Economy

Of the emerging democracies in central and eastern Europe, the Czech Republic has one of the most developed industrialized economies. It is one of the most stable and prosperous of the post-Communist states of Central and Eastern Europe.

The principal industries are heavy and general machine-building, iron and steel production, metalworking, chemical production, electronics, transportation equipment, textiles, glass, brewing, china, ceramics and pharmaceuticals. Its main agricultural products are sugarbeets, fodder roots, potatoes, wheat and hops.

Economic History

Its strong industrial tradition dates to the 19th century, when Bohemia and Moravia were the economic heartland of the Austro-Hungarian Empire. Today, this heritage is both an asset and a liability. The Czech Republic has a well-educated population and a well-developed infrastructure, but its industrial plants and much of its industrial equipment are obsolete.

According to the Stalinist development policy of planned interdependence, all the economies of the socialist countries were linked tightly with that of the Soviet Union. With the disintegration of the communist economic alliance in 1991, Czech manufacturers lost their traditional markets among former communist countries to the east.

1990-1995

The "Velvet Revolution" in 1989 offered a chance for profound and sustained economic reform. Signs of economic resurgence began to appear in the wake of the shock therapy that the International Monetary Fund (IMF) labelled the "big bang" of January 1991. Since then, astute economic management has led to the liberalisation of 95% of all price controls, annual inflation in the 10% range, modest budget deficits, low unemployment, a positive balance of payments position, a stable exchange rate, a shift of exports from former communist economic bloc markets to Western Europe, and relatively low foreign debt.

Particularly impressive have been the republic's strict fiscal policies. Following a series of currency devaluations, the crown has remained stable in relation to the US dollar. The Czech crown became fully convertible for most business purposes in late 1995.

In addition, the government has revamped the legal and administrative structure governing investment in order to stimulate the economy and attract foreign partners. Shifting emphasis from the East to the West has necessitated restructuring existing facilities in banking and telecommunications as well as adjusting commercial laws and practices to fit Western standards. The republic has made progress toward creating a stable investment climate.

This success has enabled the Czech Republic to become the first post-communist country to receive an investment-grade credit rating by international credit institutions. Successive Czech governments have welcomed US investment, in particular, as a counter-balance to the strong economic influence of Western Europe, especially of their powerful neighbour, Germany. Although foreign direct investment (FDI) runs in uneven cycles, with a 12.9% share of total FDI between 1990 and March 1998, the U.S. was the third-largest foreign investor in the Czech economy, behind Germany and the Netherlands.

The republic boasts a flourishing consumer production sector and has privatised most state-owned heavy industries through the voucher privatisation system. Under the system, every citizen was given the opportunity to buy, for a moderate price, a book of vouchers that represents potential shares in any state-owned company. The voucher holders could then invest their vouchers, infusing the chosen company with valuable capital. State ownership of businesses was estimated to be about 97% under communism. In 1998, more than 80% of enterprises are in private hands. When the voucher privatisation process is complete, Czechs will own shares of each of the Czech companies, making them one of the highest per capita share owners in the world. Privatisation through restitution of real estate to the former owners was largely completed in 1992.

1995-2000

The republic's economic transformation is far from complete. A recession in 1998 revealed that the government still faces serious challenges in completing industrial restructuring, increasing transparency in capital market transactions, fully privatizing the banking sector, transforming the housing sector, privatizing the health care system, and solving serious environmental problems.

Political and financial crises in 1997 shattered the Czech Republic's image as one of the most stable and prosperous of post-Communist states. Delays in enterprise restructuring and failure to develop a well-functioning capital market played major roles in Czech economic troubles, which culminated in a currency crisis in May. The currency was forced out of its fluctuation band as investors worried that the current account deficit, which reached nearly 8% of GDP to introduce two austerity packages later in the spring (called vernacularly "The Packages"), which cut government spending by 2.5% of GDP. Growth dropped to 0.3% in 1997, -2.3% in 1998, and -0.5% in 1999. The basic transition problem continues to be too much direct and indirect government influence on the privatised economy. The government established a restructuring agency in 1999 and launched a revitalization program - to spur the sale of firms to foreign companies. Key priorities include accelerating legislative convergence with EU norms, restructuring enterprises, and privatizing banks and utilities.

2000-2005

Growth in 2000-5 was supported by exports to the EU, primarily to Germany, and a strong recovery of foreign and domestic investment. Domestic demand is playing an ever more important role in underpinning growth as interest rates drop and the availability of credit cards and mortgages increases. Current account deficits of around 5% of GDP are beginning to decline as demand for Czech products in the European Union increases. Inflation is under control. Recent accession to the EU gives further impetus and direction to structural reform. In early 2004 the government passed increases in the Value Added Tax (VAT) and tightened eligibility for social benefits with the intention to bring the public finance gap down to 4% of GDP by 2006, but more difficult pension and healthcare reforms will have to wait until after the next elections. Privatisation of the state-owned telecommunications firm Ceský Telecom took place in 2005. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds should strengthen output growth.

Tourism

The Czech economy gets a substantial income from tourism: in 2001, the total earnings from tourism reached 118.13 billion CZK, making up 5.5% of GNP and 9.3% of overall export earnings. The industry employs more than 110,000 people - over 1% of the population.

There are several centres of tourist activity: The historic city of Prague is the primary tourist attraction, and the city is also the most common point of entry for tourists visiting other parts of the country. Most other cities in the country attract significant numbers of tourists, but the spa towns such as Karlovy Vary and Mariánské Lázne are particularly popular holiday destinations. Other popular tourist sites are the many castles and chateaux, such as those at Karlstejn, Konopiste and Ceský Krumlov. Away from the towns, areas as Ceský Ráj, ?umava and the Krkonose mountains attract visitors seeking outdoor pursuits.