Economic Reform in Czechoslovakia: Should We Believe in Santa Klaus?

Abstract

Czechoslovakia David Begg Between the wars Czechoslovakia was a prosperous market economy. Important legacies remain, but 40 years of planning have caused severe distortions. Can Czechoslovakia again become the jewel in the crown of Eastern Europe? Reforms began later than in Hungary and Poland, but are now proceeding apace. Traditional sequencing of reforms is unwise: micro reforms deserve greater priority and themselves affect macro credibility. Monetary and fiscal policies are intended to be tight, but worries remain: wage indexation, a fuzzy exchange rate commitment and rising unemployment. Enterprise reform divides into better internal and external incentives. Privatization will be impeded by restoration of property to former owners, and in any case is insufficient: problems of corporate control will remain; and inadequate attention is being given to incentives for state-owned enterprises. Better external incentives require more foreign competition (still limited); tougher domestic competition policy (still inadequate); attention to banks and credit (where bankruptcy is hard to enforce, and balance sheets should be restructured); and a temporary wage subsidy. Activities with negative value added at world prices should cease; other activities would be more efficiently supplied through imports. I discuss the principles governing the pace of intelligent restructuring and assess the prospects for its success in Czechoslovakia.