FROM COMMAND DRIVEN TO MARKET ECONOMY: CZECH EXPERIENCE

1. FROM COMMAND DRIVEN TO MARKET ECONOMY: CZECH EXPERIENCE

2. Definitions and differences • Socialist economic policy : the pros and contras • Overnight turn upside down • Shareholders, pirates and tunnels • Main economic indicators, positives and negatives • Quo vadis, Czech economy ?

3. What are the main differences between market-driven and socialist command driven economy ?

4. Free market basically means that only the market forces, i.e. supply and demand, are operating. The main rules are: • If the benefits of doing something exceed the costs, do it. • If the costs exceed the benefits, don‘t do it. That is the economic decision rule. • If supply exceeds demand, prices go down, what in turn lowers supply. • And vice versa. That is the main free market rule.

5. However, as we also know, free market seldom - or practically never - exists in its pure form. The main reasons are: • market failures • delayed action of the “invisible hand” • existence of historical, cultural, • national habits • social and political forces It leads in most cases to a certain level of market regulation by the state

6. Of the opposite solution to the free market,a strictly regulated, so-called centrally planned economy or command-driven economy, we usually mention the example of communist countries. It is not, however, the only example. This kind of economic policy is connected to periods of any social or natural catastrophe, namely, all war economies have to be centrally planned and regulated.

7. Differences with regard to3 central economic questions • What to produce ? • Capitalism‘s answer : What firms believe people want & what brings profit • Socialism‘s answer: What central planners believe socially • ( or politically) beneficial • How to produce ? • Capitalism‘s answer :Decided by the firm, efficiently, profitably • Socialism‘s answer: Decided by the planners, ideally to thebest of the country and people • For whom to produce? • Capitalism‘s answer : Distribution according to ability and inherited wealth • Socialism‘s answer: Distribution according to needs (centrally defined by the planners)

8. Examples ….. According to these definitions and comparison, socialism - or centrally planned economy of the socialist type - does not seem to be as bad, does it ? Let‘s look at the practical example of the former Czechoslovakia…..

9. What happened and when It started after the communist coup in February 1948, but partly even before that.. The People‘s Militia Klement Gottwald the first communist president

10. What happened and when • There were approximately 5 distinct etaps: • 1949 - 1959: nationalisation of property, collectivisation of agriculture, “enthusiasm“ and political processes • 1960 - 1967: stabilised and developing socialism • 1968 - 1969: an attempt of “socialism with human face“, and market features, Soviet occupation • 1969 - 1980: political “normalisation“, • concentration, over-reaching the capitalists • the 80ties up to 1989: integration of certain market principles - the “perestrojka“

11. The main economic and social principles • All production factors belonging to the state • or co-operatives, no ( or almost no ) private • enterprising • Production factors including labour allocated and used according to the plan ( the famous 5-year plans) • Centrally set prices of all products, set system of • incomes and salaries • Main stress on quantity of production, all successes loudly proclaimed, all problems concealed (everything over 100 %), economic efficiency indicators misused

12. The main economic and social principles • Economic and political orientation on the socialist camp countries (COMECON), namely U.S.S.R. • Developed system of social benefits: free education, free health care, free children and old age care • Proclaimed rights of people (right to work), in fact rather tight set of obligations (obligation to work)

13. The megalomaniac statue of Josif Stalin in the centre of Prague, built in 1949-1955, 15.5 m high, 12 m wide and 22 m long. It weighted 17,000 tons. (It was nicknamed “the queue in front of the meat shop“or “the street jam“). The sculptor commited suicide. The statue was demolished by the army in 1961

14. The main economic and social principles • Political and economic priority of the Communist Party and its members: • in education • in jobs and careers • in housing, sport and recreation • in culture • Strong role of the communist Trade Unions • Little or no regard to environment • Suppression of free thinking, writing, culture, travelling... • Suppression of religion

15. Just one example of the many…. Let‘s call the family the Novaks (it is the most frequent Czech surname). In 1947, they owned an estate of about 40 hectares in a Mid-Bohemia district, there was the married couple with 5 children, the old parents and an invalid granny. They were - and still are - a religious family. And they were a happy family. Until…...

16. In the 50s, several big political processes were organised. Tomorrow, we remember 59th anniversary of the execution of JUDr. Milada Horáková, an outstanding Czech lawyer, politician and representative of women movement, who was sentenced in one of the first and biggest of them

17. The pros and contras • Were there any positives of the system at all ? • Oh yes ! • High social security for the majority, full employment • Practically no risks (if you did not oppose the regime) • Stable prices, low (highly subsidised) prices of food and housing, cheap and wide-spread public transport • Cheap and accessible culture (if you were not too sophisticated) and recreation • Free and relatively good health care • Growing level of living (relative, with no comparison) • No great differences - the satisfaction of “being at the same level as the Dvoraks or Novotnys“ • Advantages of the economy of scale • Growing volume of production

18. The situation, both political and economic, seemed to be there forever. Most people got used to it and did what they were supposed to do. Just looking at the pictures of the 1st May celebrations….

19. May 1, 1952, Týnec

20. May 1, 1974, Týnec

21. 1968

22. May 1, 1986, Prague

23. May 1, 1987, Prague

24. AFTER THE 1989 “VELVET REVOLUTION“ , THE CR TURNED ALMOST OERNIGHT FROM COMAND DRIVEN SOCIALISM TO MARKET ECONOMY It seemed so easy: just to throw the megalomaniac communist monuments over, tighten the belts for a little while, let the free market work and the democracy flourish, and to be happy ever after….

25. The “golden nineties“ or What had happened duringthe last 15years • The main stages • price liberalisation (1991) • home and foreign market liberalisation • restitution process (1991 - ) • small and big privatisation (1991-92) • “coupon privatisation” (1992-94) • economic boom and decline • the “burned country”(1998) • the “turn to the left” (1998) • the EU accession (2004) • present

26. Coupon (voucher) privatisation was Czech special privatisation method, which was later copied also in other countries (e.g. Russia, Azerbeidjian) Under the Mass or Voucher Privatisation, eligible citizens can use vouchers that are distributed free or at nominal cost to bid for stakes other assts being privatised. In the CR (then CSR), any citizen over 18 was entitled to buy a book of vouchers for 1,200 CZK and then bid for the stakes of the privatised firms in several rounds

27. The boom of private business We used to have a saying : “Every Czech is a musician“ During the time, it changed several times: “Every Czech is a government minister”in the late 60ties “Every Czech is a shareholder”in 1991 “Every Czech is a businessman”in the mid-90ties And now ?Probably “Every Czech at lest once bankrupt or twice unemployed”

28. The boom of private business People started all sorts of businesses. Small shops in private houses, pubs in cellars, trade in everything possible and imaginable, erotic saloons, producing plaster “trpasliks“, rearing goats, ostriches and snails….. And some big businesses as well.

29. Some of the phenomena • Vietnamese markets • McDonalds and KFCs • Supermarkets and • HYPERmarkets • mobile phone boom • “tunelling“ • “the burned country“ • “bad humour“

30. Super- and hypermarkets in the CR • Hypermarket is a self-service shopping mall with the shopping area bigger than 2,500 square meters • The first one in the CR was open in 1991, at present there are 555 supermarkets, 426 discount markets and 165 hypermarkets in the CR. • The share is 19 large-area malls per 1,000,000 inhabitants of the CR, which is the highest in Central Europe. • About 60 % of all shopping is done in these markets, Czech families spend the whole days in shopping centers, as there is often also a cinema and many catering possibilities

31. Do you know this famous Czech financial “pirate“ ? His name is Viktor Kozeny, he is a millionaire several times over, and just now is prosecuted in the U.S. and the CR because of his role in the attempt at “coupon privatisation“ in Azerbeidjan and the CR. Lately, he wasput into the U.S. prison, but released again on bail Four years ago, he even tried as the EP candidate for the CR !

32. Where are you going, Quo vadis,Czech Republic? Now we have “come to Europe“. Not in the geographical sense of the word, because, as you know, Prague is the heart of Europe, but in the political, social and economic sense. After the successful referendum, Czech Republic has become the EU member on May 1, 2004

33. Negatives of the situation • Unemployment growth • State budget deficit • Social disturbances, • strikes • Roma minority problems

34. Roma minority, with still different cultural habits, high unemployment level and low education level, is one of the biggest social problems. According to the census, there are 12,000 Romas only in the CR, the reality is probably rather different

35. Czech society is also rather rascist…

36. Another big minority are Vietnamese immigrants • The first ones came in 1956 on the invitation of the Communist Czechoslovakia • Other waves continued in 1973, 1980-1983 • At present, the Vietnamese population is estimated at 17,000 persons • There are much less problems, however, as the Vietnamese people are hard-working, smiling and put a high value to education of children

37. From the street stalls, Vietnamese salesmen are moving gradually into stone shops and they are about opening a Vietnamese shopping chain

38. Vietnamese children are among the best pupils in primary and secondary schools, many of them study at universities

39. Unemployment rate in % 1991-2008 It was zero in 1989, as everybody had to be employed

40. Regional unemployment2005 (NUTS 3 level)

41. State budget deficit ( bill.CZK and % of GDP, 1994-2004)

42. Positives of the present development • Economic growth (GDP) • Low inflation rate • Generally growing level of living • Increase of FDI

43. In the long run Gross Domestic Product, bill. CZK current prices

44. GDP, year-to-year changes in %

45. Inflation rate in %, 1995-2008

46. Foreign direct investments per 1,000 inhabitants (mill. CZK, CR total and in regions, 1999-2006)

47. Trade Balancemoving sum of latest 4 quarters in per cent of GDP

48. Further present problems • Fiscal system reform • Social insurance reform • Population development • Health care system reform • Political turn to the left • Legal system (non)functioning • Corruption

49. Fiscal reform Since January 1, 2007, Czech Republic implemented flat income tax as the first step of fiscal reform • It regards physical bodies, the tax base is the so-called “super-gross income“ (gross income + the employers contribution to health and social insurance) • The tax rate is theoretically 15 %, but from a different base than before (practically about 23 %) • The reform should further introduce the same tax rate also for legal bodies and for the VAT, but this has been postponed

50. Flat tax in Europe A growing number of countries in Eastern Europe have adopted a flat tax (in bold), pressuring Western European nations to lower their rates. The table supplies a comparison of the top rates on personal income (marginal tax rates)