Is Klaus's package of economic measures going to be effective?

Martin Myant

22nd April, 1997

Martin Myant

The publication of the long-awaited balicek ekonomickych opatreni leaves little doubt that the government wants to appear to be taking the current economic difficulties seriously. In reality, however, the document does not represent a substantial change in long-term strategy. It appears rather to be an announcement of budget cuts, softened with several pages of proposals that are intended to convince the public that a coherent policy package exists.

In fact, much of this is a repetition of policies already in the government's programme. Where there are genuinely new elements, such as the role of the Fond narodniho majetku in holding back wage increases, it is difficult to know how seriously they should be taken.

The document's authors admit that they are uncertain over how far they have produced `vyrazem kontinuity ci pouhe zmeny (nebo korekce) ci dokonce zvratu dosavadni hospodarske politiky a celeho konceptu transformace'. In the next but one sentence they make a claim for continuity `vsech zakladnich postupu a priorit', although later accepting that the aims of past policy-making are now `v mnohem protichudne a nejsou v kratkem obdobi plne realizovatelne'.

Behind this lies an implicit ambiguity over the roots of the current difficulties. Vaclav Klaus has continued to attribute the deceleration in economic growth to measures taken by the CNB during 1996 aimed at restricting inflation. The document hints at a more profound analysis emphasising the chaotic structure of property rights, the poor regulation of the capital market and the low level of payment discipline between enterprises. These are factors that did not arise suddenly in late 1996 or early 1997. They are the consequences of the transformation strategy and methods of privatisation advocated so strongly by Vaclav Klaus as Federal Minister of Finance and subsequently as Czech Prime Minister.

Again, the document is ambiguous over the timing of current economic difficulties. It refers to `relativne vysoky ekonomicky rust' over the 1993-6 period (1993 actually saw a 0.9% decline in GDP), but does accept that the tendency towards a growing trade deficit has become `hlavni ekonomicky problem poslednich dvou let'. The point is important. The `Klaus' position is that the transformation has been successful and now just needs some corrections. Others in the government are clearly more comfortable with implicit criticisms of past policies.

They are right. The Czech economy has not seen a successful transformation followed by rapid growth. Instead, it experienced a faulty and incomplete transformation that could not support rapid and sustained growth.

The core of the problem lies in manufacturing industry. Some firms were able to survive the `transformation shock' and subsequently to prosper. That is particularly true of those under foreign ownership or those with a safe domestic market, such as parts of the engineering and brewing industries. Many others, however, were left deeply in debt and have never been able to undertake the investment required to match western European productivity levels. They have been able to survive, but the policy framework has given them little chance to prosper. In some cases even survival now looks problematic as they have been hit in addition by cheap imports from the far east, undermining the Czech advantage of low wages relative to western Europe.

These are not new trends. Output in the textile and garment and leather industries has been declining almost continuously since 1992. The only difference in 1997 is that decline now seems to have spread across most of industry, with only a few branches holding out thanks largely to the activities of foreign-owned firms.

Set in this context, the bulk of the measures proposed will make very little difference to the competitiveness of the Czech economy. The impact of the dovozni depozita, the absolute minimum the government could do to protect the domestic consumer-goods industry, will not resolve its long-term problems.

There are some welcome statements, such as promises to continue with export promotion measures that were finally accepted after years of lobbying by opposition politicians and industry representatives. It is, however, worth noting exactly what some of these measures really mean.

Thus it is proposed to rozsirit moznosti predexportniho financovani. In other words, firms will be helped with financing production of goods later to be exported. The background to this is in the problems faced by Czech firms, including one of the largest engineering companies, in fulfilling export orders because they could not buy the materials with which to produce the goods. This should never be a problem in a functioning market economy, but some Czech firms cannot raise the finance because of the high level of indebtedness inherited from the past.

More remarkable than what is included are the enormous gaps in the document's proposals. A coherent long-term strategy for improving Czech competitiveness would have to represent a genuine `zvrat dosavadni hospodarske politiky a celeho konceptu transformace'. It would have to include measures to support small and medium sized enterprises, which can only compete internationally with access to new technology and modern marketing expertise. There would have to be a discussion of how to revive the research base of Czech industry. There would have to be consideration of how investment and modernisation could be encouraged. There would also need to be a consideration of education and training, not least when major engineering companies are complaining of an aging labour force and a shortage of younger skilled employees.

All of these are areas that are, or have been, discussed within the framework of competitiveness policy in the European Union..

This `balicek', then, reads as a political as much as an economic document. A panic reaction of adjusting the budget and restricting imports would have given the impression of a government losing control over economic developments. A larger document helps to soften that impression. Unfortunately, the absence of a genuinely new policy approach must strengthen fears that the current economic difficulties may, as recently threatened by Deputy Prime Minister Lux, culminate in a more serious economic crisis.