Transitional Success: USSR to EU

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The Czech Republic

Transitional Success:

USSR to EU

Public finance policy issues during the political

economic transition from centrally planned socialist

economics to free market democratic capitalism.

V550 Dr. Mikesell

November 20, 1996

Rick Ferguson rfergus@indiana.edu

Eric Martin emartin@indiana.edu

Dmitri Maslitchenko dmitri@mailroom.com

Table of Contents

I. Introduction

II. Political Summary: Restructuring for Transition

III. Transition to Market Economy: 1990 - 1991

IV. Problems of Transitional Monetary Policy and the Financial Sector: An Overview

V. Macro Economic Stability: 1993 - present

VI. Monetary Policy: 1993

VII. Intergovernmental Financial Relations

VIII. Budgetary Overview: 1993 - present

IX. Tax Reform

X. Current Political Economic Considerations: 1996

XI.The EU and NATO

XII. Conclusions

XIII. References

Introduction

In 1989, after nearly 40 years of Soviet control, Czechoslovakia once again became an independent nation, the Czech and Slovak Federalist Republic. This transition from Soviet socialism to democracy culminated throughout Central and Eastern Europe with the literal collapse of the Berlin Wall in East Germany, the heroic Gdansk Shipyard Strikes in Poland. The student and worker protests in Prague and Budapest were no less important.

The Czechoslovakian revolution took place peacefully and over a much longer period of time than events in other former Soviet Union or Warsaw Pact nations. Hints of major reform in Czechoslovakia began as early as 1968. Czechoslovakian officials, under Soviet power, moved incrementally to begin the long road towards decentralization and independent Czechoslovakian rule. Their increasingly effective efforts became known as the Prague Spring, a time of growth, change and development.

Success was, of course, neither immediate nor easy to achieve. The Cold War reached a pinnacle in the Eighties and the winds of change began to blow in Central and Eastern Europe. The CEE nations endured many hardships. Soviet oppression, though waning by this time, became largely unbearable. Change in Czechoslovakia came from the ground up; dissidents quietly began to return to popular power. The revolution gained momentum by 1989. ‘Revolutionists’ began to demand sweeping economic and political reform. They were backed by well organized and very timely strikes and protests. After a two hour general strike on November 27, 1989, proving the immediate and widespread power and cohesion of the revolution, the Soviet controlled authorities finally agreed to negotiate.

Through the negotiation process and threat of further massive general strikes, former dissidents assumed officially sanctioned ‘concessional’ positions. Within months, they gained near complete (and very real) control of the Federal Assembly. On December 29, 1989, Mr. Havel, a very famous and popular Czech dissident, became President of Czechoslovakia (renamed the Czech and Slovak Federalist Republic).

This initial political victory represents only half of the nation’s success. Within the first three years of self rule, harsh economic (and subsequent political) realities forced the nation to divide once again. The nation as a whole was unable to accommodate the vast discrepancies between the western Czech and eastern Slovak regions. Massive economic reforms brought this to the popular agenda as Slovakia suffered greatly while their Czech counterparts seemed to benefit from reform.

The government in Prague wished to move swiftly to further reform efforts. Slovakia hindered Czech success and in turn suffered greatly by this Czech-led reform. Slovakia simply could not move as rapidly toward a market economy due to the economic configuration left to them by years of Soviet planned economics.

Political Overview: Restructuring for Transition

In 1992, Vladimir Meciar, a very strong nationalist was elected prime minister of the Slovak Republic, while Vaclav Klaus, a moderate federalist, was elected in the Czech Republic. Unfortunately, these two leaders were unable to agree on common economic and political strategies to govern the CSFR. Klaus’s reform plans, now legendary, were simply inappropriate for the fledgling Slovak regions. Slovakians felt alienated from the government reform in Prague. Within a short time it was very clear that the Czech regions could not completely support their Slovak countrymen through the transition. The two leaders agreed to divide the Czech and Slovak Federalist Republic (CSFR) into the Czech and Slovak Republics on January 1, 1993.