Introduction to Czech Republic’s Economy Review

Czech Republic is considered to be one of the most stable and prosperous ex communist states. Its economy is thoroughly industrialized, the infrastructure is well developed and the population is mostly well educated. The origins of Czech industrialization date back to the 19th century – the age of industrial revolution. By the 20th century, Bohemia and Moravia became an economic core of the Austro-Hungarian monarchy.

In 1918, Czechoslovakia reached its independency of Austro-Hungarian rule. The newborn country concentrated 70% of the industry of the former Austro-Hungary. Consequently, its economy and industry was strong and well developed.

During the communist era, Czechoslovakia had built an inefficient, centralized and stagnated economy. The extent of Western import was diminished. However, there were relatively well developed agricultural, pharmaceutical, chemical, consumer product and electronic sectors. Thanks to its industrial foundations since the Austro-Hungarian era, Czechoslovakia was the most developed manufacturing economy of the communist block.

The Velvet Revolution in 1989 is recognized as the basis of the free market economy and the democratic political developments of the new Czechoslovakia. It was followed by deep changes in economic system. Unlike some other ex communist states (e. g. Lithuania and Estonia), which have adopted a gradual method in moving toward capitalism, Czechoslovakia adopted the Large Privatization Law and implemented in 1991 a “big bang” approach combined with strict fiscal policy. This policy led to the significant economical achievements, such as the liberalization of 95% of all price controls, low budget deficits, low unemployment rate, a positive balance of payments, low foreign debt, a stable exchange rate for the CZK etc.

1.1.1993, Czechoslovakia split into the Czech Republic and Slovakia, and the Czech Republic became a parliamentary democracy.

Tax income before 1997 either met or surpassed government outflows. In 1997 – 1998, financial crisis challenged the position of the Czech Republic as a stable prosperous state. The slowdown caused decreased revenues and led to significant budget overspending. The Czech Republic was forced to cope with delays in enterprise restructuring and failure to develop a well functioning capital market. The country entered recession in 1998, but largely recuperated since that.

Demography. Czech’s total population: 10,211,000 people. Immigrant population: 2.357%. Total fertility rate: 1.18.

GDP. GDP level: $188.6 million in 2004 ($149.7 million in 2000). Czech GDP per capita: $18,467 in 2004 ($14,573 in 2000). Labour productivity (GDP per hour worked): $8.319 in 2004 ($4.159 in 2000).

Prices. Inflation rate: 2.9% a year in 2005 (1.38% a year in 2000). Long term interest rate: 4.75% a year in 2004 (6.3% a year in 2001).

Labour market. Unemployment rate: 8.3% in 2004 (10.3% in 2000).

Investment. FDI: more than EUR 46 billion since 1993. Estimated number of current projects: 252 (29.6% of GDP). Top 3 destination sectors: Auto components, machinery and industrial goods and consumer electronics. Top 3 business functions: Manufacturing, retail, sales, marketing & support. Top 3 investors: Volkswagen, Matsushita, and Deutsche Post.