately sought membership of the European Economic Community.

A separate preliminary report by the Federal Statistical Bureau showed 7% and an average rise of 67.4% in all other goods over the six months, but said the rapid growth of consumer prices came to a halt in July. While the total value of retail sales from the beginning of the year to the end of July rose 3% over the same period last year, the physical volume was down 45%.

People have continued to spend available income, but the huge price rises means less is affordable. Moreover, depreciation of the currency means life's savings have often been wiped out over night.

Unemployment reached 4.6% in July, according to the Statistical Bureau, with 363,700 jobless nationally, 165,000 in the Czech Republic (10.3 million population) and 197,000 in the Slovak Republic (5.3 million population). At the end of July there were an estimated 44,800 job vacancies, most in blue-collar jobs.

Privatisation will not solve these problems. The most significant privatisation to date is the sale of the Skoda car enterprise to Volkswagen, which undertook to raise production to 400,000 units annually. On August 30, the deputy chairman of Skoda-Volkswagen, Volkhard Koehler, announced an immediate reduction in output from 930 to 670 cars a day. The work week has been reduced to four days.

Koehler said the cuts were necessary because sales of the mainline Favorit model to the end of August were only 30,000, compared to 123,000 for the whole of 1990, and the same low level of sales would continue thought 1992, though exports had been good. Despite assurances to the contrary by Volkswagen, there are rumours that the company is using the Mlada Boleslav plant to produce cheap-labour components for its German plants.

The rest of the government's privatisation program is proceeding slowly. The greatest difficulty will be coordinating the coupon method of privatising state-owned enterprises (in which each individual will be issued with coupons, or shares, worth 2000 crowns) with auctions and direct sales, the Czech Republic's minister for privatisation, Tomas Jezek, said on August 20. Federal finance minister Vaclav Klaus attacked the Czech ministry for "sabotaging" the program.

The total value of enterprises to be privatised by the coupon method under the "large privatisation" program amounts to US$4667 million in the Czech republic and US$2333 million in Slovakia, representing the value of enterprises plus real estate.

The Czech privatisation ministry has selected all the enterprises to be privatised in this way in the Czech Republic. Enterprises have until November 1 to submit plans for their own privatisation. In this first phase, the Czech ministry will evaluate the plans of each of 2490 such enterprises.

As of August 15, 7058 shops and retail outlets in the Czech Republic had been auctioned for a total of US$190 million in the small privatisation process; 8723 units selected for small privatisation remained unsold. The ministry has received 50,000 requests from individuals for the return of property nationalised after 1948. dline for submitting claims.

But the underlying problem is the decline in output, which occurred in all areas of production. Industrial output dropped by 14.3%. The biggest declines were in clothing (33%), electrical engineering (29.9%) and non-ferrous metallurgy (29.5%). Construction industry output fell by 25.5%. Building commenced on only 7755 flats in the first half of the year, 82.6% down on the same period last year. Rail transport was down 22.1% over the same period last year and river transport 22%.

Slovak agriculture minister Jozef Krsek claimed in August that the persistent problems in Slovak agriculture stem from the fact that price liberalisation did not take into account surpluses left over from 1990. Krsek said that in the first half of 1991 consumption of beef in Slovakia dropped 27%, and milk 30%. By the end of the year, surpluses are expected to total 110,000 tonnes of beef, 300,000 litres of milk and 460,000 tonnes of wheat.

Krsek said that, out of 907 agricultural cooperatives in Slovakia, 163 showed losses last year. Slovakia will address the problems through subsidies for beef and dairy exports, protection of the domestic market and revision of the credit rates and pricing policy — measures which conflict with EEC economic policy.

The economic and political daily Hospodarske Noviny (Economic News) has drawn attention to the increasing insolvency of industrial enterprises, accelerated by the enterprises' failure to pay their accounts to each other. Previously the ministry would balance accounts at the end of the period and hand out subsidies, but this no longer happens. According to the Czech industry ministry, while the total value of unpaid debts for the republic in January was US$1067 million, by the end of June it had reached almost US$2600 million.

The price of building the new economy is the destruction of the old. Industry is simply being run down. Investment declined by 28.3% in the first half, and expenditure on environmental protection was 11.6% less. Labour productivity in enterprises with more than 100 employees fell by 14.3% in comparison with the same period last year.

Currently, Czechoslovak suppliers are winning new markets in the west simply because their costs are lower. For example, wages at the East Slovakian Steelworks, the biggest steel producer in the country, are one-sixth European levels.

As a result, the trade deficit for the six months at US$330 million was lower than expected. A surplus of US$210 million was registered in trade with "advanced countries" and a deficit of US$630 million with the former members of the CMEA.

Czechoslovakia's single biggest supplier is still the USSR, which provides 35% of all imports, mainly oil, followed by Germany with 18%. Exports now go primarily to Germany (24.6%) followed by the USSR (19.3%). Macro reforms, mainly the building of market structures and price liberalisation, are still very weak. While the effects of these measures have been bad, the market still doesn't lead the economy. Meanwhile, the government's monetary and fiscal policies, directed towards curbing inflation, are recessionary.

Consequently, the success of the transformation depends almost entirely on privatisation. In many respects, this is the government's only policy, because most other things — including rational trade between enterprises, the import of foreign capital, and external trade relations — depend on it. The object of the privatisation process is to create a functioning capitalist class, a prerequisite for further change.

But the slow pace of privatisation — which under current plans will affect less than about 20% of the economy in all the eastern and central Europe countries (except for former East Germany) for a long time to come — means that these economies will remain statised for decades: seas of backwardness dotted with islands of probably foreign owned, low wage, highly profitable, modernised industries.

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